Supreme Court Confirms, but Limits, FCA Implied Certification Theory

Construction and Procurement Law News, Q3 2016

Client Alert


Recently, the United States Supreme Court, in Universal Health Services Inc. v. United States, ex rel. Escobar, affirmed the viability of the “implied certification theory” of False Claims Act (FCA) liability and clarified how the FCA’s “materiality requirement should be enforced.” This case is an important case for federal government contractors

The alleged FCA violations at issue arose within the Medicaid program. For approximately five years, Yarushka Rivera, a teenage beneficiary of Massachusetts’ Medicaid program, received counseling services at Arbour Counseling Services, a “satellite mental health facility” in Lawrence, Massachusetts, owned and operated by a subsidiary of Universal Health Services. Beginning in about 2004, when Yarushka started having certain behavioral problems, five medical professionals at Arbour “intermittently treated her.” In May 2009, Yarushka had “an adverse reaction” to a medication that “a purported doctor” at Arbour prescribed after diagnosing her with bipolar disorder. In 2009, Yarushka, then seventeen years old, suffered a seizure and died.

Subsequently, an Arbour counselor revealed to Yarushka’s mother and stepfather that “few Arbour employees were actually licensed to provide mental health counseling and that supervision of them was minimal.” Of the five professionals who had treated Yarushka, only one was “properly licensed.” Additionally, approximately twenty-three Arbour employees “lacked licenses to provide mental health services, yet – despite regulatory requirements to the contrary – they counseled patients and prescribed drugs without supervision.”

In 2011, her mother and stepfather filed a qui tam action in federal court, alleging that Universal Health had violated the FCA under an “implied false certification” theory of liability. They asserted that Universal Health (acting through Arbour) submitted reimbursement claims that made representations about the specific services provided by specific types of professionals, “but that failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” More specifically, the Massachusetts Medicaid program requires “satellite facilities” – such as Arbour – to have specific types of clinicians on staff, outlines licensing requirements for particular positions, and sets forth supervision requirements for other staff. Universal Health allegedly “flouted” these regulations because Arbour employed unlicensed, unqualified and unsupervised staff. Apparently unaware of these “deficiencies,” the Massachusetts Medicaid program paid the claims. “Universal Health thus allegedly defrauded the program, which would not have reimbursed the claims had it known that it was billed for mental health services that were performed by unlicensed and unsupervised staff.”

Universal Health filed a motion to dismiss the complaint, which the District Court granted. The trial court held that the plaintiffs had failed to state a claim under the false certification theory because, with one exception not relevant here, none of the regulations that Arbour violated was a condition of payment.

Subsequently, the appeals court over Massachusetts federal trial courts reversed the trial court’s decision. The appeals court 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.” It 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 court’s view, a contractual, statutory or regulatory requirement can be a condition of payment “either by expressly identifying itself as such or by implication.” It then held that Universal Health had violated Massachusetts Medicaid regulations, which “clearly impose conditions of payment.” It also 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 agreed to review the case to resolve a conflict among the federal appeals courts regarding “implied” certification under the False Claims Act. In its unanimous decision, 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, because 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.”

The Supreme Court concluded on the first issue that the implied certification theory can be a basis for liability where (1) the claim does not merely request payment, but also makes specific representations about the goods or services provided, and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.

As to the second issue about a violation of a contractual, statutory, or regulatory provision that the Government expressly designated a condition of payment,” the Court concluded that the FCA “does not impose this limit on liability.” It also concluded, however, that “not every undisclosed violation of an express condition of payment automatically triggers liability.” Instead, “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 [FCA].”

Importantly, 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.”

Because neither the appeals nor trial court assessed the government’s complaint under the Supreme Court’s interpretations of the FCA, the Supreme Court vacated the First Circuit’s judgment and remanded the case for reconsideration.

From the perspective of the plaintiffs’ bar, the Supreme Court’s decision is generally 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 defense bar’s point of view, the Supreme Court’s holding with respect to the “materiality” component of FCA liability generally is viewed as a welcome development. The case is a stark reminder of how important monthly pay applications or invoices can be for government contractors.