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Supreme Court Dramatically Shifts False Claims Act Analysis, Daily Business Review

July 06, 2016

Reprinted with permission from the July 6, 2016 edition of Daily Business Review© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com.

In its June 16 Universal Health Services v. Escobar decision, the U.S. Supreme Court resolved a circuit split on the viability and proper scope of the implied certification theory of legal falsity under the U.S. False Claims Act. The unanimous opinion rejected the condition of payment analysis and adopted a rigorous materiality standard for analyzing FCA cases premised on underlying regulatory or contractual violations.

With their treble damages and statutory penalties, qui tam FCA lawsuits represent a significant and growing risk for large health care providers that submit thousands or millions of Medicare and Medicaid claims per year.

For these providers, Escobar will have a direct impact on both pending litigation and investigations as well as relators' and government counsel's calculations as to which cases to pursue. At the same time, the court's materiality safeguard would appear to inject a true fraud analysis into a statute that had morphed into an onerous regulatory enforcement tool.

The FCA prohibits knowingly submitting to the government or causing the submission of a "false or fraudulent claim for payment or approval." Courts have recognized that false claims can be either "factually false" or "legally false." A factually false claim is one that is based upon inaccurate information about the product or service billed, for example when a physician bills Medicare for services that were not actually provided.

Many courts had held that a legally false claim is one that either impliedly or expressly certifies compliance with conditions of payment set forth in applicable statutes, regulations or contractual provisions. Some courts had also held that, for the implied certification theory to apply, the underlying rule had to provide expressly by its terms that compliance with it was a condition of payment. It is this implied certification theory that the court addressed in Escobar.

According to the opinion written by Justice Clarence Thomas, implied false certification theory can be a basis for liability where at least two conditions are met: the claim does not merely request payment but also makes specific representations about the goods or services provided, and the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.

With regard to the materiality inquiry, the court emphasized the importance of applying a "rigorous" and "demanding" standard, such that whether a requirement is a condition of payment is relevant, but not dispositive. Under this materiality standard, the court reasoned, not every undisclosed violation of an express condition of payment will create liability.

That's because, according to the court, "The False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations."

Material Violation

The court rejected the government's argument "that any statutory, regulatory or contractual violation is material so long as the defendant knows that the government would be entitled to refuse payment were it aware of the violation." Rather, the justices observed that proof of the materiality of the violation can include but is not necessarily limited to evidence that the defendant knew that "the government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory or contractual requirement."

Conversely, "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." Furthermore, materiality simply does not exist "where noncompliance is minor or insubstantial."

At the same time, a contractual or statutory requirement that has not been specified as a condition of payment may nevertheless be found to be material based on facts and circumstances. According to the court, the critical factor is not whether the government could hypothetically refuse to make payment because of a violation, but whether it would in fact refuse to make payment based on that violation.

Proper application of the materiality standard will, in the justices' view, allow courts to distinguish between true FCA violations and "garden-variety breaches of contract or regulatory violations," which are not actionable under the FCA.

The court's reasoning appears to apply with equal force to the express false certification of liability theory in addition to the implied false certification theory upon which the majority of significant FCA cases are premised.

As a result, to support liability under a false certification theory going forward, the government and relators' counsel will need to plead specific and particularized facts satisfying the court's "rigorous" and "demanding" new materiality standard.