Unanimous Supreme Court Sets Outer Limit on FCA Liability

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By Eric Topor

June 16 — The U.S. Supreme Court laid out a new standard in determining False Claims Act liability in a hotly anticipated ruling released June 16, resolving a circuit split on when regulatory violations can give rise to liability, though the ultimate impact on health-care providers could be muddled ( Universal Health Servs., Inc. v. United States ex rel. Escobar , 2016 BL 192168, U.S., No. 15-7, 6/16/16 ).

In it's ruling, the Supreme Court said the implied false certification theory of FCA liability is valid but must meet rigorous materiality standards to support claims through regulatory violations. That means courts will have to perform more case-by-case analyses of materiality claims, potentially interjecting greater uncertainty into FCA litigation.

John W. Petrelli III with BakerHostetler in Houston, said that the ruling would place “more pressure on providers” to settle cases.

“The condition of payment was a bright line rule,” Petrelli told Bloomberg BNA. “Now you don't get that certainty until almost trial.”

In a unanimous decision authored by Justice Clarence Thomas, the court reversed a appellate court ruling in favor of two FCA whistle-blowers who alleged that a mental health facility submitted false Medicaid claims. The whistle-blowers and government attorneys argued that the facility falsely implied its certification with applicable federal regulations in submitting reimbursement claims for treatment services.

The court held that the government's designation of a particular regulation as a condition of payment isn't the determining factor in FCA liability arising from a regulatory violation. Instead, the court said that the materiality of the regulation stems from the government's actual decision to pay a claim, and whether a claimant knew that the government viewed the regulation as material.

Roger A. Cohen with Proskauer Rose LLP in New York said the ruling placed more emphasis on the knowledge element of the FCA, and whether a defendant knew or should've known that a regulation was material.

Cohen said that issue “will have further litigation,” and could depend on whether a defendant received regulatory guidance from the government, or on the accepted standards of practice in a particular area.

Laurence Freedman with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Washington said the court “rejected the ‘expansive' government view of liability, but also rejected the bright line rule that only an ‘express condition of payment' can provide the basis for liability.”

‘Sweeping Victor' for Whistle-blowers

Geoffrey R. Kaiser with Rivkin Radler LLP in Uniondale, N.Y., characterized the decision as a “sweeping victory for whistle-blowers and the government,” given its approval of the implied false certification theory of liability in general.

But, that view wasn't universal.

Petrelli said the court “struck a balance,” with its “strong emphasis on materiality.”

Whistle-blower attorneys weren't as jubilant over the ruling as Kaiser suggested they should be.

Joseph E. B. White, with Nolan Auerbach & White, whose firm frequently represents FCA whistle-blowers, pointed to the court's determination that the government's decision to pay a claim despite knowing of regulatory noncompliance was “strong evidence that the requirements are not material.”

White told Bloomberg BNA this notion was “troubling” because “there are many reasons why the government might continue paying the wrongdoer.” White said the government “might continue paying a rural hospital under such circumstances, for there is a concern that nonpayment might impact patients' access to care.”

Brian J. Markovitz with Joseph Greenwald & Laake PA, who also frequently represents whistle-blowers, also criticized this portion of the court's opinion.

Markovitz told Bloomberg BNA it's not always practical for the government to halt payments for regulatory noncompliance.

Jesse A. Witten with Drinker Biddle & Reath LLP in Washington noted that the court “rubbed out” whatever bright line rule there may have been in shifting the liability focus from explicit labels of conditions of payment to materiality.

Witten told Bloomberg BNA “there will be a great deal of discovery now over prior government payment practices in the context of particular regulatory violations.”

Cohen said that the decision puts certain providers in a more defensible position when facing implied false certification allegations because a condition of payment label attached to a regulatory violation is no longer dispositive.

Implied Certification, Materiality Standards

The ruling did provide clarity in holding that the implied false certification theory of liability “can be a basis for liability” under the FCA, resolving a circuit split. Under the implied certification theory, 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.

The U.S. Court of Appeals for the First Circuit endorsed the implied false certification theory, holding that defendant Universal Health Services Inc. could be liable for its violation of a condition of payment on its Medicaid claims (55 HCDR, 3/23/15).

Previously the Seventh and Second circuits rejected this theory of liability, but it now will be a viable avenue for whistle-blowers to pursue FCA actions nationwide, albeit within the confines of the court's materiality standard.

Rivkin Radler's Kaiser said the court substantially added to the definition of what materiality means, explaining that it was a more rigorous look into the government's decision to pay a claim, and not just whether the government has the legal right to withhold payment.

The court said that identification of a regulatory requirement as a condition of payment is “relevant, but not dispositive” in the materiality analysis. The court said indicators of the government's view of materiality included the routine payment of claims despite regulatory noncompliance, or rigorous government enforcement of a particular regulation and payment denials in instances of noncompliance.

Markovitz said that FCA defendants will latch on to the court's requirement that a defendant must know that its noncompliance was material to the government's decision to pay.

Kaiser said health-care providers “need to be more vigilant in reviewing their procedures” for claim submissions, and determining which provisions might be material to the government.

Longer Litigation Possible

BakerHostetler's Petrelli said the court's materiality standard is a “much more fact intensive issue” for courts to decide. He said that the ruling will “ultimately allow implied certification cases to continue” past the motion to dismiss stage of litigation, and into discovery.

A more subjective standard was the court's aim, according to Markovitz, in putting materiality at the forefront of its analysis. “It's case-by-case. Some will be obvious, and some will be in more of a gray area,” Markovitz said.

Proskauer Rose's Cohen said that the new materiality standard doesn't necessarily mean that a provider can't succeed at the motion to dismiss stage of litigation when facing allegations of implied false certification. Cohen pointed to the court's discussion in a footnote that plaintiffs must still meet the FCA's heightened pleading standards of particularity with “facts to support allegations of materiality.”

Markovitz said that the court didn't end the relevance of labeling a regulatory requirement as a condition of payment to FCA liability, but “it could be the beginning of the end of that.” He added that it would be up to federal courts of appeal and lower district courts to “flesh out” how much weight the label of condition of payment is given.

Future Litigation Strategies

Petrelli said that a key strategy for providers arguing against the materiality of any particular regulation will be to “separate the [alleged regulatory] violation from payment or the quality of services provided.” Petrelli said providers should pay attention to whether a regulatory requirement “really speaks to the quality of services provided,” or how the government calculates payment.

Kaiser said providers can look to specific reimbursement decisions by the government, and perhaps even Freedom of Information Act requests, to mine for evidence of the materiality of particular regulatory requirements.

Kaiser also said that whistle-blowers with first-hand knowledge of regulatory violations and related government payments will become more relevant to FCA actions through their ability to shed light on the government's view of materiality in those instances.

This was a point echoed by Witten, who said that “[f]ormer and current government employees will be important witnesses in these cases, and they will be called upon to testify about government program payment practices more so than ever before.”

Markovitz said it was possible that regulatory agencies could start explicitly including materiality language in regulations to definitively label them as material, and therefore subject to FCA liability when violated, but added that “it would be foolish on their part.”

He noted that putting explicit materiality labels on certain regulations would simply suggest that the government didn't view any regulatory requirement without such language as material.

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 opinion is at http://src.bna.com/fZf.