In a unanimous decision, the Supreme Court today charted a middle course between competing interpretations of the scope of False Claims Act.  Universal Health Servs., Inc. v. United States ex rel. Escobar, Case No. 15-7 (June 16, 2016).  The Court upheld the viability of the so-called “implied-certification” theory under the FCA, but simultaneously clarified the contours of the theory and imposed significant limitations on its reach.  It held that claims under the FCA may be actionable if they do more than merely demand payment and contain representations that state half-truths that omit critical qualifying information.

In Escobar, a teenage beneficiary of Massachusetts’s Medicaid program received counseling services for several years at Arbour Counseling Services, a satellite mental health facility owned and operated by a subsidiary of Universal Health Services, Inc.  The patient had an adverse reaction to a medication that a purported doctor at Arbour prescribed.  Her condition worsened, and she eventually died of a seizure.   Her mother and stepfather later discovered that few Arbour employees were actually licensed to provide mental health counseling, or authorized to prescribe medications or offer counseling services without supervision.  Plaintiffs then filed a qui tam suit alleging that Arbour defrauded Medicaid by submitting medical claims that made representations about the specific services provided by specific types of professionals, but that simultaneously failed to disclose serious violations of Massachusetts Medicaid regulations pertaining to staff qualifications.

The Court’s decision contains two core conclusions.  First, the Court held that the implied-certification theory of liability is valid.  The theory can serve as a basis for FCA liability when a defendant submitting a claim makes specific representations about the goods or services provided to the Government, but fails to disclose non-compliance with material statutory, regulatory, or contractual requirements.   The Court observed that omitting important information from a claim is sufficient to create an actionable misrepresentation; affirmative misrepresentations are not required so long as the omission renders the representations misleading.

Second, the Court defined, and in some respects narrowed, the theory.  Liability in such cases turns on materiality—whether the misrepresentation about compliance with a statutory, regulatory, or contractual requirement is material to the Government’s payment decision.  Materiality is a “demanding” standard that turns on a variety of considerations, including whether the government expressly identifies compliance as a condition of payment; although such an affirmative condition of payment standing alone is not dispositive of whether a condition is material.  Proof of materiality “can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.”  Slip. Op. at 16.  And conversely, the Government’s repeated payments despite actual knowledge that the submitted claims violated certain regulatory requirements are strong evidence that a condition is not material. The Court stated that a defendant can have “actual knowledge” that a condition is material even if the Government does not expressly call it a condition of payment. What matters is not the label that the Government attaches to a requirement, the Court continued, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.

The Court then charted a middle course between those courts that have rejected the implied-certification theory outright, and those courts that have set the bar so low that virtually any instance of non-compliance with a regulation or contractual provision might create potential liability (a view proffered by the Government as well).  In an important footnote, the Court confirmed that materiality is amenable to resolution on a motion to dismiss or summary judgment, rejecting the argument that materiality is too fact specific to ever serve as the basis for dismissal.  In the future “materiality” will be an important battleground in FCA cases.

Watch this space for additional analysis in the coming days, including industry-specific implications, from Dorsey & Whitney LLP.

The decision is Universal Health Services, Inc. v. United States et al., ex rel. Escobar et al.