Yesterday, the Supreme Court decided Universal Health Services, Inc. v. United States ex rel. Escobar, a case that many hoped would provide much-needed clarity on the viability of the implied certification theory of liability in False Claims Act cases. While the Court held the implied certification theory as a viable basis to impose liability, the ruling did little to provide the hoped-for clarity.
Justice Thomas, writing for a unanimous Court, held that the implied certification theory can be a basis for liability under the False Claims Act in cases “where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services being provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”
Addressing Universal Health Services’ argument that False Claims Act liability should be limited to situations where a defendant fails to disclose a statutory, regulatory, or contractual violation that the government has expressly designated a condition of payment, the Court held the False Claims Act imposes no such limit on liability. In doing so, the Supreme Court upended the bright line “condition of payment” vs “condition of participation” distinction adopted in a number of circuits, and held that in order to support liability the misrepresentation about compliance with statutory, regulatory, or contractual requirements must be “material” to the government’s payment decision.
Justice Thomas went on to explain that “[t]he materiality standard is demanding,” and “[t]he False Claims Act is not an all-purpose anti-fraud statute or a vehicle for punishing garden variety breaches of contract of regulatory violations.” Even so, the decision does little to reassure health care providers who face an increasing risk of liability under the newly announced standard. While rejecting the bright line test adopted by a number of circuits, the Court did suggest that in light of the heightened pleading standard required by the False Claims Act -- a standard that would now require pleading facts to support materiality in the complaint -- pretrial disposition on a motion to dismiss or at summary judgment would still be appropriate in cases where the complaint failed to meet this rigorous standard.
It is impossible to say what the long term impact of this decision will be -- in the immediate aftermath of the decision both the defense and relators bar are claiming some semblance of victory. In the near term, the decision offers more clarity as to what must be pleaded in a complaint alleging violations of the False Claims Act based upon implied certification, and complaints that fail to allege non-compliance with a statutory, regulatory, or contractual requirement that was “material” to the government’s payment decision will be subject to dismissal. At the same time, the Court has let the implied certification theory stand, thereby opening healthcare providers and other entities that submit claims to the government to more whistleblower cases based on ever more expansive theories of liability. What is certain is that lower courts will have to confront and flesh out this new standard and the government, defendants and relators will face increased pre-trial litigation aimed at determining the contours and limits of the Court’s decision.