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Supreme Court Considers “Implied Certifications” Under the False Claims Act

On Tuesday, April 19, the Supreme Court heard oral argument in Universal Health Services v. United States and Massachusetts ex rel. Julio Escobar and Carmen Correa, a case testing the “implied certification” theory used in many False Claims Act cases.

Implied certification” is a tricky concept developed by the federal courts under the False Claims Act (FCA).  It stems from what is known as a “false certification.”  A false certification is a request for payment from the government by a defendant, who submits a document expressly certifying compliance with a contract, regulation, or statute, but who in fact did not comply.  An “implied certification” involves a claim for payment where a defendant did not expressly certify compliance, but the act of submitting the claim “implies” compliance with specific terms or regulations.  For instance, submitting a claim for payment to Medicare has been deemed an implied certification of compliance with the Anti-Kickback Statute and the Stark Law.

The federal courts have disagreed both over whether an “implied certification” can constitute a “false claim” under the FCA, as well as what rules or statutes must be violated.  For instance, some courts of appeals have focused on the materiality of the defendant’s conduct and whether the government would have paid the defendant’s claim, had it known that it was violating a specific contract or statute.  Other courts have found that the defendant must violate a specific statute or contract term upon which payment is conditioned.  In other words, for a defendant to be liable for not doing X, Y, or Z, the contract must state explicitly that the defendant will not be paid if he does not do X, Y, or Z.

In Universal Health Services, the relators claimed that the defendant, a mental health clinic, did not adequately supervise its caregivers and did not employ people with the required credentials.  The First Circuit Court of Appeal found that the relators had a valid claim under the False Claims Act.  On appeal, the Supreme Court is considering two questions.  First, is the “implied certification” theory viable?  Second, if “implied certifications” are viable, must a defendant violate an express condition of payment set forth in a contract, statute, or regulation?

According to reports on the oral argument, the justices did not reveal much on where they stand.  Justice Sotomayor provided the most robust argument in favor of recognizing implied certifications.  The appellant argued that most “implied certification” cases are mere breaches of contract and focused extensively on the definition of fraud in the Restatement (Second) of Torts, section 551.  Challenging that assertion, Justice Sotomayor provided an example of a government contract where the government sought to purchase guns, but the guns did not shoot.  In a heated exchange, Justice Sotomayor asked counsel for the appellant:  “Do you think that anybody, except yourself, would ever think that it wasn’t a fraud to provide guns that don’t shoot if that’s what the –the government contracted for?”  Likewise, Justice Kagan pressed the appellant on a similar point, asking if a contractor “[i]n demanding payment for having satisfied the contract” has or has not represented that it has “satisfied the contract,” wondering why that would not be a fraud.

On the flip side, the Chief Justice asked counsel for the relators point blank if relators’ position is “that every material breach of a contract gives rise to a False Claims Act – a claim under the False Claims Act as false and fraudulent?”  Counsel noted that the violation has to be “knowing,” in that the defendant has to know about the specific regulation that it is violating and that the regulation is material to the government’s decision to pay.  The assistant solicitor general reiterated this point, focusing on scienter.

All in all, the argument revealed little about how the justices might lean on this question.  The justices expressed sympathy that contractors may be held liable for fraud for minute regulatory violations, but at the same time, several justices recognized that a knowing failure to comply with a law or contract could rise to the level of fraud.

A ruling in favor of the contractor, however, could be a major blow to the government and to whistleblowers in trying to recover ill-gotten gains.  Many of the types of Medicare and Medicaid fraud pursued by whistleblowers utilize the “implied certification” theory, as the submission of an individual claim does not carry with it an explicit certification of compliance with all Medicare rules.  Stay tuned, as the case should be resolved by the end of June, and we will all be watching the result closely.