Justices Search for Limits of False Claims Act Liability

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By Eric Topor

April 19 — The Supreme Court's chief justice directed pointed questions at counsel for whistle-blowers and the government during oral arguments April 19 over the limits of False Claims Act liability when a claim for payment is submitted to the government for a service that doesn’t comply with all applicable regulations.

Chief Justice John G. Roberts Jr. took the lead in trying to elicit a standard of when noncompliance with a federal regulation constituted fraud and an FCA violation, and when it might merely result in reduced payment to the claimant.

“Is every material breach of a federal contract an FCA violation?” Roberts asked David C. Frederick, counsel for the whistle-blowers.

The distinction is key to deciding on the validity of the “implied false certification” theory of FCA liability, supported by the government and whistle-blowers, under which entities submitting reimbursement claims to the government would be deemed as having implied their compliance with applicable federal rules by virtue of submitting the claims.

Roberts seemed incredulous when Deputy Solicitor General Malcolm L. Stewart, arguing for the government, seemed to suggest that failing to comply with any federal regulation in a way that would result in a reduced reimbursement would trigger FCA liability if the claimant was aware of the noncompliance and failed to disclose it to the government.

Proskauer Rose LLP senior counsel Roger A. Cohen told Bloomberg BNA that Roberts seemed to be “trying to find the bottom” limit of what the government considered fraud under the FCA, with some difficulty.

“There doesn't appear to be a lot of interest in rejecting implied certification altogether,” Cohen said. Instead, discussion focused on “where to draw the line.”

However, Cohen said he “didn't get a clear sense” from the justices “of where that line would be drawn.”

Cohen noted there appeared to be “a lot of openness to implied certification, and not a lot of tough questions over whether it's consistent with the statutory language” of the FCA.

Outcome, Possible Deadlock

R. Scott Oswald of The Employment Law Group in Washington told Bloomberg BNA that, “ultimately, we're going to have a majority [in favor of upholding the First Circuit] or a deadlock.”

Cohen said it was “reasonably likely” that the result would be a “case-by-case” rule, and would invite more litigation.

Ann T. Hollenbeck with Honigman Miller Schwartz and Cohn LLP in Detroit told Bloomberg BNA that her “guess” was that “we'll have a split decision on this one.”

‘The Human Story.'

In the case itself, whistle-blowers Julio Escobar and Carmen Correa alleged that defendant Universal Health Services, a mental health clinic, filed false Medicaid claims because none of the individuals who treated their child were actually licensed to do so, and treatment wasn't being supervised by a licensed psychiatrist as regulations required.

The U.S. Court of Appeals for the First Circuit ruled in favor of the whistle-blowers on March 17, 2015, finding that state Medicaid regulations stipulating licensing and supervision standards for psychiatric services were “conditions of payment” (55 HCDR, 3/23/15).

“The human story can't be lost,” Oswald said.

He cited Justice Sonia Sotomayor's point that, “[i]f I hired you to provide me with doctor services, you ask me for money, I'm assuming you provided me with doctor services,” as the core of the implied certification issue.

Sotomayor and Justice Elena Kagan focused on the facts of this particular case, in which mental health services were provided by unlicensed individuals who weren’t supervised by a licensed psychiatrist, with Kagan asking how is that “not committ[ing] fraud?”

Hollenbeck, however, cautioned against viewing all regulatory violations in such stark terms. Kagan's analogy “sounds simple, but in health-care there aren't many cut and dried scenarios like that,” Hollenbeck said.

Along those same lines, Roberts noted that “the difficulty comes in when you have hundreds, thousands of pages of regulations,” and a provider must determine which “the government will regard as material.”

‘Hypothetical' Struggles

Oswald that he was “struck by the cruelty of some of the questions and hypotheticals” drawn by Roberts, given the gravity of the facts of the case at bar, and the death of the whistle-blowers' daughter.

Cohen said the multitude of hypothetical and examples drawn by the justices could be a reflection of their struggle to define what conduct is fraud under the FCA.

Cohen also noted that Roberts “appreciated the danger of FCA liability” stemming from any regulatory violation.

Kagan and Sotomayor used the historical Civil War examples of the government paying for defective guns, military uniforms and gunpowder (which formed the original basis for the FCA's enactment during the Civil War) in comparison to the alleged regulatory violation by respondent Universal Health Services.

Cohen noted “there was a lot of focus on the alleged nature of the regulation, not on compliance, so much so that it appears to be a case of factual falsity.” Hollenbeck agreed that the facts of this case might be influencing the discussion of the point of law at issue.

Cohen also said he “was surprised that there wasn't more discussion of whether this [particular] regulation was a condition of payment.” He said he “hope[d] that the decision will address that issue.”

Extensive Discussion on Materiality

Hollenbeck said “the key issues discussed were clearly how materiality plays into fraud and whether submitting a claim for payment is potentially a breach of contract or potentially fraud.”

Materiality, in regard to the government's decision to pay a particular claim, was a concept the justices were repeatedly drawn back to in questioning all three counsels. Justice Stephen G. Breyer repeatedly came back to the idea of imputing contract principles on the FCA in regard to the idea of materiality.

Hollenbeck questioned “the practicality of drawing a line on materiality because the facts [of a claim] drive what is material and what isn't.”

“Bright line prescriptions on how care is delivered are often fraught with problems,” Hollenbeck said.

It's “historically rare to require perfect compliance,” Hollenbeck said. She added that materiality is “a concept in health-care that has been relevant to compliance, and achieving a standard of care.”

“Breyer's talk of contract law was troubling,” Oswald said, but he added that he was “cautiously optimistic” that Breyer would see that implied false certification serves “the intent of the statute.”

Regarding the idea of giving providers notice of what regulations are material to the government, a concept broached by Frederick and Universal Health counsel Roy T. Englert Jr., Hollenbeck said, “I doubt the justices would go there.” She said that the evolving nature of health care would make it difficult to set a standard of notice “today that is still relevant one year from now.”

Oswald said providers seeking notice of materiality were “asking for a license to steal.”

To contact the reporter on this story: Eric Topor in Washington at etopor@bna.com

To contact the editor responsible for this story: Kendra Casey Plank at kcasey@bna.com

For More Information

The transcript of the argument is available at http://src.bna.com/efi.