The False Claims Act (FCA) permits lawsuits against government contractors if they “knowingly” present a materially “false or fraudulent” claim for payment. On June 16, the Supreme Court issued a unanimous decision resolving a circuit split around the viability of “implied” fraud claims – claims that are fraudulent not because of an actual misrepresentation, but because of an implicit representation of contractual and regulatory compliance perceived in the contractor’s request for payment.
In Universal Health Services v. United States ex rel. Escobar, 579 U.S. __ (2016), the contractor, Universal Health Services, provided clinical services covered by Medicaid and Medicare, and submitted claims for those services, which the government reimbursed. However, many of the individuals that provided the services did not have the required qualifications. As a result, the First Circuit treated the contractor’s reimbursement request as an implied certification that the contractor had complied with all applicable regulations, and held that the complaint stated a claim under the FCA. Though the Supreme Court agreed that implied certification is a valid basis for liability, it narrowed the route for recovery under an implied fraud theory.
The Court recognized that “common-law fraud has long encompassed certain misrepresentations by omission,” and thus extended this rule to representations that are implied in a claim for payment. The touchstone, the Court explained, is whether the omission makes the claim “misleading.” Therefore, certain “half-truths – representations that can state the truth only so far as it goes, while omitting critical qualifying information – can be actionable misrepresentations.”
Rejecting the contractor’s argument that its exposure to misrepresentations should be limited to express conditions of payment, the Court noted that nothing in the statute suggested that an express condition of payment is relevant to determining whether a claim is false or fraudulent. The Court emphasized that a regulatory requirement might well be material even if it is not a condition of payment, and just as well might be immaterial even if it is a condition of payment. However, the Court then used the Act’s materiality and scienter requirements, which the Court characterized as “rigorous” and “demanding,” to limit the broad exposure to which contractors would be subjected under this ruling.
The key concept for the Court was that an item is material only if it is outcome determinative. The Court explained that the materiality requirement “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” It is not enough to make a falsehood “material” if it would give the government a technical right to withhold payment; the falsehood has to be so serious that the government in fact would withhold payment. The Court thus vacated the First Circuit opinion, and remanded for further proceedings.
Although the Court seemingly expanded a relator’s recovery under the FCA by validating the “implied” fraud theory, the Court ultimately narrowed any recovery under such theory through the materiality requirement of the statute. In this case, the record indicates that Massachusetts conducted a full investigation of the contractor’s misconduct and decided that the appropriate sanction was a nominal fine and improved training procedures; Massachusetts neither cancelled the contract nor sought recovery of benefits previously paid. Read in light of the Court’s newly articulated materiality standard, some believe those facts suggest that the contractor has a strong chance of winning on remand. We will see!
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