High Court to Resolve Split of Authority on “Implied” False Claims

By Susan B. Cassidy on December 13, 2015

Posted in False Claims Act, Government Contracts Regulatory Compliance, Jurisdiction

On December 3rd, the Department of Justice released its annual summary of recoveries in False Claims Act (FCA) cases. Although down from last year’s $5.69 billion, this year’s recoveries of $3.5 billion demonstrate the power that the government wields to drive settlements of fraud allegations. Of the $3.5 billion, $1.1 billion in recoveries are attributable to settlements and judgments in cases alleging false claims for payments under government contracts. A good portion of these settlements likely were driven by claims of false implied certifications.

For many years, federal courts have grappled with the issue of whether factually accurate claims submitted to the government for payment can nevertheless be “false or fraudulent,” pursuant to an implied certification theory, because of an underlying violation of law. On December 4th, the Supreme Court granted certiorari in a case that should decide whether this theory of liability is valid. Universal Health Services v. United States ex rel. Escobar represents the latest entry in a debate among the United States Courts of Appeals about the viability of the “implied false certification” theory. The cert petition raised three questions. The Court granted certification on the following two questions, leaving behind a factual inquiry about the scope of the First Circuit’s review:

“Whether the ‘implied certification’ theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable”; and

“If the ‘implied certification’ theory is viable, whether a government contractor’s reimbursement claim can be legally ‘false’ under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for a legally ‘false’ reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits.”

The False Claims Act does not define the term “false,” so a plaintiff’s burden on the “falsity” element of a case depends on the circuit in which he or she files the claim. The theory—embraced in some form by a majority of the circuits—treats a government contractor’s invoices as certifications that the contractor has complied with all applicable contract terms, laws, and regulations. This concept makes it relatively easy for plaintiffs to plead an FCA violation, especially in the jurisdictions where the law does not even require compliance to be an express condition of payment. The lax standard creates cascading liability for even a single violation of an unrelated regulation.

Although most circuits recognize the viability of the implied false certification theory, the circuits are split on the type of underlying condition must be breached for implied certification to apply. For example, two circuits—the Second Circuit and Sixth Circuit—would permit the implied certification only if the payment is expressly conditioned on the underlying contractual term, statute, or regulation. In contrast, while allowing the theory, the First Circuit and D.C. Circuit have explicitly rejected the tie to payments. The Ninth Circuit embraced the concept in 2010, but in doing so emphasized that a plaintiff must still meet the rigorous pleading standards of Federal Rule 9(b). Finally, although the Fifth Circuit has not yet explicitly recognized the implied certification theory, it has held that the underlying regulations must be a “condition or prerequisite” to payment for both implied and express false certification claims. The Fifth Circuit holds that if the government still had discretion to make the payment after a contractor’s breach, payment was not preconditioned on compliance. These nuances in the decisions have made navigating this issue difficult, and a contractor’s potential FCA exposure is markedly different depending on the circuit in which the case is brought.

More importantly, the law continues to evolve. As we have discussed on this blog, the Fourth Circuit recently reaffirmed its support for the theory, while the Seventh Circuit rejected it. The Seventh Circuit concluded that “it would be … unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference … are conditions of payment for purposes of liability under the FCA.”

The petitioner’s primary position urges the Court to reject the theory altogether, emphasizing the need for clear standards in order to avoid “potentially limitless liability under the FCA, far beyond its intended purposes and scope.” That line of argument has been persuasive, including in the Court’s last term when a unanimous Court scaled back an expansive limitations period.

False Claims Act litigation has been a bonanza for the government (and for private relators) in the past few years. Brighter lines around the “falsity” element could make those dollars harder to reach. Watch this space for more analysis of the briefing and argument over the next few months.