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Supreme Court Rules on False Claims Act Liability Under the Implied Certification Theory

January 15, 2017

The U.S. Supreme Court in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016) recently held that the implied certification theory can be a basis for liability under the civil False Claims Act (FCA), resolving a split among the Federal Court of Appeals about the theory’s viability.  Under this theory, when a contractor submits a claim, it impliedly certifies compliance with all conditions of payment.  However, if the contractor fails to disclose a violation of a material statutory, regulatory, or contractual requirement, the contractor has made a misrepresentation that renders the claim “false or fraudulent” under the FCA. certification theory

The Court not only upheld the validity of the implied certification theory, but also clarified the scope of the theory.  The Court held that the implied certification theory can be a basis for liability only where two conditions are satisfied.  First, a claim for payment cannot “merely request payment.”  The claim for payment must also “make[] specific representations about the goods or services provided.”  Second, the contractor’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” must make those “representations misleading half-truths.”  The Court also held that FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. A contractor can be liable for violating requirements even if the requirements were not designated as conditions of payment, but not every violation of a requirement that was designated as a condition of payment triggers liability.  In reaching this holding, the Court explained: “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

The Court also clarified how the materiality requirement under the FCA should be enforced.  The Court emphasized that the “materiality standard is demanding.”  Materiality “cannot be found where noncompliance is minor or insubstantial.”  Consequently, the Government’s decision to identify a provision as a condition of payment is relevant to materiality, but “not automatically dispositive.”  The Court elaborated that “proof of materiality can include … evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement,” or, conversely, the Government’s payment of a “claim in full despite its actual knowledge that certain requirements were violated” is “strong evidence that the requirements are not material.”

While the Court upheld the implied certification theory, the true impact of the decision will depend on how the lower courts choose to implement the decision.  In particular, how the lower courts read the Court’s emphasis on materiality.  The focus of future litigation may be whether the Government actually cared about the alleged violations, rather than technical arguments over terms of payment.