Universal Health Services, Inc. V. United States Ex Rel. Escobar: The U.S. Supreme Court Adopts The Implied Certification Theory As A Basis Of Liability Under The False Claims ActPrint Article
- Posted on: Jul 5 2016
On June 16, 2016, the U.S. Supreme Court decided 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”). The “implied false certification” theory provides that a defendant may violate the FCA by failing to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement. In Escobar, the Court unanimously confirmed that the theory “can be a basis for liability.”
In so holding, the Court identified two preconditions for the application of the theory. First, when a defendant submits a claim for government payment, the defendant must not “merely request payment”; instead, the defendant must also “make specific representations about the goods or services provided.” Second, the omission – that is, the defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” – must rise to the level of “misleading half-truths.” Importantly, the noncompliance must be “material to the Government’s payment decision.” In this way, “every undisclosed violation of an express condition of payment [would not] automatically trigger liability.”
Escobar involved a Medicaid patient (Yarushka Rivera) who was undergoing treatment for bipolar disorder at a Massachusetts mental health clinic. During treatment, Ms. Rivera experienced an adverse reaction to prescribed medication and died. Her parents later learned that only one of the five counselors who treated Ms. Rivera at the clinic was licensed under Massachusetts law.
In 2011, Ms. Rivera’s parents filed a qui tam complaint in federal court, alleging that the treating counselors were not licensed or supervised, in violation of Massachusetts health regulations. They claimed that, by seeking reimbursement from Medicaid for services performed in violation of those regulations, the clinic and its parent, Universal Health Services, Inc. (“UHS”), submitted false claims to the government. Because the clinic did not expressly certify that the services were performed in compliance with state regulations, the qui tam complaint relied on the implied certification theory of liability – that is, the clinic had impliedly (and falsely) certified that it was in compliance with applicable Medicaid licensing and supervision requirements at the time it submitted the claims for reimbursement.
In 2014, the district court dismissed the complaint on the ground that none of the regulations the clinic allegedly violated was an express condition of government payment. The court concluded that the complaint did not state a claim for relief because it relied on noncompliance with regulations that were conditions of participation in the Medicaid program, rather than conditions of payment by the program.
The Court of Appeals for the First Circuit reversed, holding that conditions of payment, “which may be found in sources such as statutes, regulations, and contracts, need not be ‘expressly designated.’” Instead, the court explained that whether a legal requirement is a condition of payment is “a fact-intensive and context-specific inquiry, involving a close reading of the foundational documents, or statutes and regulations, at issue” and evidence showing that the government would be entitled to refuse payment were it aware of the violation. The court concluded that the regulations at issue imposed conditions of payment, and therefore were “dispositive evidence of materiality.”
The First Circuit’s decision contributed to a split among the courts of appeals over the validity and scope of the “implied false certification” theory of liability. Other courts of appeals have rejected the theory in total (e.g., the Seventh Circuit), while others have ruled that an implied certification must involve compliance with an express condition of payment (e.g., the Second Circuit).
The Supreme Court granted certiorari to resolve the split and answer the questions whether the implied certification theory is a viable one, and if so, whether it would only apply where a defendant violated a legal requirement that the government had expressly designated as a condition of payment.
The Supreme Court’s Decision
As an initial matter, the Court held that the implied certification theory of liability is a viable one under the FCA, albeit “in some circumstances.…” The Court based its holding on the use of the word “fraudulent” in the FCA, noting that it is “a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud.” “Because common-law fraud has long encompassed certain misrepresentations by omission,” the Court found that “misrepresentations by omission can give rise to liability.”
Having found the theory to be viable, the Court identified two conditions under which a defendant may be liable: (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.
As to the first condition, the Court emphasized that, in the case before it, the defendant had made representations “about the specific services provided by specific types of professionals,” but “failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” Therefore, the Court found, the representations were “clearly misleading in context,” because the defendant used specific billing codes and identifiers concerning the “types of treatment” and “specific job titles,” implying that the clinic’s counselors had the requisite training and qualifications for their jobs. Such misrepresentations, held the Court, fell “squarely within the rule that half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information – can be actionable misrepresentations.”
As to the second condition, the Court held that a misrepresentation about legal compliance does not become “material” simply because the government expressly labeled the legal requirement as a “condition of payment,” or because the government could choose to withhold payment if it knew about the noncompliance. “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” The Court explained that “[a] statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information.” Therefore, the fact that a legal requirement is labeled as a condition of payment is relevant to materiality, but “not automatically dispositive.”
The Court explained that the materiality inquiry focuses on the “effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Although “minor or insubstantial” noncompliance “cannot” be material, other relevant considerations include whether the government “consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement,” or, conversely, whether the government “pays a particular claim in full despite its actual knowledge that certain requirements were violated.”
To underscore the importance of the materiality inquiry, the Court stressed that the analysis is “rigorous” and “demanding,” and that the FCA is not “an all-purpose antifraud statute” or “vehicle for punishing garden-variety breaches of contract or regulatory violations.”
The Court also reiterated that whistleblowers must plead their claims “with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b).”
Against this analysis, the Court found that the clinic’s submissions for reimbursement “without disclosing [the clinic’s] many violations of basic staff and licensing requirements,” could qualify as misleading misrepresentations giving rise to liability under the FCA. The Court vacated the First Circuit’s judgment and remanded the case to determine whether the alleged misrepresentations were material under the standard set forth by the Court.
The Court’s decision contains two core conclusions: the implied certification theory is viable; and liability in such cases turns on materiality – i.e., whether the misrepresentation about compliance with a statutory, regulatory, or contractual requirement is material to the government’s payment decision.
Specific Representations and Failure to Disclose Noncompliance
In adopting the theory of liability, the Supreme Court blurred the lines, if not did away with the distinction, between an express false certification and an implied false certification. Escobar makes clear that whether a requirement is expressly labeled a condition of payment is not solely dispositive of the outcome – it is only one factor. As the Court explained:
Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment. Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability. What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.
While the Court seemed to be endorsing a broad approach, the decision indicates, however, that application of the theory is more narrow than relators would prefer. Relators must show a link between the claim for payment and the undisclosed legal violation. In this regard, the Court held that the relator must plead that the defendant “ma[de] specific representations about the goods or services provided.” A request for reimbursement, without specificity as to the goods or services provided, will not suffice under Escobar.
Additionally, the underlying violation must be directly relevant to a specific representation made by the defendant. A defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” must render “those representations misleading half-truths.” Thus, technical violations that cannot be linked to any affirmative representation by the defendant should not result in an FCA violation.
Determining whether the link between the claim for payment and the undisclosed legal violation, as well as the nexus between the underlying violation and a specific representation, are context-dependent inquiries. It remains to be seen whether the district courts will establish a uniform standard for making these determinations.
The Court’s focus on the materiality of the representation indicates that pleading and proving a false certification will be a fact-specific, hotly-contested part of any qui tam action. Notwithstanding, it is important for potential relators and defendants to understand that this focus does not mean that every qui tam complaint will survive a motion to dismiss. The Court emphasized that the materiality analysis, though “rigorous” and “demanding”, should not be “too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment.” Relators have to plead “facts to support allegations of materiality” and satisfy the requirements of “plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b).”
Nevertheless, the emphasis on materiality raises a number of questions. For example, since a relator must plead and prove the materiality of the legal requirement and the defendant’s knowledge that the legal requirement was material, does this mean that both have to be satisfied? What if the materiality of the legal requirement is not disputed, but the defendant’s knowledge is disputed? Can the defendant obtain a dismissal on a motion to dismiss? The Court’s opinion does not directly answer these questions, though it suggests that the defendant would likely succeed in securing a dismissal.
The lower courts will have to grapple with these and other questions. It remains to be seen whether disputes surrounding the meaning of “materiality” will lead to inconsistent lower court opinions.
Escobar has a little something for everyone. On the one hand, it permits relators to bring qui tam actions alleging an implied false certification. On the other hand, it provides the conditions under which such a claim may be viable and assures defendants that complaints based on an implied false certification theory of liability remain subject to dismissal, despite the context-dependent nature of the claim, if relators do not plausibly allege, with particularity, that the government considers the particular undisclosed legal violation at issue to be material to its payment decision.