On June 16, 2016, the United States Supreme Court, in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), issued a unanimous decision, written by Justice Clarence Thomas, which established that the implied false certification theory can be a basis for liability under limited circumstances. In its decision, the Court considered the theory of implied false certification liability and clarified the circumstances in which the False Claims Act imposes liability for government contractors. The government and plaintiffs alleging false claims by contractors have asserted that the False Claims Act can be violated if at the time a contractor submits a claim to the government the contractor is in violation of any applicable law, regulation or contractual requirement. This is known as the “implied false certification” theory of liability: that contractors are implicitly certifying to compliance with all applicable laws, regulations and contractual requirements at the time a claim is submitted. Prior to the Escobar decision, Circuit courts were split on whether to recognize the implied certification theory, and if so, the test to be applied for determining liability under the False Claims Act. The Escobar decision has helped to clarify this issue.

Specifically in Escobar, the Court held that (i) when a contractor (in Escobar, a medical services company working under Medicare and Medicaid) makes representations in submitting a claim but fails to disclose violations of statutory, regulatory or contractual requirements, the failure to disclose can be a basis for liability if it renders the defendant's representations misleading with respect to the goods or services provided, and (ii) False Claims Act liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment and that even when a requirement is expressly designated a condition of payment, the requirement must be material to the government’s payment decision in order to be actionable under the False Claims Act.

In issuing its decision, the Court in Escobar rejected the Seventh Circuit’s view that implied false certification is not a valid theory of liability, and also rejected the position of the Second Circuit and other Courts of Appeals that an implied false certification must concern noncompliance with an express condition of payment. The Court stressed the common-law fraud element of materiality and declined to let every undisclosed violation of an express condition of payment automatically trigger liability, because, as the Court held, materiality does not simply depend on whether the government would be entitled to refuse payment were it aware of the violation. Regardless of whether a requirement is an express condition of payment, materiality cannot be found where noncompliance is minor or insubstantial.

In sum, after Escobar, the implied false certification theory of liability under the False Claim Act is alive and well but requires a fact-specific showing that any law, regulation or contractual requirement violated at the time a claim is submitted is material to the government’s payment decision.

This new ruling could have significant implications for government contractors, grantees, and contractors under grants, including Medicare and Medicaid. Contractors and grantees not in compliance with all applicable laws, regulations and contractual requirements each time a claim for payment is submitted risk potential liability, particularly where the non-compliance relates to a requirement material to the government’s payment decision. It is also likely that prime contractor and subcontractor disputes now may include additional false claims ramifications when either party alleges that the other is in noncompliance with the rules and regulations that frame their relationships. Moreover, there is a legitimate concern that this ruling will expand the scope of criminal inquiries into what previously had been a questionable area for prosecution. All of this means that recipients of federal dollars are advised to undertake regular compliance reviews to ensure ongoing compliance and timely disclosure that may be required after discovery of noncompliance; being careful to preserve the attorney-client privilege.

Additional Information

This client alert was prepared by members of Kutak Rock’s Government Contracts Group. For additional information, please contact a member of the group listed below.