Sensible Application of the Supreme Court’s Recent False Claims Act Decision

In a victory for whistleblowers and American taxpayers, the Supreme Court recently settled a long-standing split among the Federal Courts of Appeals, holding that a regulatory, statutory, or contractual requirement need not be an explicit condition of payment to satisfy the False Claims Act’s materiality requirement. Universal Health Services, Inc. v. United States ex rel. Escobar. No. 15-7, 579 U.S. __ (June 16, 2016).

This means that someone who makes a half-truth or a misrepresentation by omission regarding failure to comply with regulatory, statutory, or contractual conditions can be liable for making a false claim under the implied certification theory. Id. at 8–9. For example, someone might present a claim for payment to the United States for medical equipment, but fail to mention that critical components in the medical equipment were substituted with cheaper, less durable components.

While courts have long held that a claim is material under the False Claims Act if it has a natural tendency to influence a decision to pay the claim, as described in my prior article, in Universal Health Services, the Supreme Court provided guidance for satisfying materiality in implied certification cases. Universal Health Services, at 14–17.

Language at the beginning of the materiality discussion in Universal Health Services certainly suggests that the Court’s guidance on materiality is limited to implied certification claims based on misrepresentations. Id. at 14 (“[A] misrepresentation about compliance . . . must be material to the Government’s payment decision in order to be actionable under the False Claims Act. We now clarify how that materiality requirement should be enforced”) (emphasis added). See also id. at 15 (“A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.”) (emphasis added). But there has been concern that courts would expand application of Universal Health Services beyond implied certification cases.

Now, the first judicial decision to substantively apply Universal Health Services sensibly limited application of guidance regarding materiality in that decision to implied certification claims only.

In United States ex rel. Dresser v. Qualium Corp., No. 5:12-cv-01745-BLF, 2016 WL 3880763 (N.D. Cal. July 18, 2016), the United States filed an intervening complaint alleging that the defendants were liable for presenting false claims to the Medicare program in violation of the False Claims Act. The United States argued that the defendants’ claims were: (1) literally false, (2) false under the express certification theory, (3) false under the fraud in the inducement theory, and (4) false under the implied certification theory. Id. at *4–6.

In determining whether the United States’ claims were properly pled, the Dresser court only assessed whether the United States pled facts showing that Universal Health Services’ materiality requirements were satisfied in analyzing the implied certification theory. Id. at 5–6.

This is a tremendously important decision. As in many healthcare cases, the express claims in Dresser were submitted on a CMS-1500 form. Id. at 5. That form requires an express certification that “by ‘submitting this claim for payment from federal funds,’ the supplier ‘certif[ies] that … 4) this claim … complies with all applicable Medicare and/or Medicaid laws, regulations, and program instructions for payment ….’” Id. (citing a CMS-1500 form attached to the United States’ complaint). The Dresser court held that the CMS-1500 form is an express certification, and that the Government pled that this certification was material by alleging that “… Medicare would only pay for [the medical tests at issue when] performed by licensed or registered … technicians.” Id. at 5.

In contrast, the Dresser court held that the United States’ implied false certification theory was not adequately pled because the Government’s complaint failed to explain why “the government would not have paid Defendants’ claims had they known of Defendants’ fraudulent conduct.” As the Dresser court explained:

This does not meet Universal Health Services’ heightened materiality standard: While Universal Health Services held that payment being conditioned on compliance with regulations could be evidence that a misrepresentation was material, it also explained that this did not necessarily make a misrepresentation material.

Id. at 6, citing Universal Health Services, 579 U.S., 2016 WL 3317565, at *12.

This outcome is logically correct. In Universal Health Services, the Supreme Court explained that a defendant’s knowledge of materiality can be proven both subjectively (the defendant actually knew) and objectively (a reasonable person would know). Universal Health Services, at 12–13.

In express certification cases, because the United States typically requires that the express certification be made before it will pay a bill. Therefore, the express certification is material because objectively, it had a natural tendency to influence the United States’ payment decision. Moreover, the defendant knows or should have known that the certification was material, because they had to make the certifications to receive payment.

By contrast, in implied certification cases, there is no literal falsity and so materiality often cannot be so quickly and easily satisfied.

Hypothetically, perhaps a regulation says that certain medical equipment should be painted Carmine Red. But no Carmine Red paint is commercially available in the required paint grade. The Government contractor paints the equipment a different color, but omits mention of the paint substitution in its claim for payment for the medical equipment.

The medical equipment supplier could be liable for presenting a impliedly false claim for payment, but only if the plaintiff proves why this omission was objectively or subjectively material to the Government’s payment decision (and satisfies the other pleading standards imposed on False Claims Act complaints). Perhaps the plaintiff could plead that defendant knew or should have known that under a Government paint classification scheme, this medical equipment had to be painted that a particular color so that Government medical personnel could quickly locate it in the battlefield. That or similar facts would show that the defendant subjectively knew or should have known the paint color was material to the Government’s payment decision. But unless such facts are present and could be pled, facts demonstrating materiality would be lacking. Without this information, objectively, no one could reasonably believe that a difference in color would have any impact on the Government’s payment decision.

Tweaking this hypothetical, perhaps the defendant presented a claim for payment that expressly certified that the medical equipment was painted Carmine Red in accord with Government paint classification standards for battlefield medical equipment. As in Dresser, pleading that this express certification and literal statement is false is also enough to plead satisfaction of the False Claims Act’s materiality requirement. The Government’s requirement that a statement be made to receive payment is certainly enough to demonstrate that the statement has a natural tendency to influence the Government’s payment decision.

While we did not represent any of the parties in this case, our firm has a long history of advocating cases under the implied certification liability theory. For more information, or to discuss a potential case with us, please contact us.

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