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Argument preview: Justices to consider whether False Claims Act permits qui tam suits for “implied” falsehood

The Court next week will hear oral arguments in what may be the highest-stakes (at least in terms of dollars potentially at stake) case of the Term, Universal Health Services v United States ex rel. Escobar. At issue is a question of great import to government contractors: whether a claim submitted to the government for payment is actionably “false or fraudulent” under the so-called “implied certification” theory of falsity.

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For those who don’t specialize in government contracts law, the False Claims Act is 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 it 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 attention of the government. If their suit turns out to unearth a claim that is actionably false, the relators get to retain a large share of the proceeds of the suit.

The issue here is a surprisingly basic one: what it takes for a contractor to “knowingly” present a claim that is “false” or “fraudulent.” Under the “implied certification” theory, adopted by most though not all of the courts of appeals, any submission for payment includes an implicit certification that the contractor has complied with all applicable contract requirements (that is, applicable laws, regulations, and contract provisions). If the contractor’s performance under the contract breached applicable regulations or contract terms, then the claim for payment is, under the implied certification theory, “false.”

If that sounds obscurely abstract, the facts of this case provide useful context. The contractor (petitioner Universal Health Services) provided services to the daughter of the relators (the Escobars) at a mental health clinic in Massachusetts. Later, after adverse reactions to medication, the daughter died. On investigation, it appeared that the contractor’s operations failed to comply with certain state regulations regarding proper supervision of social workers. Regulatory authorities imposed a fine of $1,000 and required improved documentation of the clinics’ supervision practices. The parents then filed this suit under the FCA. The reimbursement claims that the clinic submitted to Medicaid accurately described the services that had been provided and the correct charges. Still, because the regulatory proceedings established that the clinic’s operations had violated applicable law, the relators claimed violations of the False Claims Act. The lower courts found the suit proper.

For a case with so much at stake – potentially hundreds of millions of dollars in FCA cases more broadly, even if the amount of money at issue in this particular case is relatively low  – the arguments in the briefs are refreshingly straightforward. The central argument of the contractor (petitioner Universal Health Services) is a plain language argument – that a claim cannot be “false” or “fraudulent” unless it states something that is untrue. If the claim seeks repayment for goods and services that the contractor actually provided and does not describe or claim any aspect of the goods and services that the contractor failed to provide, then, the contractor contends, the claim cannot be actionable under the FCA. Conversely, the relators (supported by the federal government) contend that the “claim” is false not because it includes an explicit false statement but because the contractor falsely has claimed entitlement when it submits a request for reimbursement for services that did not conform to the applicable contract. Similarly, the claim can be said to be “fraudulent” because the claim omits material facts when it fails to describe the contractor’s departures from applicable law.

The statutory arguments are ably presented, but they are so indeterminate that they seem unlikely to drive the decision. It is, I expect, the back story that will dominate the Justices’ deliberations. For its part, the contractor emphasizes the disproportionality of FCA remedies for small violations like those at stake here. The FCA imposes mandatory civil penalties of several thousand dollars for each violation of the Act (each false billing), as well as treble damages. Those damages dwarf by orders of magnitude the penalties imposed by Massachusetts regulators for the violations identified by their investigation of the contractor’s facilities. More broadly, the contractor (supported by numerous medical-industry amici) argues that it is unfair and impracticable to impose such onerous liability for each and every departure from the dauntingly intricate scheme of regulation that governs the activities of health-care professionals. The litany here is that the statute is designed to punish “fraudsters” – truly bad actors – rather than every person who happens to violate any of the tens of thousands of regulations that govern medical-service providers.

For their part, the relators (supported by the Solicitor General) emphasize the shocking level of fraud in the Medicare and Medicaid system, on the order of ten percent of all funds disbursed under those statutes. They ridicule the presentation of the contractor and its amici as a “parade of horribles,” emphasizing several features of the statute that limit its application in practice to truly serious malfeasance. One key feature of the statute gives the government the ability to intervene and take over the action if the government finds it meritorious; in most cases FCA claims are dismissed out of hand if the government chooses not to intervene and press the claim. The statute also includes a high standard of intent, requiring “knowing” presentation of a false claim. In the end, it is reasonable to expect the judicial process to sort out the fact-laden questions of whether particular claims are serious enough to warrant sanctions.

The government also draws support from numerous amici, including most notably Stanford law professor David Engstrom, the author of pathbreaking empirical studies about the FCA. Engstrom argues that concerns about burgeoning FCA litigation and high recoveries rest on scattered anecdotes inconsistent with what we can observe from accurate data about the system as a whole.

It is difficult to predict what the Justices will make of this. It is true that the contractor’s brief presents a parade of horribles, but that label doesn’t take us very far in knowing whether the Justices will find the parade horrible enough to respond. On the one hand, the Justices ordinarily are protective of government contractors; on the other, they tend to be almost reflexively hostile to those who defraud the government.

What I find most interesting about the briefing is the intense focus of the parties and amici on the medical context in which this claim arises. My own experience is much more in the realm of defense contracting (also a common FCA context, as in last Term’s Kellogg Brown & Root Services v. United States ex rel. Carter). In that context, the pressure to dispose of FCA litigation quickly on motions to dismiss is particularly telling, because an FCA judgment ordinarily leads to “debarment” – a ban on future government contracts. Because defense contractors often depend entirely on government contracts for their existence, debarment amounts to a death sentence. And it seems incongruous at best to think that large defense contractors are exposed to the risk of debarment whenever they submit a request for a contractual payment for work that includes a violation of any provision of the immense body of federal acquisition regulations. To be sure, fraud is every bit as serious a problem in that context as it is in the medical context, but the ever-present risk of debarment does make the problem of disproportionality of remedy seem more worrisome there. It will be interesting to see what the Justices make of this next week.

Recommended Citation: Ronald Mann, Argument preview: Justices to consider whether False Claims Act permits qui tam suits for “implied” falsehood, SCOTUSblog (Apr. 12, 2016, 9:12 AM),