BNA INSIGHTS: A Sensible Outcome for False Claims in Universal Health Services

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False Claims Act

The authors argue that the Supreme Court's recent Universal Health decision is a balanced and sensible result that clarifies the law and provides a useful road map for trial courts and litigants.

John S. Pachter Todd M.  Garland

By John S. Pachter and Todd M. Garland

John S. Pachter is a founding member of Smith Pachter McWhorter PLC.

Todd M. Garland is an associate of Smith Pachter McWhorter PLC, where he practices construction and government contracts law.

In the events leading up to the Supreme Court's decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, commentators and amici supporting Universal Health predicted dire consequences if the Court were to hold that the implied certification theory can be a basis for liability under the False Claims Act (FCA), 31 U.S.C. §§3729 et seq. Universal Health and amici urged the Court to reject implied certification altogether as a viable theory for establishing FCA liability. See, e.g., Brief for Petitioner at 23, Universal Health Servs., Inc. v. U.S. ex rel. Escobar, No. 15-7 (U.S. Jan. 19, 2016).

Some opponents of implied certification argued that an FCA defendant's obligation should be explicitly designated a payment condition for liability to attach. Id. at 41; see also Universal Health Servs., Inc., slip op. at 13 (discussing argument). Otherwise, according to this view, FCA defendants could be exposed to virtually unlimited liability.

On June 16, the Supreme Court in Universal Health accepted the notion of implied certification that is not tied to violation of an express condition of payment. Universal Health Servs., Inc., No. 15-7 (U.S. June 16, 2016). As discussed below, given the implied threat by Sen. Charles Grassley (R-Iowa) of legislative reversal in his amicus brief, it was too much to expect the Court to reject implied certification outright. The opinion by Justice Clarence Thomas nevertheless marks boundaries on liability for implied certification by imposing rigorous requirements on scienter, materiality and specificity of pleading fraud. This balanced decision should serve to curb congressional appetite for legislative action, but at the same time restrict expansive theories of FCA liability urged by the Department of Justice (DOJ) and qui tam relators.

In previous articles, we observed that implied certification had caused confusion, and we suggested that the court should focus on strict enforcement of the FCA's materiality and scienter requirements, and on the requirement of Fed. R. Civ. P. 9(b) for specificity in pleading fraud. The court essentially adopted the view we advanced. We also noted that Justice Antonin Scalia would likely have rejected more elaborate approaches to implied certification. In fact, Universal Health follows the Scalia approach to statutory interpretation by remaining largely faithful to the text of the FCA. Similarly, as repeatedly urged by Justice Scalia, Universal Health avoids complicated, multifactor tests and distinctions such as those between “factually” and “legally” false claims or between “conditions of payment” and “conditions of participation” that led lower courts astray, including the district court in Universal Health. 2014 BL 82774 , at *5-6. In short, the court swept away the clutter and confusion surrounding these concepts, leaving a better guide for lower courts and litigants.

Universal Health Is Couched in Cautionary Terms That Should Avoid Misguided or Excessive Outcomes

The court in Universal Health held that “in certain circumstances the implied false certification theory can be a basis for liability” under the FCA. Universal Health Servs., Inc., slip op. at 1, 8. To rein in potential excesses, the court mandated several requirements:

  •  FCA plaintiffs must demonstrate that the allegedly false claim failed to disclose noncompliance with contractual, regulatory or statutory obligations resulting in misrepresentations. Id. at 8.
  •  It is not enough for the allegedly false claim to request payment; the claim must also make specific representations about the goods or services provided. Id. at 11. These two features alone should go far to allay concerns about the twin evils of loose pleading combined with a “fishing expedition” in discovery.
  •  FCA plaintiffs must also prove the defendant had knowledge ( scienter) that the contractual, regulatory or statutory requirements allegedly violated were material to the government's decision to pay the claim. Id. at 14.
  •  Regarding the FCA's materiality requirement, 31 U.S.C. §3729(b)(4), the court placed a high burden on the government and qui tam relators. Universal Health imposes a “rigorous materiality requirement,” id. at 2, describing this burden as “demanding.” Id. at 14, 15. To drive home the point, Universal Health requires “strict enforcement” of the FCA's materiality requirement. Id. at 13-14.
  •  Similarly, Universal Health mandates strict enforcement of the FCA's scienter requirement, 31 U.S.C. §3729(a)(1), (b)(1). Id. at 13-14. The decision requires FCA plaintiffs to prove the defendant knew the provision violated was material to the government's payment decision. Universal Health Servs., Inc., slip op. at 2.

These heightened demands, in effect, could serve to elevate the “preponderance of the evidence” burden of proof in FCA cases. 31 U.S.C. §3731(d); U.S. ex rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699, 714 (7th Cir. 2014). This standard includes the requirement to prove materiality. United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1271 (D.C. Cir. 2010). Given the court's emphasis in Universal Health that the materiality requirement is “rigorous” and “demanding,” and must be strictly enforced, FCA plaintiffs now have a higher bar to clear.

Universal Health further restricts expansive theories of FCA liability advocated by DOJ and qui tam relators by holding the government accountable for its part in making payment with knowledge of the facts in question. For example, the court stated that where the government pays a claim despite actual knowledge of a violation, or has “signaled no change in position” while continuing to pay a claim knowing that certain requirements were violated, this is “strong evidence that the requirements are not material.” The court stated:

  •   [I]f 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.

Universal Health Servs., Inc., slip op. at 16 (emphasis added.) The court used the word “actual” twice in this part of its opinion. Nevertheless, deliberate ignorance or reckless disregard might also suffice. See,U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364, 380 (4th Cir. 2015).

An Implied Threat of Legislative Reversal Imposed a Practical Limitation on the Court

To restrict FCA liability to violations of provisions expressly designated as payment conditions, as urged by Universal Health and amici, would invite the government to attempt to tie every obligation to payment. The court foreclosed this unwelcome possibility. 13.

Justice Thomas cautioned against any government attempt to designate all obligations as payment conditions, countering the government's contention that all violations could be material. Id.; id. at 17.

To nullify implied certification altogether would have narrowly limited the reach of the statute, opening the court to the charge of judicial legislation. See Ross v. Blake, No. 15-339, 2016 BL 179235, at *5 (U.S. June 6, 2016); Burrage v. United States, 134 S. Ct. 881, 892 (2014).

In addition, an excursion into areas outside the facts of the case would have weakened the decision by rendering parts of the opinion nonbinding dicta. F.E.C. v. Wis. Right to Life, Inc., 551 U.S. 449, 476 n.8 (2007). The court wisely avoided improvisation. See Universal Health Servs., Inc., slip op. at 9.

Above all, the court knew Congress was looking over its shoulder, alert to an opportunity to amend the FCA to reverse a Supreme Court decision that strayed too far. Grassley, the Senate Judiciary Committee chairman, submitted an amicus brief forcefully arguing in favor of implied certification. See generally Brief for U.S. Senator Charles E. Grassley as Amicus Curiae in Support of Respondents.

Not mincing words, he reminded the court that Congress has reacted swiftly to overrule Supreme Court decisions in response to what Congress deems “narrowing interpretations” of the FCA. Id. at 2. According to Grassley, implied certification had been “congressionally reaffirmed” as an FCA theory of liability. Id. at 10. Although Grassley did not express an opinion whether implied certification should apply to the facts in Universal Health, he warned against “the Court den[ying] the theory altogether.” Id.

Grassley's cautionary remarks are backed by congressional action. Recent amendments to the FCA reflected disapproval of court decisions limiting the FCA's reach. In United States ex rel. Totten v. Bombardier Corp., the D.C. Circuit affirmed dismissal of FCA charges, holding that the FCA's plain language required actual presentment of a claim to the government. 380 F.3d 488 (D.C. Cir. 2004). Specifically, the court in Totten held that then-sections 3729(a)(1) and (a)(2) required presentation of a claim to the U.S. government, rejecting the contention that FCA liability attached to a claim provided to Amtrak, not a federal government entity. Id. at 490.

Similarly, in Allison Engine Co. v. United States ex rel. Sanders, the court held that FCA plaintiffs “must prove that the defendant intended that the false record or statement be material to the Government's decision to pay or approve the false claim.” 553 U.S. 662, 665 (2008). That case involved purportedly false claims by Allison Engine, a subcontractor under a prime contract to construct destroyers for the U.S. Navy. Id. at 665-66.

The subcontractor submitted its claims to the prime contractor, which was not a party to the case. Id. at 666. The U.S. Navy, however, had paid the prime contractor for Allison Engine's work. Id. at 666-67. According to the court, then-section 3729(a)(2) required that FCA defendants intended for the government itself to pay the allegedly false or fraudulent claim. Id. at 668-69. Under the holding in Allison Engine, FCA liability did not attach merely because a defendant's false statement resulted in use of government funds to pay the claim. Id.

In response to these decisions, Congress passed the Fraud Enforcement and Recovery Act of 2009 (FERA), Pub. L. No. 111-21, 123 Stat. 1617. FERA responded to the D.C. Circuit's Totten decision by amending section 3729(a)(1), which no longer requires that a false claim be presented directly to the federal government.

Under FERA, FCA liability attaches for the submission of a false claim to any entity that is reimbursed with federal funds (where the government is the ultimate payor). Similarly, Congress removed language from section 3729(a)(2) upon which the holding in AllisonEngine relied. As a result of FERA, the law requires that false statements be material to the government's payment decision, regardless of the defendant's intent. Stated otherwise, relators no longer “must prove that the defendant intended that the false record or statement be material to the Government's decision to pay or approve the false claim.”

The Senate report accompanying FERA explicitly stated that Congress was amending the FCA in response to Allison Engine and Totten, referring to the decisions as “erroneous interpretations” of the FCA. S. Rep. No. 111-10, at 3 (2009); see alsoU.S. ex rel. Bahrani v. ConAgra, Inc., 624 F.3d 1275, 1303 n.14 (10th Cir. 2010) (noting Congress “effectively overruled Allison Engine”); United States v. Carell, 782 F. Supp. 2d 553, 556 (M.D. Tenn. 2011) (stating Congress enacted FERA in response to Allison Engine and Totten).

Earlier, 1986 amendments to the FCA responded to the Seventh Circuit's decision in United States ex rel. State of Wisconsin v. Dean, 729 F.2d 1100 (7th Cir. 1984), which held that the state of Wisconsin could not be a qui tam relator because the suit was based on information in the U.S. government's possession when the suit was filed, notwithstanding that Wisconsin was the source of the information.

In response, Congress amended the FCA to permit qui tam suits brought by relators whose independent investigation uncovered the alleged fraud. Specifically, Congress added the “original source” exception to the act's qui tam provisions, 31 U.S.C. §3730(e)(4)(A). Minnesota Ass'n of Nurse Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032, 1046 (8th Cir. 2002); id. at 1047-48 (same).

In short, a decision nullifying implied certification would have been an invitation to Congress to amend the FCA and strengthen the hand of DOJ and qui tam realtors. SeeACLU v. Holder, 673 F.3d 245, 251 n.4 (4th Cir. 2011); id. at 247.

Universal Health Should Rein in Excesses of DOJ and Relators

It is unlikely that the court's carefully crafted 8-0 decision in Universal Health will excite Congress into action. At the same time, the court's decision does not preclude lower courts from restricting the excesses of DOJ and qui tam relators, for example, where an FCA defendant reasonably interprets an ambiguous statutory, regulatory or contractual provision. See, e.g., U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281 (D.C. Cir. 2015).

Both the Supreme Court in Universal Health and the D.C. Circuit in Purcell emphasized strict enforcement of the FCA's knowledge requirement. Universal Health Servs., Inc., slip op. at 13-14; Purcell, 807 F.3d at 287.

Similarly, both decisions restrict FCA plaintiffs' ability to impose liability for minor violations made in good faith. Universal Health Servs., Inc., slip op. at 15; Purcell, 807 F.3d at 287-88.

Finally, the Supreme Court invited lower courts to dismiss weak or poorly pleaded FCA complaints. Universal Heath demonstrates that FCA plaintiffs have a difficult burden to meet given the “rigorous” materiality standard, strict enforcement of the act's scienter requirement, and the need to plead FCA claims with plausibility and particularity under Fed. R. Civ. P. 9(b). Universal Health Servs., Inc., slip op. at 16 n.6.

In summary, the opinion in Universal Health is a balanced and sensible result that clarifies the law and provides a useful road map for trial courts and litigants.

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