Is The Two-Part Test Created In Escobar The Exclusive Means For Establishing Implied Certification Liability?

• Posted on: Dec 5 2016

This blog previously wrote about Universal Health Services, Inc. v. United States ex rel. Escobar, a Medicaid case involving the “implied certification” theory of liability under the False Claims Act (“FCA”). In Escobar, the Court held that implied certification liability under the FCA may exist where the following two conditions are satisfied: (1) the defendant 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 statutory, regulatory, or contractual requirements makes those representations misleading.

Since the Supreme Court decided Escobar, the district courts have been split on whether satisfaction of the two-part test is the only basis on which a relator can establish implied certification liability. Some courts have determined that the two-part test is the exclusive means of establishing implied certification liability, while other courts and the Department of Justice (“DOJ”) have argued that liability under the implied certification theory may be found, under certain circumstances, without satisfying the first part of the test – that is, without establishing “specific misrepresentations” about the goods or services provided.

The courts that have found the two-part test to be the exclusive means of establishing implied certification liability left no room for debate.  Each court found that the plaintiff “must” allege the two conditions set forth in Escobar. See, e.g., United States ex rel. Handal v. Ctr. for Emp’t Training, No. 2:13-cv-01697-KJMKJN, 2016 U.S. Dist. LEXIS 105158, at *12 (E.D. Cal. Aug. 8, 2016) (“To establish implied false certification, a plaintiff must show [Escobar’s two conditions].”); United States ex rel. Doe v. Health First, Inc., No. 6:14-cv-501-Orl-37DAB, 2016 U.S. Dist. LEXIS 95987, at *8 (M.D. Fla. July 22, 2016) (“[Escobar’s] two conditions must exist to impose liability . . . .”); United States ex rel. Creighton v. Beauty Basics Inc., No. 2:13-CV-1989-VEH, 2016 U.S. Dist. LEXIS 83573, at *9 (N.D. Ala. June 28, 2016) (“[T]he plaintiff must allege [Escobar’s two conditions].”).

The courts that have found that the two-part test is not the exclusive means of establishing implied certification liability argue for a more expansive view of the Supreme Court’s holding. For example, last month, in United States ex rel. Panarello v. Kaplan Early Learning Co., No. 11-cv-00353 (W.D.N.Y. Nov. 14, 2016), the court held that “Escobar cannot be read to impose the ‘specific representations’ requirement in every case.” Slip op at 8.  The court reasoned that the Supreme Court merely identified “‘some’ of the circumstances” that create implied certification liability, thereby “suggest[ing] that compliance with the conditions it discussed is not necessarily a prerequisite to implied false certification liability in every case.” Id. at 9. Consequently, the court permitted the implied certification claim to proceed even though the defendant did “not use payment codes” or “contain specific representations about the goods or services provided.”  Id. at *8.

In permitting the claim to proceed, the Panarello court relied on the court’s decision in Rose v. Stephens Institute, No. 9-cv-05966-PJH, 2016 U.S. Dist. LEXIS 128269 (N.D. Cal. 2016), which reached the same conclusion. There, the court rejected the defendant’s exclusivity argument “as a matter of law”, finding that “Escobar . . . does not purport to set out, as an absolute requirement, that implied false certification liability can attach only when these two conditions are met.”

It should be noted that both courts recognized that their decision was contrary to that of other courts. Consequently, the Rose court certified the issue to the Ninth Circuit, and the Panarello court recommended certification to the Second Circuit.

The DOJ, for its part, has argued that the two-part test is not the exclusive means of establishing implied certification liability under Escobar. In statements of interest filed throughout the country, the DOJ has relied on the portion of the Supreme Court’s decision in which it expressly declined to decide whether a claim for payment could itself constitute an implicit representation of entitlement to payment. In that regard, the DOJ has relied on the Court’s refusal to “resolve [the question of] whether all claims for payment implicitly represent that the billing party is legally entitled to payment,” noting that the claim before the Court contained “specific representations” that were “misleading half-truths.” Universal Health Services, Inc. v. United States and Massachusetts, ex rel. Julio Escobar and Carmen Correa, 579 U.S.___, 136 S. Ct. 1989, 1999-2001 (2016).

Takeaway:

This blog will continue to follow this post-Escobar debate.  One thing is for certain, there is a split of opinion that will make its way through the circuit courts, and perhaps even the Supreme Court.  Stay tuned.