Implied Certification and the Quest for Fraud that “Counts” Under the False Claims Act

By Joan H. Krause

[Cross-posted from Hamilton and Griffin on Rights]

Sometimes, we lie when we speak; other times, we lie when we don’t. Striking the right balance is the essence of the Universal Health Services (UHS) case recently argued before the Supreme Court, which challenged the applicability of the False Claims Act (FCA) to situations in which a claimant falsely “implies” compliance with underlying regulatory requirements.

UHS was brought by the parents of a young woman who died after receiving Medicaid-covered (MassHealth) mental health treatment from a clinic that did not satisfy state licensing and supervision regulations. The parents alleged that the claims for payment were fraudulent because they implicitly represented that the clinic was in full compliance with relevant state requirements. The district court dismissed the suit, finding that the staffing and supervision regulations were not “conditions of payment” whose violation would render subsequent claims false under the FCA. The First Circuit reversed, focusing instead on whether UHS had “knowingly represented compliance with a material precondition of payment.” Noting that preconditions need not be “expressly designated,” the court identified a set of regulations that, read together, appeared to limit MassHealth payment to properly supervised care. While such a fact-intensive dispute might at first appear an unlikely candidate for certiorari, UHS was one of several such “implied certification” opinions issued by the federal appellate courts in 2015. Perhaps because of its emotionally compelling facts – the other cases involved, inter alia, the recruitment practices of a for-profit college and a military contractor that falsified marksmanship scores – UHS was chosen as the vehicle to resolve a growing circuit split.

Implied certification is controversial in large part because it does not appear in the statute. The two key FCA provisions at issue apply when a defendant “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” 31 U.S.C. § 3729(a)(1)(A), or a defendant “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,” § 3729(a)(1)(B). Historically health care FCA cases involved straightforward “factually false” misrepresentations, such as claims for medical services that were not provided. More recently, the law has been extended to “legally false” claims where the items or services may have been provided, but the claimant violated an underlying legal requirement while doing so. An explicitly false representation of compliance, such as a false certification on a claim form, is a false statement under § 3729(a)(1)(B). Even in the absence of an express falsity, however, some courts have implied that all claims for government payment contain a similar unstated representation of compliance.

The term “implied certification” may be of recent vintage, but the theory is based on a longstanding line of cases applying the FCA to claimants who falsely certify entitlement to government benefits, such as a company that falsely represents that it meets the requirements of a Small Business Administration program. As I have explained elsewhere, a “false negotiations” or “fraud-in-the-inducement” theory has long applied where such misrepresentations occur during the process of securing a government contract. Implied certification extends the theory from representations regarding initial eligibility to an implied promise of continued compliance with relevant underlying program requirements.

The question, of course, is which program requirements suffice: all of the myriad regulations applying to the federal health care programs, including those whose violation subjects the defendant only to administrative remediation, or only those that form the core of the government’s contract and threaten eligibility for payment? Is the requirement that a nursing home keep its refrigerators within a particular temperature range or devote a certain square footage to laundry facilities as important, for example, as the requirements that it minimize the use of restraints and unnecessary psychotropic medication? In short, what types of lapses are important enough to “count” under the FCA? The answer has varied, with some circuits limiting implied certification to violations of express payment conditions, others applying the theory to violations of any provisions deemed “material” to the government’s payment decision (broadly defined and often determined after-the-fact), and still others remaining silent.

UHS asked the Court to resolve the circuit split by declining to recognize the implied certification theory, based on the statutory text and history and drawing on the Restatement (Second) of Torts § 551 for the proposition that a failure to disclose noncompliance is not fraudulent unless a party has an affirmative duty to do so. As a fallback, UHS asked the Court to restrict implied certification to violations of expressly designated conditions of payment. The Respondents, supported by the United States as amicus curiae, argued that a defendant who knowingly bills the government for services without disclosing that it has failed to meet material conditions for the delivery of those services has submitted a false claim, and countered that Restatement § 529 addresses the situation where a party knows a statement is materially misleading due to its failure to disclose additional information. In essence, UHS sought to restrict the theory to situations where a claimant speaks falsely, while the relators and the government would apply it as well where the claimant has remained silent.

Despite the Petitioner’s request, few commentators expect the Court to abolish the implied certification theory in its entirety – a belief that was bolstered by oral argument, with several Justices appearing skeptical that all cases lacking an express falsity should remain beyond the reach of the government’s most powerful anti-fraud weapon. Several Justices, however – including Breyer, Kagan, and the Chief Justice – expressed concern regarding the theory’s potential reach, and asked for concrete suggestions for appropriate limits. The concept of materiality was frequently mentioned as a limiting principle to distinguish important from unimportant misrepresentations, but there was little consensus on a definition. Indeed, an (academically) interesting debate unfolded regarding whether the Justices should derive a limit from the definition of fraud contained in the Restatement (Second) of Torts, or instead from the contract law distinctions between breaches of material vs. non-material contract terms (given the fact that these cases do arise from agreements to provide goods and services to the government). Ultimately, the import of the UHS decision will turn on how the Justices draw that distinction – if indeed they find it necessary to draw one at all.