The False Claims Act After <b><i>Escobar:</i></b> A Three-Part Test

After being diagnosed as bipolar and prescribed medication by health care providers at Arbour, Rivera had an adverse reaction to the medication, had two seizures, and ultimately passed away. After her death, Rivera's family filed a qui tam suit in federal court, alleging that Universal Health had violated the False Claims Act under an implied false certification theory of liability.

The government declined to intervene, and United Health filed a motion to dismiss. The district court granted the motion to dismiss, holding that the complaint failed to state a claim for implied false certification under the False Claims Act because it failed to allege noncompliance with conditions of payment by Massachusetts' Medicaid program (rather than conditions of participation in the program)

The U.S. Court of Appeals for the First Circuit reversed the decision of the district court in part, holding that preconditions of payment need not be “expressly designated,” and that that any knowing misrepresentation of compliance with a material precondition of payment renders a claim “false or fraudulent.” United States ex rel. Escobar v. Universal Health Servs., 780 F.3d 504, 512 (1st Cir. 2015). The First Circuit also held that the regulations at issue did impose conditions of payment inasmuch as they required facilities to supervise staff adequately, and therefore were “dispositive evidence of materiality.” Id. at 514 (internal quotation marks omitted).

The Supreme Court Ruling

On review, the U.S. Supreme Court began by holding that an implied false certification theory of liability is viable. “[B]y punishing defendants who submit 'false or fraudulent claims,'” the Court held, “the False Claims Act encompasses claims that make fraudulent misrepresentations, which include certain misleading omissions.” Escobar, 195 L. Ed. 2d at 351. When “a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements,” the Court held, “those omissions can be a basis for liability if they render the defendant's representations misleading with respect to the goods or services provided.” Id.

The Court enunciated three elements required as proof of alleged implied false certification liability, in addition to those typically required for False Claims Act causes of action.

First, the claim must be one that “not merely request[s] payment, but also makes specific representations about the goods or services provided.” Id. at 363. Accordingly, the contractor has to make a specific representation about the goods or services in the request for payment. For example, in Escobar , use of NPI numbers that corresponded to certain job titles was a representation that individuals qualified for those certain job titles had provided the services.

Second, “the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements [must] make[] those representations misleading half-truths.” Id.

Finally, the misrepresentation must have been material to the government's payment decision. According to the Court, 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. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant's non-compliance.” Id . at 365. In other words, the mere fact that the government has the authority to refuse payment to a provider if a provider violates the rules is not enough. Although the government's decision to expressly identify a provision as a condition of payment is not automatically dispositive, the Court noted, it is relevant.

Materiality can be alleged or proven by evidence that the government would not have paid the claim if it knew of the noncompliance. For example, the Court stated “proof of materiality can include, but is not necessarily limited to, 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.” Id. at 366.

In Escobar, for example, the plaintiff alleged that Universal Health defrauded the program because it knowingly misrepresented its compliance with requirements that are so central to the provision of mental health counseling ' Medicaid would have refused to pay these claims had it known of these violations. Although the Court did not opine on whether these allegations were sufficient, they would seem to be under the Court's holding.

Materiality can be disproven by evidence that the government “pays a particular claim in full despite its actual knowledge that certain requirements were violated” or “regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position.” Id. Furthermore, materiality “cannot be found where noncompliance is minor or insubstantial.” Id. at 365. The Court made clear that plaintiffs may not use the False Claims Act for garden-variety breaches of contract or regulatory violations or minor or insubstantial noncompliance.

Indeed, the Court stated, the False Claims Act “is not an all-purpose anti fraud statute.” Id' The Court noted that “billing parties are often subject to thousands of complex statutory and regulatory provisions. Facing FCA liability for violating any of them would hardly help would-be defendants anticipate and prioritize compliance obligations.” Id .

As a further limitation on a contractor's otherwise broad exposure to liability, the Court noted that “False Claims Act plaintiffs must ' plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) ' .” 195 L. Ed. 2d at 366 n.6. The Court stated further that lower courts should “strict[ly] enforce[]” “ the Act's materiality and scienter requirements.” Id. At 364.

Making a Valid Claim

What kind of proof will suffice? Courts will have to look at the effect there would have been on the government's likely or actual reimbursement decision, had the government been aware of the alleged misrepresentation. Evidence will need to be elicited concerning what kinds of noncompliance the government usually ignores when it comes to making payments and what kinds of noncompliance the government considers substantial enough to justify declining payment. Presumably, this can be shown by e-mails or other documentary evidence where noncompliance was disclosed yet the government approved the claims for payment anyway. It could also be established by proof that noncompliance was clear from the face of a request for payment and the government paid anyway.

Furthermore, although it is dicta , Escobar will change the elements required to prove express false certification as well. Under Escobar , a plaintiff need not prove that compliance with the relevant contractual provisions, statute or regulation is a condition of payment. This upends the rulings of the U.S. Courts of Appeal for the Second, Fourth, Fifth, Ninth, and District of Columbia Circuits that a claim under the Act is legally false only where a party certifies compliance with a statute or regulation as a condition to governmental payment. See United States ex. rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001); United States ex rel. Siewick v. Jamieson Sci. & Eng'g, Inc. , 214 F.3d 1372, 1376 (D.C. Cir. 2000); Harrison, 176 F.3d at 786-87, 793; United States ex rel. Thompson v. Columbia/HCA Healthcare Corp.' 125 F.3d 899, 902 (5th Cir. 1997); United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266-67 (9th Cir. 1996).

Conclusion

Lower courts have already started grappling with the holding of Escobar. In one case, a district court applied Escobar's new requirements and dismissed a complaint that did not contain sufficient allegations about “specific representations about the goods or services provided.” United States ex rel. Creighton v. Beauty Basics Inc., Case No. 2:13-CV-1989-VEH, 2016 U.S. Dist. LEXIS 83573 , at *9 (N.D. Ala. June 28, 2016).

In another case, a district court dismissed a plaintiff's implied false certification claims despite allegations that the defendants: 1) certified in their Medicare enrollment forms that they would abide by Medicare laws, regulations and program instructions; 2) understood that payment of a claim was conditioned on the claim being compliant with Medicare laws, regulations, and program instructions, and 3) submitted claims for payment and knowingly failed to disclose their noncompliance with Medicare regulations. United States ex rel. Dresser v. Qualium Corp., Case No. 5:12-cv-01745-BLF, 2016 U.S. Dist. LEXIS 93248 (N.D. Ca. July 18, 2016).

The district court dismissed the claims because “[t]he Amended Complaint alleges in several places that the government would not have paid Defendants' claims had they known of Defendants' fraudulent conduct, but does not explain why.” Id. at 20. “This,” the district court held, “does not meet Universal Health Services' [Escobar's] heightened materiality standard.”

One thing is clear ' Escobar significantly changed the legal landscape for FCA claims, and only as courts continue to apply its holding will its full impact become apparent.

Stanley A. Twardy Jr. is a partner at Day Pitney LLP and is a former U.S. Attorney for the District of Connecticut. Elizabeth A. Latif is a partner in the firm and is a former Assistant U.S. Attorney.