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Argument analysis: Justices display disparate views on implied fraud under False Claims Act

About the only thing clarified by yesterday’s oral argument in Universal Health Services v. United States ex rel. Escobar is that the Court is unlikely to issue a unanimous opinion. The visceral reactions of the Justices on the merits of the case could hardly be more disparate.

The case arises under the False Claims Act, a Civil War-era statute that provides for treble damages against government contractors that “knowingly presen[t] . . . false or fraudulent claim[s] for payment.” What makes the statute interesting is its “qui tam” provision, which authorizes “relators” – private individuals whom government contractors characterize as bounty hunters – to bring suit if they notice a false claim that has not come to the government’s attention. When their suits turn up claims that are actionably false, the relators retain a large share of the proceeds.

The case involves the lower courts’ validation of so-called “implied” fraud – claims that are fraudulent not because of an actual misrepresentation, but because demands for payment implicitly include a false representation. In this case, for example, the contractor (Universal Health Services) provided clinical services covered by Medicaid and Medicare; in due course it submitted claims for those services, which the programs reimbursed. In hindsight, it turns out that some individuals who provided some of the services did not have the certifications required by the regulations that applied to the particular services that they supplied. Treating the contractor’s reimbursement request as an implied certification that the contractor had complied with all applicable regulations, the First Circuit held that the complaint stated a claim under the False Claims Act.

Contractors hate the “implied certification” theory because it leaves them exposed to potential punitive damages and debarment from government contracts if they fail to comply even with a relatively obscure regulation. The concern is particularly high in areas (like Medicare or defense procurement) in which the contracts and appropriate regulations are especially complex. The government feels it is a necessary part of quelling ever-burgeoning levels of fraud in government contracts; health-care fraud is no small part of the problem.

On one side of the matter, Chief Justice John Roberts was sympathetic to the contractor’s concerns. For example, in a dialogue with Deputy Solicitor General Malcolm Stewart (appearing in support of the relator Julio Escobar), he proposed a hypothetical involving a large government contract in which the contractor complies with all of the terms except for a “buy America” term for staplers. Stewart agreed with the Chief Justice that the failure to buy American staplers would justify the government in withholding one hundred dollars (the cost of the staplers from the contract price). Under the federal government’s theory of the case, because that defect was sufficiently material to justify withholding the contractor’s claim for payment, the contractor’s claim for payment would be actionable under the False Claims Act (and thus subject to punitive damages). When Justice Elena Kagan followed up, pressing Stewart to explain what kinds of terms would be immaterial – so that their breach would not justify a False Claims Act suit – Stewart took the position that all of the government’s contract terms are material. It is pretty clear, at a minimum, that some of the Justices will not go that far.

On the other side of the spectrum was Justice Sonia Sotomayor, who repeatedly pressed Roy Englert (arguing for the contractor). Her hypothetical involved “guns that don’t shoot.” Sticking to his position, Englert insisted that unshootable guns might breach the procurement contract, but that even a material contract breach is not at all the same thing as a “false” or “fraudulent” claim – a tort. Justice Sotomayor, though, was wholly unpersuaded – arguably outraged:

So providing a gun that doesn’t shoot to the Army is simply a contract breach? …. What more facts do you need? Government contracted for guns. All of a sudden you deliver guns that don’t shoot. …. Do you think that anybody, except yourself, would ever think it wasn’t a fraud to provide guns that don’t shoot if that’s what the government contracted for?

As she put it repeatedly, she was “having a very hard time . . . understanding how you haven’t committed a fraud.”

In between those poles, Justice Breyer spent much of the argument trying to identify a line between breaches sufficiently serious to make a payment request “fraudulent” and those that were simply garden-variety contract breaches. Early on in a colloquy with Englert, he explained: “That’s to me what’s at the heart of this. How do you distinguish those regulations, breach of which are fraudulent when you breach them, from those that it is not? There are millions of regulations. That’s what all the amici are worried about.”

Both sides presented simple and forceful arguments. Englert insisted that the Court should draw its definition of fraud directly from the Restatement of Torts. The colloquy reached its height at the end of Englert’s main presentation, when Justice Breyer asked Englert “from your point of view, what the sentence in the opinion should say that describes the circumstances under which the person that submits a [payment request] has committed fraud. What is the sentence you want me to write?” Englert’s response (the last words before he sat down) was succinct: “‘See Restatement (Second) of Torts, Section 551(2)(b) and (e) and Comments j and k, and Illustrations 3 through 8.’ That’s the sentence.”

For his part, David Frederick (arguing for the relator Escobar) presented a similarly straightforward position, from which he did not stray throughout his presentation: “When a claimant asserts a right to government funds without disclosing that it has knowingly violated the government’s material payment conditions, that claim is both false and fraudulent, regardless of whether it contains express false statements.”

It is difficult to read the Court as a whole on this case. Aside from the Chief Justice (who seemed predisposed in favor of the contractor) and Justice Sotomayor (who seemed predisposed in favor of the relator), the discussion was relatively balanced. If I wanted to point to anything that might suggest that a majority might turn out to lean one way or the other, I would pick two points in the argument.

The first was an exchange between Frederick and the Chief Justice late in Frederick’s presentation. The Chief Justice suggested that under Frederick’s rule government contractors would have to say that “our bid is going to be a little bit higher to cover that potential risk.” Frederick quickly pointed out that the contractors in fact couldn’t raise the rate: “These are not bid-ask situations, by and large. . . . These are in the healthcare area under entitlement programs in which the government is setting the rate and in which the person is saying . . . I have a legal entitlement to receive reimbursement.” Frederick’s point surely is correct, but I’m not so sure it cuts in favor of his client. In a regime in which the contractors have to accept the price that the government sets, some of the Justices at least will be concerned about exposing the contractors to the risk of litigation under the False Claims Act for regulatory errors that are relatively minor in the scope of the contract as a whole.

The second was an extended comment by Englert during his rebuttal. Englert managed to save eight minutes for his rebuttal, and the Justices let him begin his rebuttal with a few minutes of uninterrupted commentary, the most effective part of which emphasized the obscurity of the regulatory violation at issue here. However logical Frederick’s test seems in the abstract, Englert had the chance to emphasize that Frederick’s rule, in this case, led to the approval of a complaint by an appellate court relying on the contractor’s violation of a regulation located first when the case was on appeal, a regulation so obscure that it had not been cited either by the relator or commonwealth of Massachusetts. As a closing statement, unrebutted by the relator or the government, it gave him a powerful last word.

I think it is pretty safe to say we will be waiting for June for the final word on this one!

Recommended Citation: Ronald Mann, Argument analysis: Justices display disparate views on implied fraud under False Claims Act, SCOTUSblog (Apr. 20, 2016, 3:21 PM),