On Tuesday, the U.S. Supreme Court appeared reluctant to embrace the government’s expansive view of liability under the False Claims Act (“FCA”), as it heard oral arguments in what may prove to be one of the most significant FCA cases in decades. While it is always hazardous to draw conclusions from questions at oral argument, some of the questioning indicated that the Court may offer qualified support for some kind of “implied certification” theory of legal falsity that falls short of the government’s broad position. The case is Universal Health Services v. U.S. ex rel. Escobar. For healthcare providers and government contractors, the decision could radically alter the landscape of potential liability for false claims.
Given the unenthusiastic reception to the government’s suggestion that noncompliance with essentially any regulation could serve as the basis for an FCA claim, discussed further below, the Court may be searching for a middle ground. With only eight justices on the bench, however, a 4-4 decision that affirms the decision below and does not resolve the circuit split is possible. Background on the case and highlights of the oral arguments are below.
Background on the legal theory, case, and questions before the Supreme Court
Under the “implied certification” theory of legal falsity, a company may be subject to FCA liability for submitting a claim while failing to comply with any relevant statutes or regulations, even if the company was not required to expressly certify its compliance as a condition of payment. The theory is that by submitting a claim for payment, the company “implicitly certifies” that it has complied with all of these statutes and regulations. For healthcare providers, this can potentially include upwards of tens of thousands of pages of statutes and regulations.
In this case, the relators are family members of a woman who allegedly died as the result of a seizure at a Massachusetts mental health clinic. The relators alleged that the clinic failed to adequately hire and supervise its staff, as required by MassHealth regulations, and that noncompliance with these regulations resulted in FCA liability. The district court dismissed the case by distinguishing conditions of payment from Medicare conditions of participation, and ruled that “implied certification” liability will only attach when there is noncompliance with a condition of payment, which is the common distinction drawn by courts when determining whether to impose FCA liability. The First Circuit reversed, holding that state Medicaid regulations governing licensing and supervision for psychiatric care were, in fact, conditions of payment.
Two questions are currently before the Supreme Court: (1) whether “implied certification” is a viable theory under the FCA, and (2) if so, under what circumstances? Although most circuit courts of appeal have recognized “implied certification” as a viable theory of liability, there has been less uniformity with respect to its application. The Second, Third, Sixth, Ninth, Tenth, and Eleventh Circuits have held that liability may be established where the defendant failed to comply with a condition of payment expressly required by the statute, regulation, or contractual provision on which the relator relied. The First, Fourth, and D.C. Circuits, on the other hand, have held that implied conditions of payment may give rise to FCA liability, even where compliance with the statute or regulation was not expressly tied to the government’s payment decision. In 2015, the Seventh Circuit rejected “implied certification” as a viable means of establishing FCA liability, thus creating a circuit split and paving the way for Tuesday’s arguments.
Highlights of the oral arguments
In a series of animated exchanges, the justices grappled with lawyers from both sides over fundamental questions about the government’s oversight of the healthcare and defense industries. Chief Justice Roberts and Justice Breyer were among the most engaged justices from an active bench. Notable statements and exchanges include:
- Justices Ginsburg, Breyer, Kagan, and Sotomayor all made statements that could appear to support the general viability of the “implied certification” theory.
- Justice Breyer posed several hypotheticals regarding a contract for medical services performed by a doctor, when the care was instead provided by a less-qualified individual, and the representation simply that “care was provided.” Harking back to the FCA’s origins in the Civil War, Justice Kagan provided the analogy of a claim for payment for the delivery of guns that won’t fire, boots that fall apart, and rations that are rancid on delivery. The Justices’ questioning suggested that both hypotheticals are examples of fraud by “implied certification.”
- Justice Sotomayor indicated that she has “a very hard time accepting” that an individual who claims money for performing a service, while failing to comply with the qualification and supervision requirements in the regulations, has not committed a fraud.
- Justice Kennedy’s questioning appeared to lend support to the theory as well. He compared it to a Restatement provision, “which says a statement is fraudulent if the maker knows or believes that it’s misleading because of his failure to add an additional statement to make it true.”
- The Court devoted considerable attention to practical questions regarding materiality, and how to determine whether noncompliance with a specific provision could give rise to liability under the FCA.
- Justice Breyer’s questioning suggested a “contract-based” approach to materiality. In that context, the breach of a material provision is grounds to repudiate the contract, but the breach of a minor provision is merely grounds for damages. Under this approach, FCA liability could only be established where a breach would be grounds to repudiate the contract.
- Chief Justice Roberts focused his questions for the relators on knowledge and materiality, and expressed concerns about the reality of government contracting. The Chief Justice noted that there are thousands of pages of regulations, and he questioned whether the relators’ approach would precipitate litigation over whether the individual who submitted each claim had knowledge of each specific regulation at issue.
- The United States appeared as amicus curiae in support of the relators, and was given separate time to present its views. Highlights of that discussion are below:
- Chief Justice Roberts asked how to tell if the government would withhold payment for noncompliance with a specific provision (i.e., whether the provision was material). He posed a hypothetical $100,000 contract for the provision of medical services. As an ancillary part of the agreement, the contractor was required to use staplers made in the U.S. If the contractor provided the medical services, but failed to use the correct staplers, the Chief Justice noted that a diligent government contracts officer might pay nearly everything under the contract, but fine the contractor $100.
- In response, the government took the extraordinarily broad position that because it would be legally entitled to withhold a portion of the payment in those circumstances, the incorrect-stapler hypothetical would constitute a false claim. The government seemed to walk this position back after a few of the justices expressed skepticism over this position.
If the Court agrees with Petitioner’s argument that a claim cannot be “false or fraudulent” unless it states something that is untrue, the decision could significantly reduce the exposure to FCA liability for companies that operate in complex regulatory environments. If the Court endorses the “implied certification” theory, on the other hand, the impact of the decision will depend on what, if any, limiting principles the Court adopts with respect to conditions of payment. Given the unenthusiastic reception to the government’s suggestion that noncompliance with essentially any regulation could serve as the basis for an FCA claim, the Court may be searching for a middle ground.
With the passing of Justice Scalia, there were only eight chairs behind the bench. In the event of a 4-4 decision, the Court would affirm the decision of the First Circuit. The decision would have no precedential value, and the circuit split would remain.
A decision is expected by late June or early July. Additional information and copies of the briefs are available courtesy of SCOTUSblog.