Supreme Court Will Take Up Implied Certification Theory of FCA Liability

Protests and LitigationOn December 4, 2015, the Supreme Court of the United States granted certiorari in Universal Health Services, Inc. v. Escobar, agreeing to take up the validity and application of the implied certification theory of False Claims Act (FCA) liability.  The implied certification theory of liability provides that a party may be held liable for violating the FCA where that party has made a request for payment despite its noncompliance with applicable statutes, regulations, or contract provisions that are material preconditions to payment.  The Supreme Court has agreed to consider two questions, as framed by petitioner Universal Health Services, Inc. (UHS):

  1. “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.”
  2. “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.”

Facts

In Escobar,[1] the relators’ daughter, a teenage recipient of state medical benefits, consulted with various mental health counselors at Arbour Counseling Services (“Arbour”), which is owned and operated by UHS, to seek treatment for behavioral problems.  After it was discovered that relator’s counselors were not licensed by the state to provide mental health therapy, as required by Massachusetts regulations, relators filed suit in the District Court for Massachusetts.

Relators’ complaint alleged that Arbour fraudulently submitted invoices for payment based on mental health services provided by counselors that were not licensed as required by Massachusetts regulation.  Relators further alleged that Arbour made similar fraudulent misrepresentations with respect to other clinical staff members and nurse practitioners, and that Arbour invoiced the government despite Arbour’s noncompliance with staffing and supervision regulatory requirements.

The district court dismissed the relators’ complaint, finding that the Massachusetts regulations at issue imposed only “conditions of participation,” and not “preconditions to payment” sufficient to give rise to FCA liability.  In so holding, the district court analyzed the text of the specific regulations at issue and noted that the regulations did not contain explicit text indicating that the regulations were conditions of payment.

Relators subsequently appealed, and the U.S. Court of Appeals for the First Circuit reversed.  Noting that “[p]reconditions of payment, which may be found in sources such as statutes, regulations, and contracts, need not be ‘expressly designated,’” the First Circuit held that the regulations at issue were, in fact, conditions of payment, and remanded the case for further proceedings.

On June 30, 2015, UHS filed a petition for certiorari with the Supreme Court.

Circuit Split

The Supreme Court’s decision in this case will have a significant impact on FCA jurisprudence, and potentially will resolve a deep-seated split among the federal courts of appeals.  Almost every circuit has weighed in on the implied false certification doctrine, with the majority of circuits recognizing the validity of the doctrine to some extent.

In the Fourth and D.C. Circuits, any knowing and material breach or violation of a contract, statute, or regulation that can be viewed as a prerequisite to payment can give rise to liability.[2]  In contrast, the Second, Third, Sixth, Ninth, Tenth, and Eleventh Circuits apply a narrower view of the doctrine, rejecting liability based on implied certification of compliance with regulations that are conditions of federal government program participation,[3] and instead limiting the application of the doctrine to situations where compliance with the applicable statute, regulation, or contract provision contains an express prerequisite to payment.[4]  The Seventh Circuit recently deepened the split with its potential rejection of the doctrine.[5]

Oral argument in the Supreme Court will likely be held in March or April 2016, and a decision is expected by the end of June 2016.

Morrison & Foerster will continue to monitor this development closely.  Please reach out to the authors of this alert, or your Morrison & Foerster contact, with any questions.


[1]  United States v. Universal Health Servs., Inc., 780 F.3d 504, 512 (1st Cir. 2015) cert. granted in part, No. 15-7, 2015 WL 4078340 (U.S. Dec. 4, 2015).

[2] See Hutcheson, 647 F.3d at 379; Triple Canopy, Inc., 775 F.3d at 636; Sci. Applications Int’l Corp., 626 F.3d at 1269.

[3] See Mikes, 274 F.3d at 700; United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 306-07 (3d Cir. 2011); United States ex rel. Augustine v. Century Health Servs., Inc., 289 F.3d 409, 415 (6th Cir. 2002); Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010); United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1219-20 (10th Cir. 2008); McNutt ex rel. United States v. Haleyville Med. Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005).

[4] See, e.g., Mikes, 274 F.3d at 700 (“[I]mplied false certification is appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid.”); Conner, 543 F.3d at 1220; see also United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 115 (2d Cir. 2010), rev’d on other grounds, 563 U.S. 401 (2011) (“Because the statute expressly states that the contractor must have submitted the report in order to be paid, a contractor that requests payment under such a contract ‘implicitly certifies compliance’ with the VETS–100 reporting requirement. Kirk therefore states a valid claim under the FCA when he alleges that Schindler submitted bids and won contracts without having filed the requisite report . . . .”); contra Hutcheson, 647 F.3d at 387 (“claim[s] may be false or fraudulent due to an implied representation of compliance with a precondition of payment that is not expressly stated in a statute or regulation”).

[5] United States v. Sanford-Brown, Ltd., 788 F.3d 696, 711-12 (7th Cir. 2015) (“Although a number of other circuits have adopted this so-called doctrine of implied false certification, we decline to join them and instead join the Fifth Circuit.”) (internal citation omitted).

The text of the Seventh Circuit’s decision leaves open to interpretation whether the Court has declined to follow the doctrine of implied false certification in its entirety or has joined the majority of other Circuits in narrowly applying the doctrine:

[W]e conclude that it would be equally unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the [Program Participation Agreement] are [sic] conditions of payment for purposes of liability under the FCA.  Although a number of other circuits have adopted this so-called doctrine of implied false certification, we decline to join them and instead join the Fifth Circuit.

Sanford-Brown, 788 F.3d at 711-12 (internal citation omitted).  DOJ has argued that there is reason to doubt a categorical rejection of the doctrine by the Seventh Circuit because the decision in Sanford-Brown largely focused on the specific statutory context in which the allegedly false claims were submitted.  DOJ also argued that the cited Fifth Circuit decision did not reject the theory of liability.  See Brief for the United States in Opposition at 14-15, United States v. Triple Canopy, Inc., No. 14-1440 (U.S. petition for cert. filed June 6, 2015).  Moreover, the Fifth Circuit’s position is less than clear.  See United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268-270 (5th Cir. 2010) (“We have thus repeatedly upheld dismissal of false-certification claims (implied or express) when a contractor’s compliance with federal statutes, regulations or contract provisions was not a ‘condition’ or ‘prerequisite’ for payment. … This prerequisite requirement seeks to maintain a ‘crucial distinction’ between punitive FCA liability and ordinary breaches of contract.”); but see, e.g., United States ex rel. Gage v. Davis S.R. Aviation, L.L.C., No. 14-50704, 2015 WL 4237682, at *2 (5th Cir. July 14, 2015) (“[T]his court has avoided deciding whether to recognize the implied certification theory.”).