On December 4, 2015, the U.S. Supreme Court granted certiorari in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7, to review the so-called “implied certification” theory of liability under the federal False Claims Act (FCA). That theory, which both the federal government and private “relators” have invoked with increasing frequency, finds an FCA violation for those who seek funds from the government while in violation of a legal or contractual obligation—even when they have not expressly verified their compliance with that legal or contractual obligation. Given the breadth of circumstances in which the implied certification theory has been, and can be, applied, the Court’s ruling in Universal Health Services could bring far-reaching changes to the scope of FCA liability.
The FCA, which targets particular forms of fraud committed against the federal government, reaches virtually every aspect of the economy because it extends to those who seek and receive federal funds. Specifically, the statute imposes liability—along with treble damages and substantial civil penalties—for knowingly presenting (or causing to be presented) a “false or fraudulent claim” for payment on the federal government, or for making a false “record or statement material” to a “false or fraudulent claim” for payment. 31 U.S.C. § 3729(a)(1)(A), (B). The FCA does not, however, define “false or fraudulent” for purposes of this provision, so courts have adopted their own theories of falsity. One of those theories is the “implied certification” theory, which most circuits have adopted in one form or another. Under that theory, a defendant can be liable where a claim for payment is made to the government while the defendant is in violation of a statutory, regulatory or contractual provision—even if the defendant has not communicated to the government or anyone else that it is in compliance with such a provision. In this circumstance, the defendant is found to have implied its compliance when it (or someone at its behest) makes a claim for payment.
Many circuits have approved this theory even where the law or contract at issue does not expressly state that compliance with it is a condition of getting paid. See United States v. Triple Canopy, Inc., 775 F.3d 628, 636 (4th Cir. 2015), petition for cert. filed, No. 14-1440 (U.S. June 5, 2015); U.S. ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377, 387 (1st Cir. 2011); United States v. Sci. Applications Int’l Corp. (SAIC), 626 F.3d 1257, 1269 (D.C. Cir. 2010). Some circuits, by comparison, require that the law or contract expressly state that compliance is a condition of payment. See Chesbrough v. Visiting Physicians Ass’n, 655 F.3d 461, 468 (6th Cir. 2011); Mikes v. Straus, 274 F.3d 687, 699 (2d Cir. 2001). And at least one circuit has rejected the implied certification theory altogether. United States v. Sanford-Brown, Ltd., 788 F.3d 696, 711-12 (7th Cir. 2015) petition for cert. filed, No. 15-729 (U.S. Dec. 2, 2015).
The relaxed burden of proving the implied certification theory explains its use by relators and the government in an extraordinarily wide variety of circumstances, including:
- Defense contractor’s alleged non-compliance with its contractual “responsibilit[y]” to ensure its security personnel had received proper weapons training (Triple Canopy, 775 F.3d 628)
- Health care provider’s alleged non-compliance with industry standards based on Medicare regulations governing radiology studies (Chesbrough, 655 F.3d 461)
- College’s alleged non-compliance with regulations governing recruitment of students (Sanford-Brown, 788 F.3d 696)
- Government contractor’s violation of contractual provisions prohibiting conflicts of interest relating to recycling of radioactive materials (SAIC, 626 F.3d 1257)
- Cycling companies’ alleged non-compliance with international cycling organizations’ rules and regulations, in breach of sponsorship agreements with U.S. Postal Service (U.S. ex rel. Landis v. Tailwind Sports Corp., 51 F. Supp. 3d 9 (D.D.C. 2014))
In Universal Health Services in particular, the parents of a patient who died of a seizure following treatment at a mental health clinic run by the defendant’s subsidiary sued the defendant under the FCA. The parents claimed that the defendant violated the FCA by seeking Medicaid reimbursement despite its subsidiary’s violation of state regulations governing the hiring and supervision of staff. The district court dismissed the parents’ complaint, but the First Circuit reversed. 780 F.3d 504 (1st Cir. 2015). The court of appeals acknowledged that there was no evidence that the subsidiary explicitly represented compliance with any regulatory provisions. Id. at 514 n.14. And the staffing regulation at issue did not expressly state that compliance with it was a condition of Medicaid reimbursement. But under the First Circuit’s own precedent, neither express statements of compliance by a defendant, nor an express condition of payment set forth in the law or contract at issue, was required to make out an FCA claim—allegations of regulatory noncompliance, coupled with claims for payment, were enough. Id. at 512-14.
With the Supreme Court’s grant of certiorari in Universal Health Services, the very existence of the implied certification theory could now be in play. The Court accepted two questions for review—(1) whether the theory is valid at all and, if it is, (2) whether it applies only where the defendant fails to comply with a statute, regulation, or contractual provision that expressly provides that compliance is a condition of receiving payment from the government. In resolving the first question, the Court conceivably could rule that implied certification is not a viable basis for FCA liability under any circumstances. Although such a ruling may not be the most likely outcome, there are grounds to support it. For one thing, as a leading commentator has explained, “allowing liability to be imposed because of false implied certifications has the practical effect of eliminating the government’s burden of proving that a defendant knowingly submitted a false claim to the government. Instead, such cases are based on the allegation that a defendant knowingly and falsely implied that it never fell out of compliance with certain laws, regulations, or contract terms.” See 1 John T. Boese, Civil False Claims and Qui Tam Actions § 2.03[G], at 2–151 (3d ed. Supp. 2009-2).
As for the second question, even if the Court accepts the implied certification theory, it may determine that the theory will only apply where the law or contractual provision at issue clearly states that compliance is a condition of getting paid by the government. Such a “clear statement” requirement arguably is essential to give recipients of funds fair notice as to what they will be impliedly certifying compliance with when they ask for payment. It also serves to ensure that the FCA is not wielded as a “sweeping instrument to promote regulatory compliance” (U.S. ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 697 (4th Cir.), cert. denied 83 U.S.L.W. 3185 (U.S. 2014)), by imposing its punitive remedies on violations of often-times obscure legal or contractual duties (U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010) (“express” condition of payment requirement “maintain[s] a crucial distinction between punitive FCA liability and ordinary breaches of contract”)). While this result would not eliminate the theory altogether, it would narrow substantially the theory’s scope.
Of course, the Supreme Court also could fully embrace the implied certification theory without any “clear statement” limitation. That result likely will provide the impetus for an expansion of FCA litigation and, correspondingly, enhanced exposure for those who do business with the government. Given the stakes, an out-pouring of amicus curiae support on all sides is anticipated. The Court likely will ask the solicitor general for his views on the theory as well. Oral argument is anticipated in March or April 2016, with a decision on the merits expected before the end of the term in late June or early July.
Our Reed Smith team will continue to monitor this important case closely and report on further developments as they unfold.
Client Alert 2015-343