Supreme Court Approves Implied Certification Theory for the False Claims Act

On June 16, 2016, the U.S. Supreme Court broadened exposure under the False Claims Act (“FCA”) by holding that the implied false certification theory can be a basis for FCA liability. The long-awaited decision, Universal Health Services, Inc. v. Escobar, is viewed as a victory for whistleblowers and the federal government, although the Court’s discussion of the “materiality” requirement could limit potential liability.

The Universal Health decision involved a mental health center’s failure to disclose that its personnel misrepresented their credentials during the treatment of a young woman who died of a seizure. The Court said that Universal Health’s use of payment codes corresponding to specific counseling services represented that its employees had provided legitimate medical services by fully licensed employees. The Court concluded that “[b]y using payment and other codes that conveyed this information without disclosing… many violations of basic staff and licensing requirements for mental health facilities, Universal Health’s claims constituted misrepresentations.” Universal Health, 579 U.S., slip.op. at 11.

The Court held that the implied false certification theory can be a basis for FCA liability if a claim for payment (a) makes specific representations about the goods or services provided but (b) fails to disclose noncompliance with material statutory, regulatory, or contractual requirements that would render the representations “misleading half-truths.” The Court defined “misleading half-truths” as “representations that state the truth only so far as it goes, while omitting critical qualifying information.” Universal Health, 579 U.S., slip.op. at 10.

While validating liability for implied certification, the Court also held that non-compliance of express conditions is not an automatic basis for liability. Instead, the Court ruled that liability depends on whether the defendant violated, or mispresented, compliance with a legal requirement that the defendant knew was material to the government’s decision to pay. Therefore, an important aspect of the Universal Health opinion focuses on the Court’s discussion of “materiality.”

The Court noted that the “materiality standard is demanding,” but chose not to establish a bright-line test. The Court explained that a misrepresentation is not material “merely because the Government designates compliance” with a certain requirement. Nor can materiality be found where noncompliance is “minor or unsubstantial.” The materiality element is not automatically satisfied simply because the Government identified a “provision as a condition of payment.” The Court’s discussion of the materiality standard opens the door for new arguments as to whether defendants had knowledge that their violations would be material and, thus, subject to FCA liability.

It is likely that DOJ enforcement actions will result in varying and perhaps conflicting decisions from the lower courts in upcoming years, as parties battle over the meaning of the Supreme Court’s decision last week. Nonetheless, the decision further confirms the importance and the potential for expansion of False Claims Act enforcement across many business sectors.

Please contact Jonathan Feld (312-627-5680 or jfeld@dykema.com) or Eric Klein (248-203-0891 or eklein@dykema.com) if you have any questions.