U.S. Supreme Court Rules in Favor of Implied Certification Using a Fact-Intensive Materiality Standard

The legal landscape for False Claim Act (“FCA”) cases recently shifted when the United States Supreme Court announced its decision in Universal Health Services, Inc. v. U.S. ex rel Escobar, No. 15-7, 2016 WL 3317565 (U.S. June 16, 2016) (“Escobar”).  Whistleblowers (also known as relators) and health care providers alike have been eagerly awaiting this decision.  Although each side hoped for a bright-line ruling, what they got was something of a mixed bag.  In Escobar, the Court resolved a split in the U.S. Circuit Courts of Appeals over the application of the “implied certification theory” of False Claims Act liability.

Relators argued that health care providers—by submitting claims that made no affirmative false statements, but omitted disclosure of serious violations of regulations—were implicitly submitting false claims, hence the term “implied certification.”  Under the implied certification theory of liability, almost any regulatory violation by a health care provider could constitute a false claim if not disclosed at the time the payment request is made.

The health care provider in Escobar advocated for a different approach, arguing that it could not have made any false claims because it made no affirmative false statements when it requested payment.  The provider also argued that the alleged violations were not related to regulations that were specific conditions of payment and therefore should have no bearing on whether the claim was a false claim.

The Court disagreed with both theories and instead concluded that, while regulatory omissions and violations outside the conditions of payment can create False Claims Act liability, such omissions and violations can only become false claims if the provider knowingly violated a requirement and the provider knows the requirement is material to the Government’s payment decision.

So what violations are “material” to the Government’s payment decision?  The Court gave little advice here.  According to the Court, materiality “cannot be found where noncompliance is minor or insubstantial.”  Also, “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 very strong evidence that the requirements are not material.”  Conversely, if the Government consistently refuses to pay claims because certain requirements were violated, that can be proof of materiality.

Additionally, the Court pointed out that the False Claims Act has a scienter (or mental intent) requirement.  As a result, relators will need to show that defendants knew that the Government considered a violated requirement to be material to the payment decision (or at least acted with reckless disregard).

Unfortunately, because the Court’s “materiality” standard is a fact-intensive analysis, it will be more difficult for health care providers to prevail on motions to dismiss claims based on an alleged failure to meet the materiality and knowledge requirements.  As a result, health care providers accused of submitting false claims may have to undergo expensive discovery if they are unwilling or unable to quickly resolve their disputes with the Government.  Given the impending increase in statutory penalties, health care providers may be reluctant to try their luck going to trial.  On the other hand, in cases where the Government’s ability to prove materiality and knowledge seems weak, summary judgment motions may produce much-needed case law on what constitutes materiality, which may ultimately serve to clarify and limit similar claims in the future.

For a lengthier analysis of the Escobar decision, click here.

Annette K. Ebright & James C. Lesnett Jr.

Annette Ebright is a litigator practicing in the areas of Complex Civil Litigation, Government Investigations, White Collar Criminal Defense and Criminal and Regulatory Compliance. Jamie Lesnett focuses his practice on complex business litigation and government investigations. Mr. Lesnett has extensive experience litigating complex business disputes in federal and state courts throughout the United States, including litigation involving contract disputes, business torts, unfair competition and trade secret misappropriation.

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