supreme courtThe U.S. Supreme Court’s June 16, 2016 decision in a closely watched False Claims Act (FCA) case, Universal Health Services, Inc. v. United States ex rel. Escobar, had a little bit in it for everyone.  It held (as had most of the federal appeals courts) that a contractor can be held liable under the FCA for making a fraudulent claim for payment from the federal government, even if the claim was never expressly made but was merely implied.  On the other hand, Universal Health unanimously vacated a First Circuit ruling that had reinstated the plaintiffs’ claims, concluding that the First Circuit applied an insufficiently rigorous test for determining whether the defendant’s allegedly false claims were “material.”

So which side really “won” the case?  If the correct answer to that question turns on whether the Court’s decision will make it more difficult for private relators to prevail in future FCA cases, then the decision was a win for FCA defendants.  For example, the Court unequivocally rejected assertions—frequently raised by FCA plaintiffs—that an FCA claim is proven any time a contractor submits a claim for payment of a contractual claim despite awareness that it has breached a significant provision of its contract.

The FCA is a Civil War-era statute enacted to punish and prevent frauds against the United States.  It imposes civil and criminal liability on “any person” who, inter alia, “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”  Although the statute does not explicitly state that the false or fraudulent claim must be “material,” federal appeals courts have universally accepted that the statute includes a materiality requirement.  The FCA includes a unique qui tam provision that authorizes private persons (“relators”) to bring civil actions for FCA violations “in the name of the Government” and allows them to retain up to 30% of whatever amount of damages they recover on behalf of the federal government as a bounty.  The number of FCA suits filed by self-proclaimed whistleblowers has exploded since 1986, when Congress amended the FCA to relax the rules governing who qualifies as a qui tam relator.

In Universal Health, the relators allege that Universal Health Services (UHS) violated the FCA by presenting “false or fraudulent” claims for payment in connection with its operation of a mental-health clinic in Massachusetts.  They claim that UHS’s operations failed to comply with a number of government regulations, particularly with respect to the credentials of employees providing mental-health services.  Although the invoices submitted by UHS to government officials for Medicaid reimbursement for its services did not explicitly state that it had performed the services in compliance with all applicable regulations, the relators argued (and the First Circuit agreed) that the submission of an invoice implied (falsely) that UHS had complied with the regulations at issue.  Because one federal appeals court (the Seventh Circuit) had rejected this “implied false certification” theory of FCA liability, the Supreme Court granted review to resolve the conflict.

The Court’s decision accepted the theory that a claim can in certain circumstances be deemed impliedly false or fraudulent (and thus actionable under the FCA) even though nothing expressly stated in the invoice is false—but with two important caveats, explained later.  The Court reasoned that when an invoice includes representations that, while stating the truth so far as they go, omit critical qualifying information, submission of the invoice can constitute an actionable misrepresentation under the FCA.  The omission can give rise to liability if the representations, while literally true, would cause a reader to reasonably infer that the writer is making additional claims that are, in fact, not truthful.

And—bad news for UHS—the Court held that the relators adequately alleged that materials submitted by UHS to government regulators in conjunction with the invoices caused regulators to reasonably (but inaccurately) conclude that UHS personnel were adequately trained and credentialed.  In light of those allegations, the Court concluded, UHS’s omission of information about inadequate training and credentials could constitute a “false or fraudulent claim.”

But—good news for other FCA defendants—the Court did not accept the relators’ (and the United States’s) theory that “all claims for payment implicitly represent that the billing party is legally entitled to payment.”  Instead, it held that FCA relators may proceed under an implied certification theory when two conditions are satisfied: (1) the allegedly false claim does not merely request payment but also “makes specific representations about the goods or services provided”; and (2) the defendant’s failure to disclose noncompliance with “material” requirements makes those representations “misleading half-truths.”  Given that substantial numbers of pending FCA implied-certification complaints don’t include allegations satisfying those two conditions, the Court’s lukewarm endorsement of that theory provides little solace for the private-relators’ bar.

Worse still from qui tam plaintiffs’ perspective was the Court’s treatment of the materiality requirement.  The Court confirmed not only that materiality is a required element of all FCA claims but also that the requirement is “rigorous” and “demanding,” and it vacated the First Circuit’s ruling because it concluded that the appeals court had applied an insufficiently demanding materiality requirement.  UHS had pursued its no-implied-certification-theory argument in part because, it asserted, materiality is too fact-intensive an issue to ever be resolved on a motion to dismiss or at summary judgment.  The Court stated that those fears were unfounded, noting that materiality claims are subject to the heightened pleadings standards of Federal Rule of Civil Procedure 9(b) and must be supported by specific factual allegations.

In particular, the Court rejected a materiality standard adopted by several appeals courts, stating, “A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.”  Rather, the burden will be on the relator to demonstrate—presumably based on past government practices—that the government would not have paid the allegedly false claim had it known that the contractor did not comply with the requirement at issue.  Pleading facts sufficient to meet that burden could prove difficult, particularly given that many government contracting officers routinely approve payment of invoices even when made aware that the contractor may not have complied with every applicable regulation.

Indeed, the Universal Health decision is likely to prove fatal to several notorious FCA claims now working their way through the courts.  For example, the Fifth Circuit is currently reviewing a $663 million FCA judgment entered against a manufacturer of guardrail components used on highways.  The district court determined that the manufacturer’s allegedly false claim—certification of compliance with certain federal regulatory requirements—was “material,” despite repeated statements by the relevant federal officials (after being fully briefed about alleged noncompliance with the regulations) that purchase costs of the guardrails were (and continue to be) eligible for federal government reimbursement.  WLF filed an amicus brief in support of the appellants in the case, United States ex rel. Harman v. Trinity Industries, Inc.  In light of Universal Health, the lower court’s materiality ruling is untenable.

In sum, although the Universal Health decision leaves many important FCA questions unanswered and will undoubtedly provide fodder for court battles for years to come, it can fairly be classified as a victory for the wider government contracts defense community.  Particularly in light of the Court’s explication of materiality, one can reasonably expect district courts to be more willing to dismiss insubstantial future FCA claims on the pleadings.

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