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Implied False Certification Theory as Basis for FCA Liability Endorsed by Supreme Court With Limits

    Client Alerts
  • June 30, 2016

In a recent and highly anticipated opinion that will significantly affect healthcare providers and other government contractors, the U.S. Supreme Court unanimously ruled that the “implied false certification theory” is a valid basis for liability under the federal False Claims Act (“FCA”). Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7, 2016 WL 3317565 (U.S. June 16, 2016). According to the implied false certification theory, “when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant’s violation of a material statutory, regulatory, or contractual requirement … the defendant has made a misrepresentation that renders the claim false or fraudulent under [the FCA].”  Id. at *1 (internal quotations omitted). 

Prior to the decision in Escobar, there was a split in the U.S. Circuit Courts of Appeals on this issue. Id. at *7. The Seventh Circuit had rejected the implied false certification theory, holding that only affirmative falsehoods could create a false claim. Id. Other lower courts limited the application of the implied false certification theory to situations where “defendants failed to disclose violations of expressly designated conditions of payment.” Id. Still others held that the implied false certification theory could create a false claim even if the violation was not an express condition of payment. Id. The Supreme Court took this case to resolve the split. However, the amount of clarity the Court provided is up for debate.

Procedural History

In Escobar, the relators were the parents of Yarushka Rivera, a teenage girl who suffered a fatal reaction to prescription medication while receiving treatment at a mental health facility in Massachusetts run by Arbour Counseling Services (“Arbour”), a subsidiary of Universal Health Services (“UHS”). Id. at *4. During their investigation of Rivera’s death, the relators discovered that Rivera was diagnosed, treated, and prescribed medications by individuals who were not properly licensed and/or supervised. Id. The relators subsequently filed a qui tam suit against UHS, alleging violations of the FCA based on the implied false certification theory. Id. at *5-6. Specifically, the relators alleged that UHS violated the FCA by submitting claims that made representations about the services provided by specific professionals, but “failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” Id. at *6. The relators alleged that UHS defrauded the Massachusetts Medicaid program because the program “would not have reimbursed the claims had it known that it was billed for mental health services that were provided by unlicensed and unsupervised staff.” Id.

The U.S. District Court for the District of Massachusetts dismissed the qui tam suit because it found that the regulations that UHS and Arbour violated were not conditions of payment. Id. The First Circuit Court of Appeals reversed. Id. at *7. 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.” Id. The Supreme Court addressed two important issues: (1) whether the implied false certification theory is a valid basis for liability under the FCA; and (2) if viable, whether a claim could only be false if the applicable statute, regulation, or contractual provision expressly states that it is a condition of payment. Id.

The Implied False Certification Theory is a Valid Basis for FCA Liability

As already noted, the Supreme Court concluded that the implied false certification theory is a valid basis for FCA liability in some circumstances. Id. at *8. In reaching this conclusion, the Court noted that the FCA is designed to punish defendants who submit false or fraudulent claims to the government, but the FCA does not define the terms “false” or “fraudulent.” Id. Accordingly, the Supreme Court looked to the common-law meaning of fraud and found that it “has long encompassed certain misrepresentations by omission[.]” Id. at *8-9. The Court concluded that “false or fraudulent claims include more than just claims containing express falsehoods.” Id. at *9 (internal quotations omitted). Rather, false or fraudulent claims can include omissions because “representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.” Id. at *9-10. 

On that basis, the Supreme Court found that UHS had submitted misleading claims because UHS had submitted payment codes that corresponded to specific counseling services and used National Provider Identification numbers corresponding to specific job titles. Id. at *10. The Court found that these representations were “clearly misleading” because they would lead one to believe that the services had been provided by individuals who were properly licensed and supervised under Massachusetts law to provide those services. Id. at *11. “By 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, [UHS’s] claims constituted misrepresentations.” Id.

Thus, the Supreme Court found that the implied false certification theory is a valid basis for liability where two conditions are met:  “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.” Id. at *11.

Government Designation of Requirement as an Express Condition of Payment is Not Controlling

The Supreme Court ruled that FCA liability is not limited to a defendant’s failure to disclose violations of statutes, regulations, or contractual provisions which are express conditions of payment. However, “not every undisclosed violation of an express condition of payment automatically triggers liability.” Id. at *9. Instead, the key factor is whether compliance with the relevant statute, regulation, or contractual provision is material to the Government’s payment decision. Id. at *10.

The Supreme Court said concerns about “open-ended” liability could be addressed through strict enforcement of the FCA’s materiality and scienter (i.e., intent) requirements which it described as both rigorous and demanding. Id. at *14-15. Materiality “cannot be found where noncompliance is minor or insubstantial.” Id. at *12. The FCA defines “material” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. § 3729(b)(4). According to the Court, “materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Escobar, 2016 WL 3317565 at *14 (internal quotations and punctuation omitted).

In clarifying how the materiality requirement should be enforced, the Supreme Court emphasized that a misrepresentation cannot be considered material simply because the Government designates compliance with a particular requirement as a condition of payment. Id. at *15. “Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Id. “The False Claims Act is not an all-purpose antifraud statute.” Id. (internal quotations and citations omitted). However, whether a provision is labeled a condition of payment is relevant to the materiality determination, but it is not dispositive. Id. at *12. The Court declined to find a bright-line rule that every condition of payment is material, finding that, to do so might encourage the Government to “respond by designating every legal requirement an express condition of payment.” Id. at *10.

Additionally, the Court found that, to be actionable, the defendant must have actual knowledge (or at least act in reckless disregard) that a condition is material to the Government’s payment decision. Id. at *4. As a result, “proof of materiality can include …  evidence that the defendant knows that the Government consistently refuses to pay claims … based on noncompliance with the particular statutory, regulatory or contractual requirements.” Likewise, “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.” Id. at *12.

This is, of course, a fact-intensive inquiry. The Court did point out in a footnote that “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) by, for instance, pleading facts to support allegations of materiality.” Id. at *12 n.6. However, it remains to be seen whether any defendant will be able to effectively argue for dismissal prior to expensive discovery given the factual nature of the inquiry.


The Supreme Court’s decision in Escobar is likely to have long-term implications for healthcare providers and other government contractors. Neither relators nor defendants came out as a clear “winner” in this decision. While relators may score the affirmation of the implied false certification theory as a win, defendants have the “rigorous” and “demanding” materiality requirement in their corner. However, the Supreme Court’s reliance on a fact-intensive inquiry to determine whether a provision is material may result in a choice between settlement or the expense of discovery and a potential trial, with little hope of dismissal on a motion to dismiss. The Supreme Court’s reluctance to delineate clear boundaries for implied false certification claims means that there will likely be significant litigation over the concept of materiality in the future and little clarity for healthcare providers and government contractors in the interim.