Attys React To High Court's FCA Liability Ruling

Portfolio Media. Inc. 111 West 19 th Street, 5th Floor New York, NY 10011 www.law360.com Phone: +1 646 783 7100 Fax: +1 646 783 7161 customerservice@law360.com Attys React To High Court's FCA Liability Ruling By Adrianne Reilly Law360, New York (June 16, 2016, 8:54 PM ET) -- The U.S. Supreme Court ruled Thursday in Universal Health Services v. Escobar that corporations can face False Claims Act liability if they bill the government while out of compliance with regulations that aren t explicit conditions of payment. Here, attorneys tell Law360 why the decision is significant. Douglas W. Baruch, Fried Frank Harris Shriver & Jacobson LLP If I had to weigh the outcome of this decision, I d say the balance tips in favor of contractors. There s no doubt that the decision means that implied certification liability is now possible in some jurisdictions where it had been rejected before, but most observers expected the Supreme Court to allow some form of the theory to survive. The loss for the government stems from the fact that the court has imposed rigorous limitations on the use of the implied certification theory and expressly rejected the far more lenient standard advocated by the Justice Department and relators. No longer can the government meet its materiality burden by coming in after the fact with self-serving declarations that payment would not have been made had the violation been known. Instead, to qualify as an implied certification, the misrepresentation has to go to the essence of the contractual bargain and the government and relators must allege and prove that the defendant knew at the time of claim submission that the misrepresentation would have been material to the payment decision. So, yes, the implied certification theory lives on, but its reach has been sharply limited. Linda Clark, Barclay Damon LLP The court seems to have declined a bright-line test of materiality in favor of a rule of reason type analysis that builds upon the FCA requirement that violations be capable of influencing government payment decisions. Errors that would normally be ignored as a basis for governmental auditing, recoupment or prosecution would not be deemed material under the court s analysis, while more substantial errors that a contractor knows or should know? would trigger non-payment could be sufficiently material. The decision could make the foreseeability of claim acceptance or rejection by governmental payors a pivotal issue in FCA cases. Matthew M. Curley, Bass Berry & Sims PLC It is not surprising that the Supreme Court affirmed the notion that the implied certification theory may give rise to FCA liability. The court, however, missed an opportunity to delineate clear boundaries for that theory. Reassurances that the materiality standard is demanding and not satisfied where

noncompliance is minor or insubstantial leaves those boundaries open to much debate particularly where noncompliance relates to regulations that on their face have nothing to do with payment by the government. It is difficult to view this as anything other than a win for those pushing for a more expansive view of FCA liability. Jason Drori, Foley & Lardner LLP Escobar resolves a circuit split by affirming the validity of the implied certification theory of FCA liability and its application to noncompliance with material requirements for government payment regardless of whether such requirements are expressly designated as conditions of payment. In so doing, the ruling will do little to stem the tide of FCA litigation. Escobar does make implied certification claims more defensible. It establishes a new, demanding materiality standard not satisfied by minor or insubstantial violations or merely because the government designates compliance with a particular regulatory or contractual requirement as a condition of payment. Instead, evidence showing a defendant knows the government consistently refuses to pay claims based on similar noncompliance can prove materiality. Because gauging materiality is necessarily fact-intensive, FCA cases are more likely to proceed beyond the pleading stage. William A. Escobar, Kelley Drye & Warren LLP In Universal Health, the Supreme Court resolved a conflict among the Courts of Appeal on the issue of implied certification liability. The court held that liability under the FCA can attach when a defendant is shown to have violated a statutory, regulatory or contractual obligation that was material to the payment of a claim by the federal government. The decision takes an expansive view of the somewhat nebulous concept of implied certification and rejects the narrower view that a false claim must relate to an express false statement that leads to payment of a claim. Under this decision, an entity that is subject to statutory, regulatory or contractual obligations implicitly certifies with each submission of a claim that it is complying with all those obligations. Failure to disclose non-compliance with any such obligation can constitute a false claim. Recognizing that this holding, coupled with a vast regulatory system imposing a wide array of obligations on entities that engage with the federal government, could expose companies to substantial liability and litigation, the court took pains to emphasize that the regulatory or contractual violation has to be material to the decision to pay the claim. While the court tries to provide some guidance on the necessary showing of materiality, the reality is that this decision will expand litigation under the federal and state false claims acts and encourage the false claims plaintiffs bar. Mitchell S. Ettinger, Skadden Arps Slate Meagher & Flom LLP In deciding Universal Health, the Supreme Court is attempting to walk a fine line between expanding the reach of the FCA to claims where the contractor failed to fulfill each and every regulatory and/or legal obligation and limiting the reach of the act to only those claims where there is an affirmative misrepresentation. Without question, the decision will expand the reach of the FCA in that the implied certification theory was not recognized in all circuits. In addition, while the Supreme Court provided a framework for application of the two types of implied certifications that may be actionable, it remains to be seen how plaintiffs will attempt to satisfy the pleading requirements of the act. Thomas J. Finn, McCarter & English LLP Today s Supreme Court decision reaffirms the implied false certification theory of liability. In doing so, the court held that liability can be imposed upon a government contractor for its knowing noncompliance with federal statutes, regulations, or contract requirements, regardless of whether the

requirements were an express condition of payment. The court s decision, in my view, added further ambiguity to this theory of liability under the FCA. The practical effect is that government contractors are left with no greater clarity as to what would be considered material to the government s payment decision, thus subjecting them to liability for criminal penalties, civil penalties, and treble damages. Stuart Gerson, Epstein Becker Green The Supreme Court vacated and remanded the matter in a manner that represents a compromise view of implied false certification. Given the oral argument, this result and the fact that it is unanimous is unsurprising. The court recognizes the vitality of the implied false certification theory but also holds that the First Circuit erred in adopting the government s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the government would be entitled to refuse payment were it aware of the violation. One would predict that Universal is going to have an uphill battle though not be completely defenseless on the remand and that the government and relator s lawyers are going to trumpet this case as a genuine victory in that the implied false certification theory has been endorsed in the face of uniform industry opposition. There is some justification for this, but not completely so. The materiality requirement, stringently interpreted, and the fact that the First Circuit s expansive view was rejected suggest that the game is far from over and that there still are viable defenses, facts allowing, to cases premised upon the implied false certification theory. Ty Howard, Bradley Arant Boult Cummings LLP Although the court s unanimous decision in Escobar may initially be construed as a government victory because it upholds the implied certification theory, it likely will be a pyrrhic one. The court s significant limitations on when that theory can apply and the significant bolstering of the materiality requirement foreclose the government s most expansive use of the theory and create a much higher bar for qui tam plaintiffs to clear before FCA liability can apply, both of which will be welcome news to health-care providers, government contractors, and others that do business with the federal government. Susan Huntington, Day Pitney LLP The decision by the Supreme Court in Universal Health means that federal contractors, including any health-care provider participating in a federal health benefit program like Medicare or Medicaid, needs to pay attention to regulatory representations and warranties. These contract provisions cannot be dismissed as boilerplate. Legal and compliance due diligence is critical to avoid the expanded risk of liability under the FCA created by the decision. Paul Kalb, Sidley Austin LLP What is most significant is that for the first time, the court imposed real limitations on that theory by clarifying, that for a claim to trigger the implied certification theory, the statute, regulation, or contractual provision impliedly violated must truly be material to the government s payment decision for a claim to be false or fraudulent. In so holding, the court plainly rejected the government s more expansive reading of the law. This decision shifts the battleground in FCA cases from whether the implied certification theory is valid to whether the particular rule purportedly breached is material to the government s payment decision. Lee F. Lasris, Florida Health Law Center This is another instance where bad facts create bad law. Billing for services of unlicensed and unsupervised personnel did more than fail to meet a technical guideline; it put the patient at extreme

risk of harm. This is an extreme case and the outcome is appropriate under the circumstances. How this will affect the healthcare industry going forward where providers may be in technical noncompliance with a Medicare regulation that does not create a meaningful risk of harm to a patient is yet to be seen." Cleveland Lawrence III, Sanford Heisler LLP By clarifying the scope of the FCA's liability provisions, the Supreme Court has empowered courageous whistleblowers to come forward and expose frauds on the federal treasury especially frauds committed when private contractors simply omit material information from government purchasers. Qui tam relators who often risk their careers to recover America's stolen funds no longer need to worry that defendants will escape liability on judicially created technicalities that undermined the intent of the FCA. This added level of certainty strengthens the FCA and its whistleblower provisions and will undoubtedly result in billions more returned to the federal Treasury in the coming years. Tara Lee, Quinn Emanuel Urquhart & Sullivan LLP A viable false claim complaint can now be crafted out of mere contractual, statutory, or regulatory noncompliance, as long as the noncompliance is alleged to be material and misleading. By endorsing the broadest formulation of implied certification any lower court had articulated, the Universal Health decision may mean more cases survive a motion to dismiss. But Justice [Clarence] Thomas' opinion also strengthens the materiality defenses available at trial and summary judgment for contractors compelled to defend themselves, and may ultimately limit the number of cases that can survive to judgment. Craig Margolis, Vinson & Elkins LLP Today s decision is an overall victory for the FCA defense community. Emphasizing the FCA is not a means of imposing treble damages... for insignificant regulatory or contractual violations, the court limited the theory to situations where specific representations are made in a claim along with undisclosed, knowing non-compliance with a material requirement. And, under a rigorous materiality standard, it is not dispositive whether the undisclosed violation was an express condition of payment or even whether the government could refuse to pay. The decision therefore cabins what in some circuits was an expansive theory and defines materiality helpfully, for the defense, in other contexts. Christopher Myers, Dentons Implied false certification is dead. Following the Supreme Court s decision in Escobar, contractors can no longer be held liable under the FCA for merely requesting payment while noncompliant with some law, regulation or contract requirement. Instead, the Supreme Court created a new theory of FCA liability, under which contractors may be liable if they make some specific representation about the goods or services provided that is only half-true because it omits information about a noncompliance that is material to the government, regardless of whether the requirement at issue is an express precondition to payment. While this decision should bring an end to fraud claims where the contractor does nothing more than request payment, it creates new questions that will generate litigation for years to come. David Nadler, Blank Rome LLP The court s unanimous decision today takes what is essentially a middle ground on the controversial implied certification theory of the FCA, which can impose liability where a contractor has engaged in a lie by omission, such as failing to disclose its noncompliance with a contractual, regulatory or statutory precondition to receiving payment. While endorsing the theory, the court rejected an objective standard

that such a requirement must be an express precondition to payment in favor of a subjective determination as to whether the noncompliance was material to the government s decision to pay. The court s ruling thus rejects a bright-line litmus test for implied certification liability. Unfortunately the subjective nature of the court s ruling is not likely to reduce the avalanche of FCA cases because these issues are intensely factual and not likely to be dismissed early in the case. Kimo S. Peluso, Manatt Phelps & Phillips LLP Although the court is upholding the general theory of implied false certification, today s decision sets a fairly high bar on what constitutes this sort of fraud by omission. Under this standard, it is going to be hard for the government or a relator to argue that a silent omission about a regulatory violation is fraudulent, unless the government has a track record of denying payments over that very type of violation. Jacques Smith, Arent Fox LLP We anticipate that FCA defendants will litigate false certification cases with greater frequency as a result of this decision. And we expect more defendants to forcefully challenge blanket allegations from the government or relators that the statements or omissions at issue were material to government payment decisions at the motions to dismiss phase. The ruling also likely opens the door for greater discovery into government payment decisions in FCA cases that are not dismissed during the pleading stage of the case. Stephen Sozio, Jones Day The court s decision provides yet another strong reminder that the FCA is not an all-purpose remedy for foot-faults. It also repeatedly emphasizes that materiality and scienter are rigorous hurdles that relators must satisfy. The court explained in particular that materiality is not a matter of the government s say-so or even its right to refuse payment for non-compliance. Going forward, litigation may focus more on whether alleged violations actually mattered and were knowing, rather than technical arguments over terms of payment. Relators may find it harder to transform mere errors into fraud under this practical and common-sense emphasis. Victor Walton, Vorys Sater Seymour and Pease LLP Defense counsel will obviously be disappointed that the court rejected the condition of payment standard, but the court created a very strict materiality standard. Defendants won t be liable for minor or insubstantial noncompliance and the government s refusal to pay a claim based upon a noncompliance is not conclusive of its materiality. Moreover, the government s continued payment of claims despite knowledge of allegations of noncompliance is very strong evidence that the requirements at issue were immaterial. This suggests that the government s payment of claims after an investigation of a relator s allegations could be grounds for summary judgment. Jeffrey Wertkin, Akin Gump Strauss Hauer & Feld LLP The Supreme Court s decision upholding the implied certification theory will not drastically change the landscape regarding the types of claims that can be brought under the FCA. The majority of the federal circuit courts had already recognized the implied certification theory in various forms. However, the court s materiality holding may make it harder for defendants to dismiss FCA suits at the motion to dismiss and summary judgment stages.

Jesse A. Witten, Drinker Biddle & Reath LLP Today s decision is a total upheaval of how parties and courts have approached implied certification cases. The court rejected the competing legalistic interpretations advanced by the parties and adopted by the lower courts. Instead, the court held that noncompliance with a regulation or contractual term can serve as the basis for FCA liability if the violation was material to the government s decision to pay and adopted a common-sense approach to the question of materiality. According to the court, if the government regularly pays claims despite knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Government lawyers should now be prepared to respond to discovery demands by defendants seeking evidence that particular violations were not material to the decision to pay a claim. Thomas E. Zeno, Squire Patton Boggs LLP While the full impact of the Escobar decision will not become apparent for some time, contractors and providers could face possibly ruinous judgments unless they re-examine their compliance programs in an effort to minimize risk under the FCA. --Editing by Emily Kokoll. All Content 2003-2016, Portfolio Media, Inc.