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Opinion analysis: Justices chart their own path in narrowing recovery for implied fraud under the False Claims Act

Justice Clarence Thomas’s opinion for a unanimous Court in Universal Health Services v. United States ex rel. Escobar resolves a major dispute among the lower courts under the False Claims Act.  If you’re not familiar with it, the False Claims Act is a major thorn in the side of government contractors, 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 attention of the government.  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 of an implicit representation of contractual and regulatory compliance perceived in the contractor’s request for payment.  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.  It turns out that many of the individuals that provided the services did not have the required qualifications. 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. The Court’s opinion reversing the court of appeals is interesting because it specifically rejects the principal arguments that the contractor presented, yet still ends up ruling in favor of the contractor on a broad new theory largely of the Court’s own devising.

The propriety of the “implied” certification theory is the “big” question that seemed to justify review in Escobar.  And on that question, the Court came down squarely in favor of the government.  The Court emphasized that “common-law fraud has long encompassed certain misrepresentations by omission,” and had no trouble extending that rule to representations that are implied in a claim for payment.  The touchstone, the Court explained, is whether the omission makes the claim “misleading.”  In the Court’s phrasing, the doctrine falls within a familiar “rule that half-truths – representations that state the truth only so far as it goes, while omitting critical qualifying information – can be actionable misrepresentations.”

The Court turned next to the contractor’s argument that the Court, if it accepted the implied certification theory, should limit the contractor’s exposure to misrepresentations about express conditions of payment.  The Court’s rejection of that proposal was almost flippant.  The Court noted that nothing in the statute suggested that an express condition of payment is relevant to determining whether a claim is false or fraudulent.  Moreover, the Court emphasized, a regulatory requirement well might be material even if it is not a condition of payment – such as a requirement “that guns it orders must actually shoot” – and just as well might be immaterial even if it is a condition of payment.  On the latter point, the Court emphasized that the government might respond to a rule turning on whether a regulatory requirement is a condition of payment “by designating every legal requirement an express condition of payment,” which would expand False Claims Act liability beyond any reasonable bound.

Having rejected the contractor’s arguments with a tone showing little concern for the contractor’s broad exposure to liability, the Court turned to its own mechanism for limiting undue exposure under the Act, “strict enforcement of the Act’s materiality and scienter requirements,” which the Court characterized as “rigorous” and “demanding.”  The key concept, for the Court, was that an item is material only if it is outcome determinative.  Thus, quoting Williston, the Court explained that the requirement “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” To underscore the vigor of the point, the Court emphasized that it was articulating a standard that is not “a vehicle for punishing garden-variety breaches.”

The Court illustrated its “materiality” requirement with a hypothetical from the government’s oral argument: a contract that requires that contractors buy American-made staplers.  Because the use of foreign staplers would justify the government in withholding payment under the contract, a failure to disclose the use of foreign staplers would in the government’s view be material.  The Court rejected “such an extraordinarily expansive view of liability,” emphasizing that the correct analysis would turn on whether the government “pays claims despite knowing that foreign staplers were used.”  Recognizing that the government would be unlikely to cancel a major contract for such a trivial item, the Court suggested that such a breach in that event would not justify False Claims Act liability.

To a large extent, the opinion reads much like the Court’s decision in Kirtsaeng v. John Wiley & Sons, announced earlier on Thursday morning – with the bulk of the opinion rejecting one after another of the arguments offered to justify reversal of the lower court opinion, followed by a surprise turn at the end of the opinion as the Court finds just one point sufficient to justify reversal.  The difference between this case and Kirtsaeng is that the basis for reversal here well might offer a standard under which the contractor will prevail.

As I explained in my post about Kirtsaeng, the opinion in that case reversed the Second Circuit without suggesting any line of reasoning likely to result in a victory for Kirtsaeng on remand.  This case looks quite different.  What we know from the record here is that Massachusetts conducted a full investigation of the contractor’s misconduct and decided that the appropriate sanction was a nominal fine and improved training procedures; Massachusetts neither canceled the contract nor sought recovery of benefits previously paid.  Read in light of the Court’s newly articulated materiality standard, those facts suggest that the contractor has a strong chance of winning on remand. It is of course more difficult to speculate about this case’s application in other contexts.  The vigorous discussion of materiality, though, well might produce a substantial contraction in False Claims Act liability across a wide range of cases. Only time will tell on that front.

PLAIN LANGUAGE: The False Claims Act permits suits against government contractors if they “knowingly” present a materially “false or fraudulent” claim for payment. The Court’s opinion says three things about that statute.  First, a claim can be fraudulent not only because it affirmatively states something that is false, but also because it fails to state something important.  Second, it does not matter if the false item is technically a condition of payment; it matters only if the false item is “material.”  Third, it is not enough to make a falsehood material that it would give the government a right to withhold payment; the falsehood has to be so serious that the government in fact would withhold payment.

Recommended Citation: Ronald Mann, Opinion analysis: Justices chart their own path in narrowing recovery for implied fraud under the False Claims Act, SCOTUSblog (Jun. 16, 2016, 9:39 PM),