False Claims Act: Implied Certification and Other Recent Developments.

Transcription

1 127 th Annual Meeting January 19-21, 2017 The Williamsburg Lodge and Conference Center, Williamsburg, VA False Claims Act: Implied Certification and Other Recent Developments. A presentation by the VBA Construction and Public Contracts Section, and the Criminal Law Section

2 Presenters* W. Alexander Burnett Alex Burnett is a partner at Williams Mullen where he focuses his practice on construction law as well as bankruptcy & creditors' rights and real estate litigation. Alex serves a broad spectrum of clients involved in the construction industry including banks, owners, general contractors, subcontractors and suppliers. He actively participates in client s construction projects by drafting or revising contracts, advising clients of their rights throughout a project, and regularly litigating and arbitrating on behalf of clients, including prosecuting and defending Mechanic s Liens, Mechanic s Lien enforcement, payment and performance bond claims. Prior to joining Williams Mullen, Alex served as a law clerk to The Honorable Claude M. Hilton, Chief Judge of the U.S. District Court, Eastern District of Virginia, Alexandria Division. He is a member of the Virginia State Bar and the Richmond Bar Association. As a member of the Virginia Bar Association, he serves as Secretary of the Section Council for the Construction and Public Contracts Law Section. Alex has been recognized as a "Rising Star" in General Litigation and Construction Litigation by Virginia Super Lawyers magazine (2009, 2011-present) and named as a "Legal Elite" by Virginia Business magazine (2011-present). He is listed in The Best Lawyers in America for Construction Law (2017-present). Martindale-Hubbell has rated Alex an AV attorney, its highest rating available. Alex earned his Bachelor of Arts degree in political science from the University of North Carolina at Chapel Hill and his Juris Doctor degree from the University of Richmond School of Law, cum laude. While in law school, he served as editor-in-chief of the University of Richmond Law Review and authored the note, Dusenbery v. United States: Setting the Standard for Adequate Notice, 37 University of Richmond Law Review 613 (2003). Arnie B. Mason Arnie Mason is a partner with Williams Mullen in its Tysons Corner office. Mr. Mason focuses his practice on construction law and represents clients in all phases of a construction project. He has extensive experience with preparing and negotiating construction contracts, preparing, litigating and mediating complex construction claims on federal, state and private projects, in addition to advising on various types of issues that arise from the pre-bid stage through dispute resolution. Mr. Mason has been recognized as an up and coming construction attorney by Chambers USA. Mr. Mason serves on the Board of Governors for the Construction Law & Public Contracts Section of the Virginia State Bar. Mr. Mason has written several articles on varying topics of interest to the government contracts and construction law community, *The biographical information is provided by the speakers or collected from their websites.

3 which have appeared in various publications, including the William & Mary Law Review, Government Contracts Service, Construction Claims Advisor, Law 360 s Expert Analysis section, the Virginia Bar Association Journal and the Virginia State Bar Construction Law and Public Contracts Section Newsletter. Mr. Mason also regularly lectures on topics of interest to the construction community, including presentations on construction contracts, differing site conditions, defective specifications, unabsorbed home office overhead claims, M/DBE programs, false claims, and claims and dispute resolution procedures under different types of standard form construction contracts. Mr. Mason joined Williams Mullen in 2012 after practicing with Watt, Tieder, Hoffar & Fitzgerald, L.L.P. for 11 years. Prior to that, he held a judicial clerkship with the Honorable Stephen C. St. John of the United States Bankruptcy Court for the Eastern District of Virginia. Mr. Mason received his undergraduate degree from the University of Virginia and his law degree from William & Mary. Diana Lyn Curtis McGraw Diana Lyn Curtis McGraw joined Wolcott Rivers Gates in May of 2015 and received her J.D. from Regent University School of Law, her Master in Project Management with a specialty in construction and supply chain management from Penn State University, and her undergraduate degree from Virginia Tech. She concentrates her practice in government contracts, construction law, and federal and state litigation. She also performs consulting services to government contractors who need support with work acquisition, project management, small business utilization, and contract compliance. Before entering legal practice, Diana was employed by a large construction firm for eight years managing $2.5 billion in federal work and $3 billion in private work. Her duties included creating policy and internal audits to mitigate risk and ensure contract compliance, managing small business DBE/MBE/SWAM subcontracting plans, managing green building requirements for LEED certification, drafting joint venture and teaming agreements, managing projects for SBA 8(a) Mentor Protégé program, and providing implementation procedures for tax incentive programs. With a foundation in the construction industry and her educational background, Diana brings a unique perspective to construction and government procurement cases. She was one of the first women LEED accredited professionals in Mississippi and has worked on 12 LEED projects in the United States with an aggregate value of a billion dollars. Diana is also active in her community and church. She is a strong advocate for children with epilepsy and is a mother to four boys. *The biographical information is provided by the speakers or collected from their websites.

4 Robert P. McIntosh Robert McIntosh is an Assistant U.S. Attorney for the Eastern District of Virginia, Richmond Division, having served in that position since Since 2009, Mr. McIntosh has been designated the Affirmative Civil Enforcement (ACE) attorney in the Richmond Division and has handled False Claims Act investigations, qui tam actions, and Civil Rights investigations. He also has served as local counsel in environmental and affirmative tax litigation brought by the U.S. Department of Justice. He is the designated bankruptcy attorney in the Richmond U.S. Attorney s Office, and handles litigation in bankruptcy court delegated to the U.S. Attorney s Office on behalf of federal agencies. Prior to his designation as the ACE attorney in Richmond, his practice from 2001 to 2009 focused on civil defensive litigation and bankruptcy. Before joining the U.S. Attorney s Office, Mr. McIntosh was a Trial Attorney with the Tax Division, U.S. Department of Justice, in Washington, D.C., having served in that position approximately ten years. He came to the Department of Justice after serving a judicial clerkship with the Honorable Frank Q. Nebeker, then Chief Judge of the U.S. Court of Veterans Appeals (now the United States Court of Appeals for Veterans Claims). Mr. McIntosh received his undergraduate and law degrees from Brigham Young University. Mr. McIntosh and his wife, Carolyn, are the parents of four children. He is active in his church and in the Boy Scouts of America. *The biographical information is provided by the speakers or collected from their websites.

5 False Claims Act: Implied Certification and Other Recent Developments Moderator: W. Alexander Burnett, Williams Mullen Speakers: Arnie B. Mason, Williams Mullen Diana Lyn Curtis McGraw, Wolcott Rivers Gates Universal Health Services v. United States ex rel. Escobar 1 is the case of the decade for government contractors. On June 16, 2016, the much-anticipated Supreme Court ruling in Escobar was announced and a newly defined use of the implied certification theory as a basis for False Claims Act liability was upheld. History and Overview Government contracts have exploded since To fight simultaneous wars in both Afghanistan and Iraq, the Bush administration had decided to outsource virtually every facet of America's military operations, from building and staffing Army bases to hiring mercenaries to provide security for diplomats abroad. After Bush took office, private military contracts soared from $145 billion in 2001 to $390 billion in Federal contracting rules were routinely ignored or skirted, and military-industrial giants like Raytheon and Lockheed Martin cashed in as war profiteering went from war crime to business model. 2 However with that growth are significant risks with whopping penalties. False Claims Act is one of the most highly litigated issues today. The False Claims Act (FCA) was enacted on March 2, 1863; during the Civil War to combat wide-spread fraud on the government. 3 Since the FCA was passed by Congress during President Abraham Lincoln s presidency, it is commonly known as the Lincoln Law. 4 At the time, defense contractors sold the Union Army decrepit horses and mules in ill health, faulty rifles and ammunition, and rancid rations and provisions among other unscrupulous actions. 5 Thus Congress felt the need to impose strict penalties to curtail these fraudulent actions and the penalties have since been amended over the years to be essentially punitive in nature. 6 The FCA is one of the most powerful tools in the government s litigation tool box to recover losses incurred by fraud. 7 Since 1986, FCA litigation is responsible for nearly $50 billion in recovery. 8 1 Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct (2016). 2 Guy Lawson, The Stoner Arms Dealers: How Two American Kids Become Big-Time Weapons Traders. ROLLING STONES (March 16, 2011), (last visited January 11, 2017) Stat. 696, 37 Cong. Ch Larry D. Lahman, Bad Mules: A Primer on the Federal False Claims Act, THE OKLAHOMA BAR JOURNAL, 05/Aprarchive05/obj7612fal.aspx (last visited January 11, 2017). 5 6 Vt. Agency of Nat. Res. v. United States ex rel. Stevens, 529 U.S. 765, 784 (2000). 7 H.R. Rep. No , at 18 (1986) (stating FCA is used as the primary vehicle by the Government for recouping losses suffered through fraud and thus deeming it important that it be an effective tool for recouping these losses ). 8 John R. Thompson Jr., Andrew M. Bowman, and Kirk M. Sosebee, The False Claims Act Past Present, and Future.

6 The attorney general, including his designees, and private litigants 9 may bring FCA actions against a person who: 10 knowingly 11 presents, or causes to be presented, a false or fraudulent claim for payment or approval; knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim... The four elements for a FCA claim include: (1) a false statement or fraudulent course of conduct; (2) made with the requisite scienter; (3) that is material; and (4) that results in a claim to the Government. 12 Materiality continues to be a factual issue litigated in FCA actions. Based on the Supreme Court decision in Escobar, the element of materiality will help maintain the rigorous and demanding standard for implied certification claims. A false statement or course of conduct is material if it has a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property by the Government. 13 The Supreme Court has consistently held a broad and expansive view of the FCA statute even when potential criminal sanctions may be imposed in addition to civil penalties. 14 FCA Damages and Penalties FCA Claims are known for their significant treble damages that have become punitive in nature. Thus, damages in these cases can very quickly escalate, putting government contractors and FCA defendants at risk for tremendous amounts. FCA monetary damages include not only treble damages but also civil penalties. On August 1, 2016, the range for FCA civil penalties increased to $10, to $21, from $5, to $11, per claim for all violations occurring after November 2, 2015 in connection with the Federal Civil Penalties Inflation Adjustment Act Improvements Act. 15 Qui Tam Suits The 1986 amendments to the FCA spurned litigation for relators by providing causes of action for retaliation against whistleblowers and reverse false claims. 16 In 2016, whistleblowers filed 702 qui tam lawsuits, resulting in the DOJ recovering $2.9 billion and whistleblowers receiving $519 million. 17 From January 2009 through September 2016, the DOJ has recovered more than $31.3 billion in settlements and judgments for FCA claims, including $4.7 billion in fiscal year Based on what the Government recovers, relators may receive up to 25% of the recovery if the Government proceeds with the action and up to 30% if the relator proceeds with a qui tam action If the attorney general decides not to intervene in the action, private litigants, known as relators (colloquially known as whistleblowers), may bring a qui tam suit on behalf of the United States. 31 U.S.C U.S.C.S (LexisNexis, Lexis Advance through PL , with a gap of PL , approved July 22, 2016). 11 The terms "knowingly" means a person, with respect to information, has actual knowledge of the information; acts in deliberate ignorance of the truth or falsity of the information; or acts in reckless disregard of the truth or falsity of the information; and requires no proof of specific intent to defraud. 31 U.S.C. 3729(a)(1)(A) U.S.C.S United States v. Neifert-White Co., 390 U.S. 228, 232 (1968) /pdf/ pdf (last visited January 11, 2017). 16 S. Rept. No , at 2-3 (1986) (last visited January 11, 2017) U.S.C.S (LexisNexis, Lexis Advance through PL , with a gap of PL , approved July 22, 2016).

7 Settlements in 2016 A brief overview of several of the largest settlements in 2016: Wyeth and Pfizer Inc. paid $784.6 million to resolve federal and state claims that Wyeth knowingly reported false and fraudulent prices on two drugs used to treat acid reflux, Protonix Oral and Protonix IV. The government alleged that Wyeth (before it was acquired by Pfizer) failed to report deep discounts available to hospitals, as required by the government to ensure that the Medicaid program enjoyed the same pricing benefits available to the company s commercial customers. Novartis Pharmaceuticals Corp. paid $390 million based on claims that the company gave kickbacks to specialty pharmacies in return for recommending Exjade, an iron chelation drug, and Myfortic, an anti-rejection drug for kidney transplant recipients. The settlement includes $306.9 million for the federal government and $83.1 million for state Medicaid programs. Wells Fargo paid $1.2 billion for originating and endorsing residential mortgages as eligible for federal insurance by the Federal Housing Administration (FHA) that did not meet requirements intended to reduce the risk of default. By originating and endorsing ineligible loans for FHA insurance, the banks increased their mortgage profits at taxpayer expense while incurring little or no risk of their own. 20 United States ex. rel. Mikes v. Straus, 274 F.3d 687, (2d Cir. 2001). 21 Straus, 274 F.3d at 697. See United States ex rel. Siewick v. Jamieson Sci. & Eng'g, Inc., 341 U.S. App. D.C. 459, 214 F.3d 1372, 1376 (D.C. Cir. 2000) ("[A] false certification of compliance with a statute or regulation cannot serve as the basis for a qui tam action under the [False Claims Act] unless payment is conditioned on that certification."); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, (4th Cir. 1999) ( The courts in these cases will not find liability merely for non-compliance with L-3 Communications paid $25.6 million for defective holographic weapon sites sold to the Department of Defense, Department of Homeland Security, and FBI. L-3 Communications admitted knowing the sites failed to perform as represented in cold temperatures and humid environments, but delayed disclosing the defects to federal authorities for years. For additional information about other significant FCA settlements and judgments during fiscal years , please see the attached fact sheet. Drawing the line between breach of contract and False Claims Act violations Courts have developed two categories of false statements or fraudulent course of conduct: submissions that are factually false and those that are legally false. 20 A factually false certification is more of a traditional notion in that the contractor requests payment for goods or services that were never provided to the Government or were provided, but the description of the goods or services included in the pay application was incorrect. Whereas a legally false certification is when a contractor falsely certifies that he has complied with federal statutes, regulations, or contractual terms when he has actually failed to remain in compliance. The Second, Fourth, Fifth, Ninth, and District of Columbia Circuits have limited FCA liability to false certifications of compliance to statutes, regulations, or provisions that are preconditions of payment and not all instances of regulatory noncompliance. 21 a statute or regulation. ); United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997) ( Thus, where the government has conditioned payment of a claim upon a claimant's certification of compliance with, for example, a statute or regulation, a claimant submits a false or fraudulent claim when he or she falsely certifies compliance with that statute or regulation. ); United States ex rel. Hopper v. Anton, 91 F.3d 1261, (9th Cir. 1996) ( Violations of laws, rules, or regulations alone do not create a cause of action under the FCA. It is the false certification of compliance which creates liability when certification

8 The FCA is not a vehicle to impose liability for garden-variety issues of contractual performance. 22 Courts have recognized that FCA plaintiffs cannot shoehorn what is, in essence, a breach of contract action into a claim that is cognizable under the False Claims Act. This misguided journey must come to an end. If every dispute involving contractual performance were to be transformed into a qui tam FCA suit, the prospect of litigation in government contracting would literally have no end. 23 The Fourth Circuit Court of Appeals has held [t]o support an FCA claim, there needs to be something more than the usual back-and-forth communication between the government and the contractor over this or that construction defect and this or that corrective measure. 24 Despite this need for division between a simple breach of contract and a FCA violation, Courts must remain focused on the purpose of the FCA: to protect the treasury against fraudulent claims. To do so courts have recognized a claim for payment is false when it rests on a false representation of compliance with an applicable federal statute, federal regulation, or contractual term. 25 While these false certifications may be expressed or implied, when they are implied through silence, courts have been challenged to interpret the silence with regards to liability and the decisions that have been reached just in 2015 have been significantly far apart. Implied Certification Theory Implied certification theory is when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant s violation of a material statutory, regulatory, or contractual requirement, so the theory goes, the defendant has made a misrepresentation that renders the claim false or fraudulent under 3729(a)(1)(A). 26 The D.C. Circuit has provided an example to better explain the benefits of implied certification theory: Consider a company that contracts with the government to supply gasoline with an octane rating of ninety-one or higher. The contract provides that the government will pay the contractor on a monthly basis but nowhere states that supplying gasoline of the specified octane is a precondition of payment. Notwithstanding the contract's ninety-one octane requirement, the company knowingly supplies gasoline that has an octane rating of only eighty-seven and fails to disclose this discrepancy to the government. The company then submits pre-printed monthly invoice forms supplied by the government forms that ask the contractor to specify the amount of gasoline supplied during the month but nowhere require it to certify that the gasoline is at least ninety-one octane. So long as the government can show that supplying gasoline at the specified octane level was a material requirement of the contract, no one would doubt that the monthly invoice qualifies as a false claim under the FCA despite the fact that neither the contract nor the invoice expressly stated that monthly payments were conditioned on complying with the required octane level. United States v. Sci. Applications Int'l Corp., 393 U.S. App. D.C. 223, 235 (2010). There was a split of authority between the circuits as to the viability and scope of the implied certification theory, which escalated rapidly in 2015 when three circuits analyzed the theory and arrived at very different conclusions. The First and Fourth Circuits adopted the theory 27 while the Seventh Circuit Court of is a prerequisite to obtaining a government benefit. ). 22 United States ex rel. Owens v. First Kuwaiti Gen. Trading & Contr. Co., 612 F.3d 724, 734 (4th Cir. 2010). 23 United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 373 (4th Cir. 2008). 24 First Kuwaiti Gen. Trading, 612 F.3d at United States v. Sci. Applications Int'l Corp., 393 U.S. App. D.C. 223, 232 (2010). 26 Escobar, 136 S. Ct. at United States v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015); United States ex rel. Escobar v. Universal Health Servs., 780 F.3d 504 (1st Cir. 2015).

9 Appeals rejected the theory all together. 28 The United States Supreme Court decided on December 4, 2015 that it would settle the issue. 29 The Fourth Circuit Court of Appeals In United States v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015), defense contractor, Triple Canopy, Inc. ( Triple Canopy ) was awarded a firm fixed price to provide security services. 30 Triple Canopy was then awarded a specific task order TO-11 to provide services in Al Asad Airbase, Iraq. 31 Triple Canopy agreed to provide services in accordance with the responsibilities identified in TO-11, including repelling attacks, providing escorts, performing entrance searches, preventing theft, running background checks, checking ammunition lists and computerizing personnel systems. 32 Specifically, Triple Canopy agreed to use guards who have received initial training for the weapons carried and held certain marksmanship skills 33 for these weapons. Payment was not expressly conditioned on this marksmanship requirement. 34 However when performing the task order, Triple Canopy employed over 330 Ugandan nationals to perform the contract under the supervision of eighteen U.S. citizens. 35 Upon arrival in Al Asad, the Ugandan guards were tested and failed to meet the marksmanship requirements. Despite knowledge of this noncompliance, Triple Canopy submitted its monthly invoice for payment for services rendered. At the direction of Triple Canopy, false scorecards were created for each of the Ugandan guards and placed in the individual personnel files. Over the next year, additional Ugandan guards were hired to meet attrition needs of the contract, and again none of these guards were able to meet the marksmanship requirements. Near the end of the contract term, forty Ugandan guards were retested. None of these guards were able meet the requirements and false cards were created and placed in their personnel files. 36 Over the period of performance, Triple Canopy submitted twelve monthly invoices totaling $4,436, The invoices included the number of guards in service for each period at a rate of $1,100 per guard. The TO-11 contract terms did not expressly require Triple Canopy to certify that each guard met the marksmanship requirement with its payment application. 38 The Fourth Circuit determined it was time to make a bold statement and explicitly support the viability of implied certification theory: 39 The use of "judicially created formal categories" for false claims is of "relatively recent vintage," and rigid use of such labels can "do more to obscure than clarify" the scope of the FCA. 40 Our focus, regardless of the label used, remains on whether the Government has alleged a false or fraudulent claim. In Harrison I, we briefly noted the existence of implied certification claims and, while mentioning such claims might be "questionable" in the circuit, reserved ruling on their viability. 41 Since Harrison I, however, the weight of authority has shifted significantly in favor of recognizing this category of claims at least in some instances. 42 For 28 United States v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015). 29 Escobar, 136 S. Ct. 582 (2015). 30 Triple Canopy, 775 F.3d at (The marksmanship required each guard to score a minimum of 23 rounds out of 40 from a distance of 25 meters.) at at 635 n United States ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377, 385 (1st Cir. 2011). 41 Harrison I, 176 F.3d at 788 n See United Health Grp., 659 F.3d at (collecting cases from the First, Second, Sixth, Ninth, Tenth, Eleventh, and D.C. Circuits).

10 the reasons expressed infra, we agree that contractual implied certification claims can be viable under the FCA in the appropriate circumstances. The Fourth Circuit held that Triple Canopy with the requisite scienter, made a request for payment under a contract and withheld information about its noncompliance with material contractual requirements. 43 Triple Canopy knew that the Ugandan guards failed to meet one of the identified responsibilities in TO- 11, then falsified documents, and knowingly falsely implied that it was entitled to payment. The Fourth Circuit takes a further step in expanding the viability of implied certification theory, holding the noncompliance with that the contractual condition is not limited expressly to preconditions of payment for FCA liability to attach. While the Fourth Circuit recognized that this theory is prone to abuse, it may be restrained by the materiality and scienter elements. 44 Materiality may be established by expressed language in the four corners of a document or through testimony that both parties understood the provision was a precondition of payment. The Fourth Circuit held that the government sufficiently pled materiality in Triple Canopy. First, common sense strongly suggest that the Government s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight. The Seventh Circuit Court of Appeals In United States v. Sanford-Brown, Ltd., 788 F.3d 696 (7 th Cir. 2015), a former Director of Education at Sanford-Brown College named Brent Nelson filed suit against his previous employer, Sandford-Brown College, and parent company Sandford-Brown, Limited (collectively 43 at Sanford-Brown, 788 F.3d at at Sandford-Brown College ) under the Federal Claims Act. Specifically, Nelson claimed that the college s recruiting and retention practices violated the FCA through the procurement of significant funds via thousands of false claims to the government. 45 In this case, Sanford-Brown College and its parent companies had received federal education subsidies under Title IV of the Higher Education Act ( HEA ). 46 In order to be eligible for these subsidies, the Sandford-Brown College had to enter into a Program Participation Agreement ( PPA ) with the U.S. Secretary of Education. 47 This PPA, which allowed students to receive federal funding, required Sandford-Brown College to agree to comply with certain statutory, regulatory and contractual requirements detailed in 20 U.S.C and supporting regulations including 34 C.F.R In September 2005, Sandford- Brown, Limited entered into a PPA ( 2005 PPA ) with the following bold statement on the first page: The execution of this Agreement by the Institution and the Secretary is a prerequisite to the Institution's initial or continued participation in any Title IV, HEA Program. 49 In December 2007, Sandford-Brown campus in Jacksonville, Florida entered into another PPA with the U.S. Department of Education ( 2007 PPA ) with an identical bold requirement as the 2005 PPA which required that Sandford-Brown College to comply with the same federal statutes and regulations in the 2005 PPA and the additional provisions inserted in the 2007 PPA. 50 Sandford-Brown College was removed from the 2005 PPA and added to the 2007 PPA in May of The question in this case turned on whether abiding by the Title IV restrictions was a condition of payment or a condition of participation. Based on the condition of payment theory, which Nelson and the Government argued for, an institution must 48 Sanford-Brown, 788 F.3d at at at at 708.

11 remain in compliance with all of the PPA s conditions in order to remain lawfully eligible to continue receiving federal subsidies. 52 Through this theory, any claim of federal subsidies following noncompliance with any conditions in the PPA would result in a violation of the FCA. 53 In opposing this theory, the Sandford-Brown College argued that abiding by the Title IV restrictions was a condition of participation. 54 In other words, Title IV s conditions are not prerequisites for payment but instead merely require that an institution enter into the PPA in good faith and promise to adhere to the conditions set forth therein. 55 Any violation of these conditions would constitute a breach of contract rather than a false claim under the FCA and would result in significantly less liability than a violation of the FCA. 56 Ultimately, the Court in this case sided with Sandford-Brown College in finding that the condition of payment necessary to be eligible for federal subsidies under the program in question was good-faith entry into the PPA. 57 Without evidence of fraud prior to entry into the PPA, the Court stated that it could not impose FCA liability on the Defendants for non-performance of the PPA after entry. 58 To succeed on its claims, the Court held that Nelson would have had to prove that Sandford- Brown College fraudulently secured their initial Title IV eligibility. 59 Nelson failed to provide evidence that Sandford-Brown College entered into the PPA in bad faith. 60 The Court justified its ruling by stating that it would be unreasonable to place such significant liability upon unwavering compliance with thousands of pages of federal statutes and regulations incorporated into the PPA. 61 In sum, the Court emphasized the fact that PPA stands for Program Participation Agreement and not Program Payment Agreement, and promises of future performance do not become false due to subsequent non-compliance. 62 Proof of fraud requires more than breach of promise: fraud entails making a false representation, such as a statement that the speaker will do something it plans not to do. 63 The Facts in Escobar In United States ex rel. Escobar v. Universal Health Services, 780 F.3d 504 (1st Cir. 2015), the First Circuit agreed with the Fourth Circuit that implied certification theory is viable; however, the court tried to restrain the theory only if the noncompliance of a statute, regulation, or contract provision is a material precondition of payment. 64 The Commonwealth of Massachusetts provides a state Medicaid program through MassHealth. MassHealth then provides reimbursement to health care providers for services rendered to patients insured through this program. To participate in MassHealth, mental health centers, including satellite facilities, 65 must meet the requirements set forth in the Code of Massachusetts Regulations. 66 The MassHealth requires [a]ll unlicensed counselors included in the center must be under 52 at at , at , at Sanford-Brown, 788 F.3d at Escobar, 780 F.3d at Satellite facilities are either autonomous or dependent. Autonomous Satellite Programs are mental health center programs operated by a satellite facility with sufficient staff and services to substantially assume its own clinical management independent of the parent center. On the other hand, dependent satellite programs are mental health center programs in a satellite facility that are under the direct clinical management of a parent center. 130 Mass. Code Regs (Lexis Advance through all regulations in effect as of 11/18/2016) Mass. Code Regs (Lexis Advance through all regulations in effect as of 11/18/2016).

12 the direct and continuous supervision of a fully qualified professional staff member trained in one of the core disciplines [of psychiatry, psychology, social work, or psychiatric nursing]. 67 The program goes on to require satellite facilities to adhere to additional regulations concerning supervision and integration with the parent facilities. 68 Universal Health Services provides mental health services at Arbour Counseling Services in Lawrence, Massachusetts. 69 Arbour Counseling Services is a satellite facility and the quit tam action alleges Arbour Counseling Services failure to meet the satellite specific requirements and its noncompliance with supervision and licensure requirements deemed its reimbursement claims to MassHealth legally false. 70 In 2007, Yarushka Rivera ( Yarushka ), a teenage beneficiary of the Massachusetts Medicaid program, began receiving counseling services at Arbour Counseling Services for behavioral problems at school. 71 Maria Pereyra initially provided those services despite lacking a professional license to provide mental health therapy. Yarushka became dissatisfied with Pereyra s services. Upon meeting with Edward Keohan, Pereyra s supervisor, Yarushka s parents became concerned that Pereyra was not being properly supervised. Yarushka was then transferred to Diana Casado to continue counseling services. Casado was also unlicensed and Yarushka s parents again became concerned that Arbour Counseling Services was not providing proper supervision for its unlicensed counselors. 72 By February of 2009, Yarushka received services from a third service provider, Anna Fuchu. 73 While Fuchu indicated that she was a psychologist with a Ph. D., she failed to explain that she received her training from an unaccredited online school and that her professional licensure application had been rejected. Yarushka was eventually diagnosed with bipolar disorder and when her behavioral problems had not improved; she was not permitted to attend school unless she received psychiatry services. Fuchu then referred Yarushka to Maribel Ortiz for treatment. Ortiz, another employee of Arbour Counseling Services, prescribed trileptal 74 for Yarushka s bipolar disorder. 75 Within a few days of starting Trileptal, Yarushka was experiencing side effects that caused her serious concerns. 76 Yarushka left several messages for Ortiz and when these messages were never returned, Yarushka made the decision to discontinue use. On May 13, 2009, just seven days after starting the medication, Yarushka had a seizure, despite having no history of seizures. After Yarushka s first seizure, Keohan instructed Maria Gaticales to supervise Ortiz. Unfortunately within five months, Yarushka had another seizure that proved to be fatal. 77 Yarushka s parents eventually learned after their daughter s death that Ortiz was actually a nurse and not a licensed psychiatrist, and that she was not being supervised properly. 78 In fact, Gaticales who was supervising Ortiz was not Mass. Code Regs (Lexis Advance through all regulations in effect as of 11/18/2016) Mass. Code Regs (Lexis Advance through all regulations in effect as of 11/18/2016). 69 Escobar, 780 F.3d at at The Food and Drug Administration ( FDA ) has never approved Trileptal to treat bipolar disorder, only to treat partial seizures. Brief for Respondents at 11-12, Universal Health Servs. v. United States ex rel. Escobar, 195 L.Ed. 2d 348 (2016) (No. 15-7); See Trileptal Medication Guide, UCM pdf (last visited January 11, 2017). 75 Escobar, 780 F.3d at at 510.

13 board certified or even eligible for board certification. 79 Massachusetts Department of Public Health ( DPH ) conducted an investigation into the matter and determined that Arbour Counseling Services employed at least 23 unlicensed mental health counselors and failed to employ a board certified or board eligible psychiatrist. 80 The First Circuit s Analysis Although the First Circuit held that the noncompliance must concern a precondition of payment, the condition need not be expressly stated 81 but must be material to the government s decision to pay. 82 The statutory, regulatory, or contractual requirement can be a condition of payment either by expressly identifying itself as such or by implication. 83 Specifically, MassHealth conditions reimbursement of satellite claims on the clinical director s fulfillment of his or her regulatory duties, which includes ensuring appropriate supervision. The court observed that this condition of payment was confirmed by the fact that the cost of staff supervision is automatically built into MassHealth reimbursement rates. 84 Thus, Escobar had plead sufficient facts indicating the supervision at Arbour was either grossly inadequate or entirely lacking to survive a motion to dismiss at 514 n. 14 ( Although the record is silent as to whether Arbour explicitly represented that it was in compliance with conditions of payment when it sought reimbursement from MassHealth, we have not required such express certification in order to state a claim under the FCA. We note, however, that each time it submitted a claim, Arbour implicitly communicated that it had conformed to the relevant program requirements, such that it was entitled to payment. ) (citations omitted). 82 at 512. Cf. Sci Applications Int l Corp., 626 F.3d at 1269 ( The existence of express contractual language specifically linking compliance to eligibility for payment may well constitute dispositive evidence of materiality, but it is not... a necessary condition. ). The First Circuit further held that the complaint properly plead that the provision requiring proper supervision was a material condition to payment 86 and that Arbour Counseling Services had the requisite intent. 87 In addition, the First Circuit also determined that the failure to employ a properly licensed psychiatrist constituted noncompliance with a material condition of payment. 88 The Supreme Court of the United States On June 16, 2016, Justice Thomas delivered the opinion of the Supreme Court in Universal Health Services v. United States ex rel. Escobar, 195 L. Ed. 2d 348 (U.S. 2016). The Court was presented with two questions: Whether the implied certification theory of legal falsity under the FCA applied by the First Circuit below but recently rejected by the Seventh Circuit is viable. 2. If the implied certification theory is viable, whether a government contractor s reimbursement claim can be legally false under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for 83 at at 514 (citing 130 Mass. Code Regs (C)(3)) ( The express and absolute language of the regulation in question, in conjunction with the repeated references to supervision throughout the regulatory scheme, constitute dispositive evidence of materiality. ) (quoting Hutcheson, 647 F.3d at 394). 87 at 515 (Keohan s admission in an interview with Massachusetts DPH that he had been unaware that supervision was required to be provided on a regular and ongoing basis, or that the supervision meetings needed to be documented ). 88 at Petition for a Writ of Certiorari at i-ii, Universal Health Servs. v. United States ex rel. Escobar, 195 L.Ed. 2d 348 (2016) (No. 15-7).

14 legally false reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits. Right off the bat, the Supreme Court confirmed the viability of implied certification theory: 90 [I]mplied false certification theory can be a basis for liability. Specifically, liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading. Specifically, the Supreme Court held that implied certification theory is viable when the request for payment makes specific representations about the goods or services and the request fails to disclose noncompliance with material statutory, regulatory, or contractual requirements. 91 The Supreme Court began its analysis by reviewing the statutory language itself. 92 Although the FCA specifically defines the terms knowingly and material, it does not expressly define the term fraud. 93 It was Congress s intent to apply the well-settled meaning of the common-law terms it uses unless the statutory language indicates otherwise. 94 The commonlaw fraud has long been understood to include misrepresentations by omission. 95 The issue is whether submitting a claim without disclosing violations of statutory, regulatory, or contractual requirements constitutes such an actionable misrepresentation. 96 The Supreme Court held that if the omission of critical qualifying information is misleading, then the misrepresentation is actionable. The Court then provided an example of such an omission that is misleading and creates an actionable misrepresentation: an applicant for an adjunct position at a local college makes an actionable misrepresentation when his resume lists prior jobs and then retirement, but fails to disclose that his retirement was a prison stint for perpetrating a $12 million bank fraud. 97 In this case, when Arbour Counseling Services submitted claims that included payment codes that corresponded with specific counseling services, Arbour Counseling Services represented that they had performed those services. 98 In addition, Arbour Counseling Services staff members utilized National Provider Identification numbers that correspond with specific job titles, which represented that they were performing services in that capacity. 99 Because these representations are misleading, the half-truths told by Arbour Counseling Services were held to be actionable. 100 The Supreme Court also held that liability for FCA hinges on whether the condition was material to the Government s decision for payment, not whether it was expressly designated as such or as a condition to payment: 101 False Claims Act liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. Defendants can be liable for violating requirements even if they were not expressly 90 Escobar, 136 S. Ct. at at at 1995; Allison Engine Co. v. United States ex rel. Sanders, 553 U. S. 662, 668 (2008) U.S.C.S Sekhar v. United States, 133 S. Ct. 2720, 2724 (2013). 95 Escobar, 136 S. Ct. at at at 1996.

15 designated as conditions of payment. Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability. 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. A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government s payment decision in order to be actionable under the False Claims Act. The Supreme Court reinforces that the materiality standard is a demanding and rigorous standard and a label cannot be determinative. 102 Expressed language is not dispositive. 103 Although Congress defined the term materiality, the Court reasoned that materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. 104 For instance, if the Government is known for making payment despite being aware of noncompliance with a contractual requirement, then it is likely that the requirement is not material. 105 Although the express condition of payment is a factor in determining materiality, courts must also look to the actions of the government and whether those actions align with the materiality standard. 106 Thus, if the government is indifferent to the noncompliance, this is a factor that indicates the requirement may not have been material. The Supreme Court also reasoned that the scienter requirement would also provide a means to restrain the implied certification theory. 107 Knowledge does not have to be actual knowledge; the statutory language includes deliberate ignorance and reckless disregard standards. 108 If the defendant should have known because a reasonable person would have known, his failure to acknowledge the materiality amounts to deliberate ignorance or reckless disregard. 109 Despite how a bright line test may at first glance appear to be more black and white, there are potential problems with such an approach. To illustrate the issues with applying a bright line test to materiality, the Supreme Court explained its reasoning: 110 If the Government contracts for health services and adds a requirement that contractors buy American-made staplers, anyone who submits a claim for those services but fails to disclose its use of foreign staplers violates the False Claims Act. To the Government, liability would attach if the defendant s use of foreign staplers would entitle the Government not to pay the claim in whole or part irrespective of whether the Government routinely pays claims despite knowing that foreign staplers were used. Likewise, if the Government required contractors to aver their compliance with the entire U. S. Code and Code of Federal Regulations, then under this view, failing to mention noncompliance with any of those requirements would always be material. The False Claims Act does not adopt such an extraordinarily expansive view of liability. Thus, the Supreme Court rejected the First Circuit holding -- materiality does not turn alone on whether the Government would have declined payment if it knew of the violation. 111 Universal Health Services and other government contractors hoped for a bright line test, where implied certification theory would be restrained 102 at at 2002 (quoting 26 R. Lord, Williston on Contracts 69:12, at 549 (4th ed. 2003) (Williston). 105 at at U.S.C. 3729(a)(1)(A). 109 Escobar, 136 S. Ct. at at 2004 (omitting internal quotations). 111 at 2003.

16 by the requirement that the provision be expressly stated as a condition of payment. 112 By requiring the contract language to expressly designate the materiality of the provision, Universal Health and others argued that it would provide fair notice and better delineate a mere breach of contract claim from a FCA violation. 113 The Supreme Court, however, was concerned that the Government may respond with arbitrary actions to circumvent a bright line holding by making every legal requirement of a contract a precondition for payment. 114 With the decision in Escobar overturning the Second and the Seventh Circuits, we will likely see more litigation. Because these cases are so fact intensive, we may see a broader range of discovery to determine if the requirements actually mattered or if the government proves to be indifferent based on their previous actions. With an increase in litigation and discovery, the big winners here are the American taxpayers. FCA violations will continue to generate settlements and award significant damages to the government and Congress s purse. If the American people believe that the Supreme Court got it wrong, Congress can always rewrite or revise the statutory language. However, with the ability to restrain the implied certification theory despite the lack of bright lines and the monetary gains of the status quo, Congress may be reluctant to do so. Escobar on Remand As expected, materiality continues to develop through litigation. The fundamental inquiry is "whether a piece of information is sufficiently important to influence the behavior of the recipient." 115 Upon remand in Escobar, the First Circuit has focused materiality on three factors: 1) allegation that regulatory compliance is a condition of payment; 2) centrality of licensing/supervision requirements to program; and 3) and lack of evidence that the government knew of violations at the time it paid the claims. 116 The First Circuit also truncated the materiality analysis to the date of specific claims alleged and did not consider government actions following those claims. Post-Escobar Jurisprudence In United States ex rel. Nelson v. Sanford- Brown, Ltd., 840 F.3d 445 (7th Cir. 2016), the Seventh Circuit affirmed summary judgement for the defendant by demonstrating that noncompliance with the participation agreement was a condition of participation and not a material prerequisite to payment under the materiality standards of Escobar. In United States ex rel. Miller v. Weston Education, Inc., 840 F.3d 494 (8th Cir. 2016), the Eighth Circuit held that noncompliance with the participation agreement was material and reversed the district court s summary judgement in favor of the defendant. In City of Chicago v. Purdue Pharmacy, LP, No. 14 CV 4361, 2016 U.S. Dist. LEXIS (N.D. Ill. Sep. 29, 2016), the City of Chicago continued to make payments, even after the suit had been filed, thus undermining the theory that the misrepresentations were material to payment. 117 Effects of Escobar Escobar may require more discovery in FCA actions to prove materiality. Additional discovery requests may include documents relating to similar contracts or grants in which the government did or did not withhold payment, documents concerning prior versions of standard forms to identify consistent language, depositions of contracting officers about common practice in approving payments, and any actual historical information regarding similar claims. 112 at United States ex rel. Escobar v. Univ. Health Servs., 842 F.3d 103 (1st Cir. 2016) City of Chi. v. Purdue Pharma L.P., No. 14 CV 4361, 2016 U.S. Dist. LEXIS , at *51-53 (N.D. Ill. Sep. 29, 2016).

17 Escobar may allow more cases to survive motions to dismiss and summary judgment, thereby causing higher settlements to be reached. Fourth Circuit Court of Appeals Post Escobar The Fourth Circuit Court of Appeals has supported the holding of Escobar: 118 The Supreme Court has recently held that a relator can proceed under an implied false certification theory. Under that theory, when a defendant makes representations in submitting a claim but omits its violation of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant's representations misleading with respect to the goods or services provided. The relevant question is whether the defendant knowingly violated a requirement that the defendant knows is material to the government's decision to pay a claim. That requirement, however, need not be an express condition of payment. 118 United States ex rel. Garzione v. PAE Gov't Servs., No , 2016 U.S. App. LEXIS 19814, at *2-3 (4th Cir. Nov. 3, 2016) (omitting internal citations).

18 Caution As of: January 3, :33 AM EST Universal Health Servs. v. United States ex rel. Escobar Supreme Court of the United States April 19, 2016, Argued; June 16, 2016, Decided No Reporter 136 S. Ct *; 195 L. Ed. 2d 348 **; 2016 U.S. LEXIS 3920 ***; 84 U.S.L.W. 4410; 41 I.E.R. Cas. (BNA) 709; 26 Fla. L. Weekly Fed. S 258 UNIVERSAL HEALTH SERVICES, INC., Petitioner v. UNITED STATES and MASSACHUSETTS, ex rel. JULIO ESCOBAR and CARMEN CORREA Notice: The LEXIS pagination of this document is subject to change pending release of the final published version. Prior History: [***1] ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT specific representations about the goods or services provided, and a failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths; [2]-Liability for failing to disclose violations of legal requirements is not limited to those requirements that are expressly designated as conditions of payment; [3]-A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government s payment decision in order to be actionable. Identifying a provision as a condition of payment is relevant, but not automatically dispositive of materiality. United States ex rel. Escobar v. Universal Health Servs., 780 F.3d 504, 2015 U.S. App. LEXIS 4234 (1st Cir. Mass., 2015) Disposition: 780 F. 3d 504, vacated and remanded. Core Terms false claim, requirements, materiality, misrepresentation, condition of payment, violations, services, contractual, staff, submitting, fail to disclose, representations, designated, common-law, fraudulent, misleading, licensing, supervision, regulations, Contracts, attach, false certificate, fraudulent claim, misrepresented, noncompliance, knowingly, induce, materiality requirement, reimbursement claim, actual knowledge Case Summary Overview HOLDINGS: [1]-The implied false certification theory can be a basis for liability under the False Claims Act, 31 U.S.C.S. 3729(a)(1)(A), at least where the claim does not merely request payment, but also makes Outcome Judgment vacated; case remanded. Unanimous Decision. LexisNexis Headnotes Governments > Federal Government > Claims By & Against HN1 The False Claims Act, 31 U.S.C.S et seq., imposes significant penalties on those who defraud the Government. According to a theory of False Claims Act liability commonly referred to as implied false certification, when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant s violation of a material statutory, regulatory, or contractual requirement, so the theory goes, the defendant has made a misrepresentation that renders the claim false or fraudulent under 3729(a)(1)(A). At least in certain circumstances, the implied false certification theory can be a basis for liability. Specifically, liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant s Diana McGraw

19 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 2 of 17 noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading. Governments > Federal Government > Claims By & Against HN2 Liability under the False Claims Act, 31 U.S.C.S et seq., for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment. Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability. 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. Governments > Federal Government > Claims By & Against HN3 A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government s payment decision in order to be actionable under the False Claims Act, 31 U.S.C.S et seq. Governments > Federal Government > Claims By & Against HN4 Since 1863, Congress has repeatedly amended the False Claims Act, but its focus remains on those who present or directly induce the submission of false or fraudulent claims. 31 U.S.C.S. 3729(a) imposes civil liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. A claim includes direct requests to the Government for payment as well as reimbursement requests made to the recipients of federal funds under federal benefits programs. 3729(b)(2)(A). The Act s scienter requirement defines knowing and knowingly to mean that a person has actual knowledge of the information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information. 3729(b)(1)(A). And the Act defines material to mean having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 3729(b)(4). Governments > Federal Government > Claims By & Against HN5 Congress has increased the False Claims Act s civil penalties so that liability is essentially punitive in nature. Defendants are subjected to treble damages plus civil penalties of up to $10,000 per false claim. 31 U.S.C.S. 3729(a). 28 C.F.R. 85.3(a)(9) (2015) adjusts the penalties for inflation. Governments > Federal Government > Claims By & Against HN6 The implied false certification theory can, at least in some circumstances, provide a basis for liability under the False Claims Act, 31 U.S.C.S et seq. By punishing defendants who submit false or fraudulent claims, the False Claims Act encompasses claims that make fraudulent misrepresentations, which include certain misleading omissions. When a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant s representations misleading with respect to the goods or services provided. Governments > Federal Government > Claims By & Against Governments > Legislation > Interpretation HN7 The False Claims Act imposes civil liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. 31 U.S.C.S. 3729(a)(1)(A). Congress did not define what makes a claim false or fraudulent. But it is a settled principle of interpretation that, absent other indication, Congress intends to incorporate the wellsettled meaning of the common-law terms it uses. And the term fraudulent is a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud. Governments > Federal Government > Claims By & Against HN8 The False Claims Act, 31 U.S.C.S et seq., abrogates the common law in certain respects. For instance, the Act s scienter requirement requires no proof of specific intent to defraud. 31 U.S.C.S. 3729(b)(1)(B). But it is presumed that Congress retained all other elements of common-law fraud that are consistent with the statutory text because there are no textual indicia to the contrary. Governments > Federal Government > Claims By & Against Torts > Business Torts > Fraud & Misrepresentation > Nondisclosure Diana McGraw

20 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 3 of 17 HN9 Because common-law fraud has long encompassed certain misrepresentations by omission, false or fraudulent claims under the False Claims Act, 31 U.S.C.S et seq., include more than just claims containing express falsehoods. Misrepresentations by omission can give rise to liability. Torts > Business Torts > Fraud & Misrepresentation > Nondisclosure HN10 Half-truths representations that state the truth only so far as it goes, while omitting critical qualifying information can be actionable misrepresentations. Torts > Business Torts > Fraud & Misrepresentation > Nondisclosure Contracts Law > Defenses > Fraud & Misrepresentation HN11 In tort law, if a defendant does speak, he must disclose enough to prevent his words from being misleading. Contract law also embraces this principle. Public Health & Welfare Law > Social Security > Medicaid > State Plans HN12 Core Massachusetts Medicaid requirements include (1) that a counselor treating children is required to have specialized training and experience in children s services, 130 Mass. Code Regs , and also (2) that, at a minimum, the social worker possesses the prescribed qualifications for the job, 130 Mass. Code Regs (C). Governments > Federal Government > Claims By & Against HN13 The implied certification theory can be a basis for liability under the False Claims Act, 31 U.S.C.S et seq., at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. Torts > Business Torts > Fraud & Misrepresentation > Nondisclosure HN14 A statement that contains only favorable matters and omits all reference to unfavorable matters is as much a false representation as if all the facts stated were untrue. Governments > Federal Government > Claims By & Against HN15 Regarding whether a defendant should face False Claims Act, 31 U.S.C.S et seq., liability only if it fails to disclose the violation of a contractual, statutory, or regulatory provision that the Government expressly designated a condition of payment, the Act does not impose this limit on liability. But not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry. Governments > Federal Government > Claims By & Against Torts > Business Torts > Fraud & Misrepresentation > Nondisclosure HN16 31 U.S.C.S. 3729(a)(1)(A) imposes liability on those who present false or fraudulent claims but does not limit such claims to misrepresentations about express conditions of payment. Nor does the commonlaw meaning of fraud tether liability to violating an express condition of payment. A statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information. Governments > Federal Government > Claims By & Against HN17 Under the False Claims Act, 31 U.S.C.S et seq., a misrepresentation must be material to the other party s course of action. But statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment. Materiality cannot rest on a single fact or occurrence as always determinative. Governments > Federal Government > Claims By & Against HN18 For purposes of the False Claims Act, 31 U.S.C.S et seq., a defendant can have actual knowledge that a condition is material without the Government expressly calling it a condition of payment. If the Government fails to specify that guns it orders must actually shoot, but the defendant knows that the Government routinely rescinds contracts if the guns do not shoot, the defendant has actual knowledge. Likewise, because a reasonable person would realize the imperative of a functioning firearm, a defendant s failure to appreciate the materiality of that condition would amount to deliberate ignorance or reckless disregard of the truth or falsity of the information even if the Government did not spell this out. Governments > Legislation > Interpretation Diana McGraw

21 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 4 of 17 HN19 Policy arguments cannot supersede clear statutory text. Governments > Federal Government > Claims By & Against Torts >... > Fraud & Misrepresentation > Actual Fraud > Elements HN20 A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government s payment decision in order to be actionable under the False Claims Act. 31 U.S.C.S. 3729(b)(4) defines materiality using language that has been employed to define materiality in other federal fraud statutes: The term "material" means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. This materiality requirement descends from common-law antecedents. Indeed, the common law could not have conceived of "fraud" without proof of materiality. Torts >... > Fraud & Misrepresentation > Actual Fraud > Elements Contracts Law > Defenses > Fraud & Misrepresentation > Material Misrepresentations HN21 Under any understanding of the concept, materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. In tort law, for instance, a matter is material in only two circumstances: (1) if a reasonable man would attach importance to it in determining his choice of action in the transaction; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter in determining his choice of action, even though a reasonable person would not. Materiality in contract law is substantially similar. A misrepresentation is material only if it would likely induce a reasonable person to manifest his assent, or the defendant knows that for some special reason the representation is likely to induce the particular recipient to manifest his assent to the transaction. Governments > Federal Government > Claims By & Against HN22 The materiality standard of the False Claims Act, 31 U.S.C.S et seq., is demanding. The False Claims Act is not an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations. 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 noncompliance. Materiality, in addition, cannot be found where noncompliance is minor or insubstantial. Governments > Federal Government > Claims By & Against HN23 When evaluating materiality under the False Claims Act, 31 U.S.C.S et seq., the Government s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, 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. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material. Governments > Federal Government > Claims By & Against Civil Procedure >... > Pleadings > Heightened Pleading Requirements > Fraud Claims Civil Procedure >... > Pleadings > Complaints > Requirements for Complaint HN24 False Claims Act, 31 U.S.C.S et seq., plaintiffs must plead their claims with plausibility and particularity under Fed. R. Civ. P. 8 and 9(b) by, for instance, pleading facts to support allegations of materiality. Governments > Federal Government > Claims By & Against HN25 The False Claims Act, 31 U.S.C.S et seq., is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations. Lawyers' Edition Display Decision Diana McGraw

22 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 5 of 17 [**348] Implied-false-certification theory could be basis for liability under False Claims Act provision (31 U.S.C.S. 3729(a)(1)(A)) for claim's specific misleading representations. Summary Overview: HOLDINGS: [1]-The implied false certification theory can be a basis for liability under the False Claims Act, 31 U.S.C.S. 3729(a)(1)(A), at least where the claim does not merely request payment, but also makes specific representations about the goods or services provided, and a failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths; [2]-Liability for failing to disclose violations of legal requirements is not limited to those requirements that are expressly designated as conditions of payment; [3]-A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable. Identifying a provision as a condition of payment is relevant, but not automatically dispositive of materiality. Outcome: Judgment vacated; case remanded. Unanimous Decision. Headnotes CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- IMPLIED FALSE CERTIFICATION > Headnote: LEdHN[1] [1] The False Claims Act, 31 U.S.C.S et seq., imposes significant penalties on those who defraud the government. According to a theory of False Claims Act liability commonly referred to as implied false certification, when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant's violation of a material statutory, regulatory, or contractual requirement, so the theory goes, the defendant has made a misrepresentation that renders the claim false or fraudulent under 3729(a)(1)(A). At least in certain circumstances, the implied false certification theory can be a basis for liability. Specifically, liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant's noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIMS ACT -- MATERIAL VIOLATION > Headnote: LEdHN[2] [2] Liability under the False Claims Act, 31 U.S.C.S et seq., for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment. Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability. 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. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- MATERIALITY > Headnote: LEdHN[3] [3] A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the government's payment decision in order to be actionable under the False Claims Act, 31 U.S.C.S et seq. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIMS ACT -- SCIENTER -- MATERIALITY > Headnote: LEdHN[4] [4] Since 1863, Congress has repeatedly amended the False Claims Act, but its focus remains on those who present or directly induce the submission of false or fraudulent claims. 31 U.S.C.S. 3729(a) imposes civil liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. A claim includes direct requests to the government for payment as well as reimbursement requests made to the recipients of federal funds under federal benefits programs. 3729(b)(2)(A). The Act's scienter requirement defines knowing and knowingly to mean that a person has Diana McGraw

23 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 6 of 17 actual knowledge of the information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information. 3729(b)(1)(A). And the Act defines material to mean having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 3729(b)(4). CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- PENALTIES > Headnote: LEdHN[5] [5] Congress has increased the False Claims Act's civil penalties so that liability is essentially punitive in nature. Defendants are subjected to treble damages plus civil penalties of up to $10,000 per false claim. 31 U.S.C.S. 3729(a). 28 C.F.R. 85.3(a)(9) (2015) adjusts the penalties for inflation. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- IMPLIED FALSE CERTIFICATION > Headnote: LEdHN[6] [6] The implied-false-certification theory can, at least in some circumstances, provide a basis for liability under the False Claims Act, 31 U.S.C.S et seq. By punishing defendants who submit false or fraudulent claims, the False Claims Act encompasses claims that make fraudulent misrepresentations, which include certain misleading omissions. When a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant's representations misleading with respect to the goods or services provided. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101STATUTES 125 > FALSE CLAIMS ACT -- COMMON LAW > Headnote: LEdHN[7] [7] The False Claims Act imposes civil liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. 31 U.S.C.S. 3729(a)(1)(A). Congress did not define what makes a claim false or fraudulent. But it is a settled principle of interpretation that, absent other indication, Congress intends to incorporate the wellsettled meaning of the common-law terms it uses. And the term fraudulent is a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIMS ACT -- COMMON LAW > Headnote: LEdHN[8] [8] The False Claims Act, 31 U.S.C.S et seq., abrogates the common law in certain respects. For instance, the Act's scienter requirement requires no proof of specific intent to defraud. 31 U.S.C.S. 3729(b)(1)(B). But it is presumed that Congress retained all other elements of common-law fraud that are consistent with the statutory text because there are no textual indicia to the contrary. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > MISREPRESENTATION BY OMISSION > Headnote: LEdHN[9] [9] Because common-law fraud has long encompassed certain misrepresentations by omission, false or fraudulent claims under the False Claims Act, 31 U.S.C.S et seq., include more than just claims containing express falsehoods. Misrepresentations by omission can give rise to liability. FRAUD AND DECEIT 5 > HALF-TRUTHS > Headnote: LEdHN[10] [10] Half-truths--representations that state the truth only so far as it goes, while omitting critical qualifying information--can be actionable misrepresentations. FRAUD AND DECEIT 5 > FAILURE TO DISCLOSE > Headnote: LEdHN[11] [11] In tort law, if a defendant does speak, he must disclose enough to prevent his words from being misleading. Contract law also embraces this principle. POVERTY AND WELFARE LAWS 8 > MEDICAID -- STATE LAW > Headnote: LEdHN[12] [12] Core Massachusetts Medicaid requirements include (1) that a counselor treating children is required to have specialized training and experience in children's services, 130 Mass. Code Regs , and also (2) that, at a minimum, the social worker possesses the Diana McGraw

24 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 7 of 17 prescribed qualifications for the job, 130 Mass. Code Regs (C). CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- IMPLIED CERTIFICATION > Headnote: LEdHN[13] [13] The implied-certification theory can be a basis for liability under the False Claims Act, 31 U.S.C.S et seq., at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. FRAUD AND DECEIT 5 > UNFAVORABLE MATTERS > Headnote: LEdHN[14] [14] A statement that contains only favorable matters and omits all reference to unfavorable matters is as much a false representation as if all the facts stated were untrue. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- LIABILITY -- MATERIALITY > Headnote: LEdHN[15] [15] Regarding whether a defendant should face False Claims Act, 31 U.S.C.S et seq., liability only if it fails to disclose the violation of a contractual, statutory, or regulatory provision that the government expressly designated a condition of payment, the Act does not impose this limit on liability. But not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- LIABILITY > Headnote: LEdHN[16] [16] 31 U.S.C.S. 3729(a)(1)(A) imposes liability on those who present false or fraudulent claims but does not limit such claims to misrepresentations about express conditions of payment. Nor does the common-law meaning of fraud tether liability to violating an express condition of payment. A statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- MATERIALITY > Headnote: LEdHN[17] [17] Under the False Claims Act, 31 U.S.C.S et seq., a misrepresentation must be material to the other party's course of action. But statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment. Materiality cannot rest on a single fact or occurrence as always determinative. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- KNOWLEDGE -- MATERIAL CONDITION > Headnote: LEdHN[18] [18] For purposes of the False Claims Act, 31 U.S.C.S et seq., a defendant can have actual knowledge that a condition is material without the government expressly calling it a condition of payment. If the government fails to specify that guns it orders must actually shoot, but the defendant knows that the government routinely rescinds contracts if the guns do not shoot, the defendant has actual knowledge. Likewise, because a reasonable person would realize the imperative of a functioning firearm, a defendant's failure to appreciate the materiality of that condition would amount to deliberate ignorance or reckless disregard of the truth or falsity of the information even if the government did not spell this out. STATUTES > POLICY -- TEXT > Headnote: LEdHN[19] [19] Policy arguments cannot supersede clear statutory text. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- MISREPRESENTATION -- MATERIALITY > Headnote: LEdHN[20] [20] A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the government's payment decision in order to be actionable under the False Claims Act. 31 U.S.C.S. 3729(b)(4) defines materiality using language that has Diana McGraw

25 136 S. Ct. 1989, *1989; 195 L. Ed. 2d 348, **348; 2016 U.S. LEXIS 3920, ***1 Page 8 of 17 been employed to define materiality in other federal fraud statutes: The term material means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. This materiality requirement descends from common-law antecedents. Indeed, the common law could not have conceived of fraud without proof of materiality. FRAUD AND DECEIT 17 > MATERIALITY -- TORTS -- CONTRACTS > Headnote: LEdHN[21] [21] Under any understanding of the concept, materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. In tort law, for instance, a matter is material in only two circumstances: (1) if a reasonable man would attach importance to it in determining his choice of action in the transaction; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter in determining his choice of action, even though a reasonable person would not. Materiality in contract law is substantially similar. A misrepresentation is material only if it would likely induce a reasonable person to manifest his assent, or the defendant knows that for some special reason the representation is likely to induce the particular recipient to manifest his assent to the transaction. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- MISREPRESENTATION -- MATERIALITY > Headnote: LEdHN[22] [22] The materiality standard of the False Claims Act, 31 U.S.C.S et seq., is demanding. The False Claims Act is not an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations. 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 noncompliance. Materiality, in addition, cannot be found where noncompliance is minor or insubstantial. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIM -- MISREPRESENTATION -- MATERIALITY > Headnote: LEdHN[23] [23] When evaluating materiality under the False Claims Act, 31 U.S.C.S et seq., the government's decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, 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. Conversely, if the government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material. PLEADING 171 > FALSE CLAIMS ACT > Headnote: LEdHN[24] [24] False Claims Act, 31 U.S.C.S et seq., plaintiffs must plead their claims with plausibility and particularity under Fed. R. Civ. P. 8 and 9(b) by, for instance, pleading facts to support allegations of materiality. CLAIMS AGAINST UNITED STATES AND FOREIGN GOVERNMENTS 101 > FALSE CLAIMS ACT -- PENALTIES > Headnote: LEdHN[25] [25] The False Claims Act, 31 U.S.C.S et seq., is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations. Syllabus [**354] [*1993] Yarushka Rivera, a teenage beneficiary of Massachusetts' Medicaid program, received counseling services for several years at Arbour Counseling Services, a satellite mental health facility owned and operated by a subsidiary of petitioner Universal Health Services, Inc. She had an adverse reaction to a medication that a purported doctor at Arbour prescribed after diagnosing her with bipolar disorder. Her condition worsened, and she eventually died of a seizure. Respondents, her mother and stepfather, later discovered that few Arbour employees were actually licensed to provide mental health counseling or authorized to prescribe medications or offer counseling services without supervision. Diana McGraw

26 136 S. Ct. 1989, *1993; 195 L. Ed. 2d 348, **354; 2016 U.S. LEXIS 3920, ***1 Page 9 of 17 Respondents filed a qui tam suit, alleging that Universal Health had violated the False Claims Act (FCA). That Act imposes significant penalties on anyone who knowingly presents... a false or fraudulent claim for payment or approval to the Federal Government, 31 U. S. C. 3729(a)(1)(A). [**355] Respondents sought to hold Universal Health liable under what is commonly referred to as an implied false certification theory of liability, [***2] which treats a payment request as a claimant's implied certification of compliance with relevant statutes, regulations, or contract requirements that are material conditions of payment and treats a failure to disclose a violation as a misrepresentation that renders the claim false or fraudulent. Specifically, respondents alleged, Universal Health (acting through Arbour) defrauded the Medicaid program by submitting reimbursement claims that made representations about the specific services provided by specific types of professionals, but that failed to disclose serious violations of Massachusetts Medicaid regulations pertaining to staff qualifications and licensing requirements for these services. Universal Health thus allegedly defrauded the program because Universal Health knowingly misrepresented its compliance with mental health facility requirements that are so central to the provision of mental health counseling that the Medicaid program would have refused to pay these claims had it known of these violations. The District Court granted Universal Health's motion to dismiss. It held that respondents had failed to state a claim under the implied false certification theory of liability [***3] because none of the regulations violated by Arbour was a condition of payment. The First Circuit reversed in relevant part, holding that every submission of a claim implicitly represents compliance with relevant regulations, and that any undisclosed violation of a precondition of payment (whether or not expressly identified as such) renders a claim false or fraudulent. The First Circuit further held that the regulations themselves provided conclusive evidence that compliance was a material condition of payment because the regulations expressly required facilities to adequately supervise staff as a condition of payment. Held: 1. The implied false certification theory can be a basis for FCA liability when a defendant submitting a claim makes specific representations about the goods or services provided, but fails to disclose noncompliance with material statutory, regulatory, or contractual requirements that [*1994] make those representations misleading with respect to those goods or services. Pp. _ -, 195 L. Ed. 2d, at (a) The FCA does not define a false or fraudulent claim, so the Court turns to the principle that absent other indication, 'Congress intends to incorporate the well-settled meaning of the [***4] common-law terms it uses,' Sekhar v. United States, 570 U. S.,, 133 S. Ct. 2720, 186 L. Ed. 2d 794, 798. Under the common-law definition of fraud, the parties agree, certain misrepresentations by omission can give rise to FCA liability. Respondents and the Government contend that every claim for payment implicitly represents that the claimant is legally entitled to payment, and that failing to disclose violations of material legal requirements renders the claim misleading. Universal Health, on the other hand, argues that submitting a claim involves no representations and that the nondisclosure of legal violations is not actionable absent a special duty of reasonable care to disclose such matters. [**356] Today's decision holds that the claims at issue may be actionable because they do more than merely demand payment; they fall squarely within the rule that representations that state the truth only so far as it goes, while omitting critical qualifying information, can be actionable misrepresentations. Pp. -, 195 L. Ed. 2d, at (b) By submitting claims for payment using payment codes corresponding to specific counseling services, Universal Health represented that it had provided specific types of treatment. And Arbour staff allegedly made further representations by using National [***5] Provider Identification numbers corresponding to specific job titles. By conveying this information without disclosing Arbour's many violations of basic staff and licensing requirements for mental health facilities, Universal Health's claims constituted misrepresentations. Pp. -, 195 L. Ed. 2d, at Contrary to Universal Health's contentions, FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment. Pp. -, 195 L. Ed. 2d, at (a) Section 3729(a)(1)(A), which imposes liability on those presenting false or fraudulent claim[s], does not limit claims to misrepresentations about express conditions of payment. Nothing in the text supports such a restriction. And under the Act's materiality requirement, statutory, regulatory, and contractual Diana McGraw

27

28 136 S. Ct. 1989, *1996; 195 L. Ed. 2d 348, **357; 2016 U.S. LEXIS 3920, ***9 Page 11 of 17 HN3 LEdHN[3] [3] A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government s payment decision in order to be actionable under the False Claims Act. We clarify below how that rigorous materiality requirement should be enforced. Because the courts below interpreted [**358] 3729(a)(1)(A) differently, we vacate the judgment and remand so that those courts may apply the approach set out in this opinion. I A Enacted in 1863, the False Claims Act was originally aimed principally at stopping the massive frauds perpetrated by large contractors during the Civil War. United States v. Bornstein, 423 U. S. 303, 309, 96 S. Ct. 523, 46 L. Ed. 2d 514 (1976). [A] series of sensational congressional investigations prompted hearings where witnesses painted a sordid picture of how the United States had been billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war. United States v. McNinch, 356 U. S. 595, 599, 78 S. Ct. 950, 2 L. Ed. 2d 1001 (1958). Congress responded by imposing civil and criminal liability for 10 types of fraud on the Government, subjecting violators [***10] to double damages, forfeiture, and up to five years imprisonment. Act of Mar. 2, 1863, ch. 67, 12 Stat HN4 LEdHN[4] [4] Since then, Congress has repeatedly amended the Act, but its focus remains on those who present or directly induce the submission of false or fraudulent claims. See 31 U. S. C. 3729(a) (imposing civil liability on any person who... knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval ). A claim now includes direct requests to the Government for payment as well as reimbursement requests made to the recipients of federal funds under federal benefits programs. See 3729(b)(2)(A). The Act s scienter requirement defines knowing and knowingly to mean that a person has actual knowledge of the information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information. 3729(b)(1)(A). And the Act defines material to mean having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. 3729(b)(4). HN5 LEdHN[5] [5] Congress also has increased the Act s civil penalties so that liability is essentially punitive in nature. Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U. S. 765, 784, 120 S. Ct. 1858, 146 L. Ed. 2d 836 (2000). Defendants are subjected to treble damages plus civil [***11] penalties of up to $10,000 per false claim. 3729(a); 28 CFR 85.3(a)(9) (2015) (adjusting penalties for inflation). B The alleged False Claims Act violations here arose within the Medicaid program, a [*1997] joint statefederal program in which healthcare providers serve poor or disabled patients and submit claims for government reimbursement. See generally 42 U. S. C et seq. The facts recited in the complaint, which we take as true at this stage, are as follows. For five years, Yarushka Rivera, a teenage beneficiary of Massachusetts Medicaid program, received counseling services at Arbour Counseling Services, a satellite mental health facility in Lawrence, Massachusetts, owned and operated by a subsidiary of petitioner Universal Health Services. Beginning in 2004, when Yarushka started having behavioral problems, five medical [**359] professionals at Arbour intermittently treated her. In May 2009, Yarushka had an adverse reaction to a medication that a purported doctor at Arbour prescribed after diagnosing her with bipolar disorder. Her condition worsened; she suffered a seizure that required hospitalization. In October 2009, she suffered another seizure and died. She was 17 years old. Thereafter, an Arbour counselor revealed to respondents [***12] Carmen Correa and Julio Escobar Yarushka s mother and stepfather that few Arbour employees were actually licensed to provide mental health counseling and that supervision of them was minimal. Respondents discovered that, of the five professionals who had treated Yarushka, only one was properly licensed. The practitioner who diagnosed Yarushka as bipolar identified herself as a psychologist with a Ph. D., but failed to mention that her degree came from an unaccredited Internet college and that Massachusetts had rejected her application to be licensed as a psychologist. Likewise, the practitioner who prescribed medicine to Yarushka, and who was held out as a psychiatrist, was in fact a nurse who lacked authority to prescribe medications absent supervision. Rather than ensuring supervision of unlicensed staff, the clinic s director helped to misrepresent the staff s qualifications. And the problem Diana McGraw

29 136 S. Ct. 1989, *1997; 195 L. Ed. 2d 348, **359; 2016 U.S. LEXIS 3920, ***12 Page 12 of 17 went beyond those who treated Yarushka. Some 23 Arbour employees lacked licenses to provide mental health services, yet despite regulatory requirements to the contrary they counseled patients and prescribed drugs without supervision. When submitting reimbursement claims, Arbour used payment [***13] codes corresponding to different services that its staff provided to Yaruskha, such as Individual Therapy and family therapy. 1 App. 19, 20. Staff members also misrepresented their qualifications and licensing status to the Federal Government to obtain individual National Provider Identification numbers, which are submitted in connection with Medicaid reimbursement claims and correspond to specific job titles. For instance, one Arbour staff member who treated Yaruskha registered for a number associated with Social Worker, Clinical, despite lacking the credentials and licensing required for social workers engaged in mental health counseling. 1 id., at 32. After researching Arbour s operations, respondents filed complaints with various Massachusetts agencies. Massachusetts investigated and ultimately issued a report detailing Arbour s violation of over a dozen Massachusetts Medicaid regulations governing the qualifications and supervision required for staff at mental health facilities. Arbour agreed to a remedial plan, and two Arbour employees also entered into consent agreements with Massachusetts. In 2011, respondents filed a qui tam suit in federal court, see 31 U. S. C. 3730, alleging that Universal [***14] Health had violated the False Claims Act under an implied false certification theory of liability. The operative complaint asserts that Universal Health (acting through Arbour) submitted [*1998] reimbursement claims that made representations about the specific services provided by specific types of professionals, but that failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for [**360] these services. 1 Specifically, the Massachusetts Medicaid program requires satellite facilities to have specific types of clinicians on staff, delineates licensing requirements for particular positions (like psychiatrists, social workers, 1 Although Universal Health submitted some of the claims at issue before 2009, we assume as the parties have done that the 2009 amendments to the False Claims Act apply here. Universal Health does not argue, and we thus do not consider, whether pre-2009 conduct should be treated differently. and nurses), and details supervision requirements for other staff. See 130 Code Mass. Regs , (2014). Universal Health allegedly flouted these regulations because Arbour employed unqualified, unlicensed, and unsupervised staff. The Massachusetts Medicaid program, unaware of these deficiencies, paid the claims. Universal Health thus allegedly defrauded the program, which would not have reimbursed the claims had it known that it was billed for mental health services that were performed by unlicensed and unsupervised staff. The United States declined [***15] to intervene. The District Court granted Universal Health s motion to dismiss the complaint. Circuit precedent had previously embraced the implied false certification theory of liability. See, e.g., United States ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F. 3d 377, (CA1 2011). But the District Court held that respondents had failed to state a claim under that theory because, with one exception not relevant here, none of the regulations that Arbour violated was a condition of payment. See 2014 U.S. Dist. LEXIS 40098, 2014 WL , *1, *6- *12 (D Mass., Mar. 26, 2014). The United States Court of Appeals for the First Circuit reversed in relevant part and remanded. 780 F. 3d 504, 517 (2015). The court observed that each time a billing party submits a claim, it implicitly communicate[s] that it conformed to the relevant program requirements, such that it was entitled to payment., at 514, n. 14. To determine whether a claim is false or fraudulent based on such implicit communications, the court explained, it asks simply whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented [***16] compliance with a material precondition of payment., at 512. In the court s view, a statutory, regulatory, or contractual requirement can be a condition of payment either by expressly identifying itself as such or by implication., at The court then held that Universal Health had violated Massachusetts Medicaid regulations that clearly impose conditions of payment., at 513. The court further held that the regulations themselves constitute[d] dispositive evidence of materiality, because they identified adequate supervision as an express and absolute condition of payment and repeated[ly] reference[d] supervision., at 514 (internal quotation marks omitted). We granted certiorari to resolve the disagreement among the Courts of Appeals over the validity and scope of the implied false certification theory of liability. Diana McGraw

30

31 136 S. Ct. 1989, *2000; 195 L. Ed. 2d 348, **362; 2016 U.S. LEXIS 3920, ***20 Page 14 of 17 actionable misrepresentations. 3 A classic example of an actionable half-truth in contract law is the seller who reveals that there may be two new roads near a property he is selling, but fails to disclose that a third potential road might bisect the property. See Junius Constr. Co. v. Cohen, 257 N. Y. 393, 400, 178 N. E. 672, 674 (1931) (Cardozo, J.). The enumeration of two streets, described as unopened but projected, was a tacit representation that the land to be conveyed was subject to no others, and certainly subject to no others materially affecting the value of the purchase. Ibid. Likewise, an applicant for an adjunct position at a local college makes an actionable misrepresentation when his resume lists prior jobs and then retirement, but fails to disclose that his retirement was a prison stint for perpetrating a $12 million bank fraud. See 3 D. Dobbs, P. Hayden, & H. Bublick, Law of Torts 682, pp , and n. 14 (2d ed. 2011) (citing Sarvis v. Vermont State Colleges, 172 Vt. 76, 78, 80-82, 772 A. 2d 494, 496, (2001)). So too here, by submitting claims for payment using payment codes that corresponded to specific counseling services, Universal Health represented that it had provided individual therapy, family therapy, preventive medication counseling, and other types of treatment. Moreover, Arbour staff members allegedly made further representations in submitting Medicaid reimbursement claims by using National Provider Identification numbers corresponding to specific job titles. And these representations were clearly misleading in context. Anyone [**363] informed that a social worker at a Massachusetts mental health clinic provided a teenage patient with individual counseling services would probably but wrongly conclude that the clinic had complied with HN12 LEdHN[12] [12] core Massachusetts Medicaid requirements (1) that a counselor treating children [is] required to have specialized training and experience in children s services, 130 Code Mass. Regs , and also 3 This rule recurs throughout the common law. HN11 LEdHN[11] [11] In tort law, for example, if the defendant does speak, he must disclose enough to prevent his words from being misleading. W. Keeton, [***21] D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts 106, p. 738 (5th ed. 1984). Contract law also embraces this principle. See, e.g., Restatement (Second) of Contracts 161, Comment a, p. 432 (1979). And we have used this definition in other statutory contexts. See, e.g., Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. 27, 44, 131 S. Ct. 1309, 179 L. Ed. 2d 398 (2011) (securities law). (2) that, at a minimum, the social [***22] worker possesses the prescribed qualifications for the job, (C). By using payment and other codes that conveyed this information without disclosing Arbour s many violations of basic staff and licensing requirements for mental [*2001] health facilities, Universal Health s claims constituted misrepresentations. Accordingly, we hold that HN13 LEdHN[13] [13] the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. 4 III The second question presented is HN15 LEdHN[15] [15] whether, as Universal [***23] Health urges, a defendant should face False Claims Act liability only if it fails to disclose the violation of a contractual, statutory, or regulatory provision that the Government expressly designated a condition of payment. We conclude that the Act does not impose this limit on liability. But we also conclude that not every undisclosed violation of an express condition of payment automatically triggers liability. Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry. A Nothing in the text of the False Claims Act supports Universal Health s proposed restriction. HN16 LEdHN[16] [16] Section 3729(a)(1)(A) imposes liability on those who present false or fraudulent claims but does not limit such claims to misrepresentations about express conditions of payment. See SAIC, 626 F. 3d, at 1268 (rejecting any textual basis for an express- 4 As an alternative argument, Universal Health asserts that misleading partial disclosures constitute fraudulent misrepresentations only when the initial statement partially disclosed unfavorable information. Not so. HN14 LEdHN[14] [14] [A] statement that contains only favorable matters and omits all reference to unfavorable matters is as much a false representation as if all the facts stated were untrue. Restatement (Second) of Torts, 529, Comment a, pp (1976). Diana McGraw

32