On August 24, 2018, the Ninth Circuit addressed the Supreme Court’s decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, holding that Escobar sets forth the exclusive test for establishing FCA liability under the theory of implied false certification. In that case, U.S. ex rel. Rose v. Stephens Institute, the Ninth Circuit also grappled with Escobar’s materiality requirement, providing further guidance on how the past government action factor of the materiality analysis should be applied.
The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we will take a closer look at recent legal developments involving the FCA. This week, we examine the Supreme Court’s opinion in Escobar and its impact on the question of the FCA’s materiality requirement.
In addition to tackling the viability of the implied certification theory of liability in Escobar, the Supreme Court also held that the FCA does not restrict liability to noncompliance with express conditions of payment, stating that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.” The Supreme Court explained that any concerns about fair notice or open-ended liability without such a restriction on liability can be addressed through “strict enforcement” of the FCA’s “demanding” and “rigorous” materiality requirement, as well as the FCA’s scienter requirement.
U.S. ex rel. Badr v. Triple Canopy, Inc., an intervened case arising out of the Fourth Circuit, has been one of the more closely-watched recent FCA cases. Previously, the Fourth Circuit held that the government’s complaint properly alleged an FCA claim and could survive Triple Canopy’s motion to dismiss. That ruling was subsequently vacated by the Supreme Court following its decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, which we covered here and here. On May 16, 2017, the Fourth Circuit issued its opinion on remand, finding that the complaint satisfied the pleading standards set forth in Escobar and re-affirming its conclusion that the complaint adequately stated an FCA claim.
The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we are taking a closer look at recent legal developments involving the FCA. This week, we examine the Supreme Court’s opinion in Escobar and its impact on the theory of implied certification.
In one of the few cases to apply the Supreme Court’s recent decision in Universal Health Services v. Escobar, the Seventh Circuit recently revisited and affirmed its prior rejection of an implied certification claim under the FCA. Whether this is a window into how other circuit courts might implement Escobar remains to be seen.
In United States ex rel. Nelson v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), the relator brought several claims, one of which was an implied certification claim, alleging that Sanford-Brown College (the “College”), which receives federal subsidies, violated the FCA by maintaining recruiting and retention practices that ran afoul of Title IV. In particular, the College entered into a Program Participation Agreement (PPA) with the federal government to receive subsidies under the Higher Education Act, and the PPA contained boilerplate language requiring the College to affirm that it would comply with Title IV’s mandates. The relator claimed that because the College’s practices in actuality violated Title IV, its representations in the PPA, and its attendant subsidy claims, were false.
In June, the Supreme Court issued Universal Health Services, Inc. v. U.S. ex rel. Escobar, a landmark opinion in which the Supreme Court addressed the standard for pleading materiality in FCA implied certification cases. The Supreme Court ultimately remanded the case to the First Circuit to resolve in the first instance whether the alleged violations met that standard, and last week, the First Circuit gave its answer: the violations were material.
This summer, the Northern District of California issued an opinion in an intervened case that expanded the theory of express false certification to a startling degree. Ruling on a motion to dismiss, the court in U.S. ex rel. Dresser v. Qualum Corp. (No. 5:2012-cv-01745, N.D. Cal.) held that the defendants, owners and operators of a sleep clinic and a DME company, could be subject to express false certification liability for submitting CMS-1500 claim forms in which they certified their compliance “with all applicable Medicare and/or Medicaid laws, regulations, and program instructions for payment.” According to the court, this general legal certification was sufficient to support an express false certification claim because “by submitting the CMS-1500, Defendants falsely certified that they had complied with Medicare regulations, even though they were not complying with the personnel qualification requirement, and they made this certification knowingly.”
The United State District Court for the Eastern District of New York recently dismissed an FCA complaint for failing to plead materiality under the standard announced in Universal Health Services, Inc. v. U.S. ex rel. Escobar, the Supreme Court’s landmark FCA opinion issued in June of this year. The case, U.S. ex rel. Lee v. Northern Adult Daily Health Care Center, 13-cv-4933, 2016 WL 4703653 (E.D.N.Y. Sept. 7, 2016), becomes one of the first to substantively apply Escobar and highlights the barrier the FCA’s materiality requirement poses to FCA relators in the wake of the Supreme Court’s ruling. It also suggests ways in which courts already are divided in their interpretation of Escobar.
On July 18, 2016, the United States District Court for the Northern District of California issued one of the first post-Escobar decisions addressing a motion to dismiss FCA allegations on grounds that the complaint did not satisfy Rule 9(b)’s pleading standard. In the intervened case, the United States alleged that diagnostic sleep studies were performed in locations that violated federal law and/or were performed by technicians who were not licensed or certified. The United States proceeded on multiple FCA theories (including factual falsity, express false certification, fraud in the inducement, and implied false certification).
On June 16, 2016, the U.S. Supreme Court issued its much-anticipated opinion in Universal Health Services, Inc. v. United States ex rel. Escobar regarding the implied certification theory of False Claims Act (FCA) liability. The Court’s unanimous opinion, drafted by Justice Clarence Thomas, is significant in three respects, detailed further below: (1) the Court ruled that, in certain circumstances, the implied certification theory can be a basis for FCA liability; (2) the Court held that an express condition of payment in a statutory, regulatory or contractual requirement is relevant—but “not automatically dispositive”—in determining FCA liability; and (3) the Court clarified how the FCA’s materiality requirement should be enforced by lower courts addressing FCA suits premised on an implied false certification theory.