A powerful tool to combat fraud, waste, and abuse, the False Claims Act (31 U.S.C. §§ 3729 et seq.) (the “FCA”) imposes civil liability upon any individual or corporation who knowingly submits, or causes the submission of, a false or fraudulent claim to the United States. As we discussed in a previous blog, the amount of damages recovered pursuant to the FCA suggests that the Government’s aggressive enforcement of the FCA is unlikely to subside any time soon. In fact, recent figures reflect that the Government’s recovery of damages and settlements under the FCA has exceeded $17 billion since 2009.
Earlier this week, the U.S. Supreme Court heard oral argument in United Health Srvs., Inc. v. United States ex rel. Escobar, an FCA case. The United Health Services case presents two important questions for the Supreme Court concerning the scope of the FCA: (1) whether the implied certification theory of liability is appropriate under the FCA; and (2) if so, whether the implied certification theory should be limited to statutes, regulations, or contract provisions that expressly condition payment upon compliance.
“Falsity” Under the FCA
The threshold requirement under the FCA is “falsity.” The plain language of the FCA contemplates liability for causing the Government to pay a false claim, as well as causing the Government to approve a false claim. Decisional law interpreting the FCA has distinguished between false claims that are “factually false” or “legally false.” A claim is factually false when the contractor submits an incorrect description of goods or services provided, or a request for reimbursement for goods or services never provided. On the other hand, a claim is legally false if a contractor submits a false certification that it has complied with a statute, regulation, or contract provision, and that compliance is a condition to Government payment.
The various federal circuits have reached different conclusions regarding the viability of the implied certification theory of FCA liability (i.e., a legally false claim). Even more troubling, however, is the fact that different circuit courts have reached vastly different interpretations of the legal standard that should be applied to the implied certification theory. As an example, below are three different legal standards utilized by three different circuit courts:
- A claim is false if it is submitted in violation of a statute, regulation, or contract provision that expressly requires compliance as a prerequisite to payment.
- A claim is false if it contains a misrepresentation of compliance with a statute, regulation, or contract provision that is material to the Government’s payment decision.
- A claim is false if it violates a statute, regulation, or contract provision, regardless if the violation is not a prerequisite to payment.
Despite the differing interpretations of the implied certification theory of the FCA, the Supreme Court has been reluctant to tackle the issue. That was until the Supreme Court granted certiorari to hear the United Health Services case on December 4, 2015.
Background of United Health Services
In United Health Services, two relators (i.e., whistleblowers) filed a qui tam FCA action alleging that United Health Services submitted fraudulent reimbursement claims to Medicaid for services provided by counselors that were not properly licensed in accordance with relevant Massachusetts regulations. Although United Health Services never explicitly certified compliance with the Massachusetts regulations in its Medicaid claims, the relators nevertheless argued that the claims submitted by United Health Services were false under the implied certification theory of the FCA.
The District Court dismissed the relators’ claims, however, recognizing that “not every regulatory violation gives rise to potential FCA Action.” See United States ex rel. Escobar v. United Health Servs., Inc., Civil Action No. 11-11170-DPW, 2012 WL 1271757, at *6 (D. Mass. Mar. 26, 2014). Instead, the District Court concluded that “before a regulation can give rise to FCA liability, it must, in fact, be a condition of payment.” Id. at *7.
On appeal, the First Circuit reversed the District Court’s decision. See United States ex rel. Escobar v. United Health Servs., Inc., 780 F.3d 504, 517 (1st Cir. 2015). The First Circuit reasoned that “[p]reconditions of payment, which may be found in sources such as statutes, regulations, and contracts need not be ‘expressly designated.’” Id. at 512. Accordingly, the First Circuit held that the violations of the relevant Massachusetts regulations alleged by the relators were sufficient to create falsity and survive a motion to dismiss. See id. at 515-16.
Oral Argument Before the Supreme Court
The parties’ oral argument before the Supreme Court, and the Justices’ reaction to the parties’ arguments, was interesting for several reasons. Perhaps tellingly, the Justices asked very few questions regarding the issue of viability of the implied certification theory of the FCA. This presents a strong indication that the Justices believe the implied certification theory is supported by the text of the FCA, and may be applied in certain circumstances.
That said, both parties fielded numerous questions from the Justices regarding the boundaries of the implied certification theory under the FCA. Through hypothetical examples, the Justices grappled with the limits of the implied certification theory. As Justice Breyer inquired:
That’s to me what’s at the heart of this. How do you distinguish those regulations, breach of which are fraudulent when you breach them, and implicit promise not to, from those that not? There are millions of regulations. . . .
In response to Justice Breyer’s question, the focus of the oral argument turned to the question of materiality — i.e., when is a violation of a statute, regulation, or contract provision material enough to warrant the imposition of FCA liability. At one point, Chief Justice Roberts appeared skeptical that a breach of a defense contract’s provision to “Buy America” when purchasing staplers would fit within the ambit of the FCA.
Overall, the argument reflected the inherent tension created by the implied certification theory of the FCA. On one hand, contractors are fearful that even the most benign violations of a statute, regulation, or contract provision could give rise to FCA liability. On the other hand, the Government contends that such an expansive interpretation of the FCA is an indispensable tool in combating fraud, waste, and abuse.
The Supreme Court’s decision in Universal Health Services, expected to be released in June 2016, is likely to have a profound impact on the scope and breadth of the FCA. We will monitor developments in this case and provide an update on the Procurement Playbook discussing the impact of the Supreme Court’s decision once it is released.