The U.S. Supreme Court recently affirmed the viability of the “implied certification theory” of False Claims Act (FCA) liability and “clarif[ied]” how the law's “materiality requirement should be enforced.” While the full impact of the Supreme Court's much-anticipated decision in Universal Health Services Inc. v. United States, ex rel. Escobar will not be known for quite some time, as discussed below, it will undoubtedly have an immediate impact on FCA litigation in two significant respects.
The alleged FCA violations at issue arose from the treatment of Yarushka Rivera, a teenage beneficiary of Massachusetts' Medicaid program. Rivera died from an "adverse reaction" to medication prescribed to her at a mental health facility affiliated with United Health in Lawrence, Mass. The respondents subsequently learned that few employees of the facility were licensed to provide mental health counseling or prescribe drugs without supervision, which wasn't reflected accurately in the claims submitted for Medicare reimbursement.
After filing complaints with various state agencies, the respondents filed a qui tam action in federal court, alleging that Universal Health had violated the FCA under an "implied false certification" theory of liability. Universal Health filed a motion to dismiss the complaint, which the District Court granted. Although "Circuit precedent had previously embraced the implied false certification theory of liability," "the District Court held that respondents had failed to state a claim under that theory because, with one exception not relevant here, none of the regulations that Arbour violated was a condition of payment." (Arbour Counseling Services is a satellite mental health facility in Lawrence owned and operated by a subsidiary of petitioner Universal Health Services.)
Subsequently, the U.S. Court of Appeals for the First Circuit reversed the District Court's decision. The First Circuit noted that, each time a billing party submits a claim, it "implicitly communicate[s] that it conformed to the relevant program requirements, such that it was entitled to payment." The First Circuit went on to explain that, to determine whether a claim is "false or fraudulent" based on such communications, it "asks simply whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment." In the First Circuit's view, a contractual, statutory or regulatory requirement can be a condition of payment "either by expressly identifying itself as such or by implication." The First Circuit then held that Universal Health had violated Massachusetts Medicaid regulations, which "clearly impose conditions of payment." Further, the First Circuit held that the regulations themselves "constitute[d] dispositive evidence of materiality," because they identified "adequate supervision" as an "express and absolute" condition of payment.
The Supreme Court's Decision
A. Implied Certification Theory of Liability
The Supreme Court granted certiorari "to resolve the disagreement among the Courts of Appeals over the validity and scope of the implied false certification theory of liability," which treats a payment request as an implied certification of compliance with relevant statutes, regulations or contract requirements that are "material" conditions of payment and treats a failure to disclose a violation as a misrepresentation that renders the claim "false or fraudulent."
In its unanimous decision, authored by Justice Clarence Thomas, the Supreme Court first held that "the implied false certification theory can, at least in some circumstances, provide a basis for liability." The Supreme Court reasoned that the term "fraudulent," as used in the FCA, is "a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud." And, since common-law fraud has "long encompassed certain misrepresentations by omission, 'false or fraudulent claims' include more than just claims containing express falsehoods."
The Supreme Court went on to explain that, by submitting payment claims using codes that corresponded to specific counseling services, Universal Health represented that it had provided family and individual therapy, "preventative medication counseling" and other types of treatment. Furthermore, Arbour staff allegedly made additional representations in submitting Medicaid reimbursement claims by using National Provider Identification numbers that correspond to specific job titles. These claims were "clearly misleading in context," according to the Supreme Court. The Supreme Court stated that, "[b]y using payment and other codes that conveyed this information without disclosing Arbour's many violations of basic staff and licensing requirements for mental health facilities, Universal Health's claims constituted misrepresentations."
In concluding its discussion of the first issue under consideration, the Supreme Court stated:
[W]e hold that the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.
The second issue the Supreme Court addressed is whether "a defendant should face False Claims Act liability only if it fails to disclose the violation of a contractual, statutory, or regulatory provision that the Government expressly designated a condition of payment." The Supreme Court concluded that the False Claims Act "does not impose this limit on liability." The Supreme Court also concluded, however, that "not every undisclosed violation of an express condition of payment automatically triggers liability." Instead, the Supreme Court stated, "a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act."
As a final matter, the Supreme Court elaborated on what kind of nondisclosure gives rise to a "material" falsehood. In particular, the Supreme Court explained that "[t]he materiality standard is demanding," and "[a] misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment." It also is "insufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant's noncompliance." Moreover, materiality "cannot be found where noncompliance is minor or insubstantial." In summation, the Supreme Court stated:
[W]hen evaluating materiality under the False Claims Act, the Government's decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.
Because neither the First Circuit nor the District Court assessed respondents' complaint under the Supreme Court's "interpretations" of the False Claims Act, the Supreme Court vacated the First Circuit's judgment and remanded the case for reconsideration of whether "respondents have sufficiently pleaded a False Claims Act violation."
Decision's Immediate Impact
While the full impact of the Supreme Court's decision will not be known for quite some time, the Supreme Court's decision undoubtedly will have an immediate impact on FCA litigation in two significant respects.
First and foremost, the Supreme Court's affirmation of the implied certification theory of liability inevitably will cause an uptick in FCA lawsuits - by both the government and whistle-blowers - that are premised on an implied certification theory. The ultimate effect of this new reality most likely will be that more companies in more industries will have to contend with FCA suits.
Second, the Supreme Court's decision almost certainly means that FCA suits increasingly will be resolved at the dispositive motions stage. More specifically, in footnote six of its decision, the Supreme Court rejected Universal Health's argument that questions of "materiality" inherently are not properly resolved via a motion to dismiss or a motion for summary judgment:
We reject Universal Health's assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment. The standard for materiality that we have outlined is a familiar and rigorous one. And False Claims Act plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b), for instance, pleading facts to support allegations of materiality.
Moreover, as noted above, the Supreme Court's decision makes clear that government knowledge of alleged noncompliance with statutory, regulatory or contractual requirements is relevant to the issue of "materiality." In fact, the Supreme Court went so far as to say that, "if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material."
Similarly, the Supreme Court held that, "if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material." Thus, it is very likely that FCA defendants increasingly will use in motions for summary judgment evidence of government knowledge of alleged noncompliance.
In the final analysis, the Supreme Court's decision in Universal Health Services Inc. v. United States, ex rel. Escobar is a mixed bag for litigants. From the perspective of the plaintiffs' bar, the Supreme Court's decision generally has been viewed as a win because the decision makes clear that the implied certification theory of FCA liability is viable and here to stay. From the perspective of the defense bar, on the other hand, the Supreme Court's holding with respect to the "materiality" component of FCA liability generally has been viewed as being a welcome development. While the full impact of the Supreme Court's decision will not be known for some time, it is safe to say that these two counterbalancing aspects of the Supreme Court's decision will have an immediate and significant impact on FCA litigation.Reproduced with permission from ©2016 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com
This article was first published on Bloomberg BNA on August 19, 2016. (login required)