Trends In False Claims Lawsuits

 Trends in False Claims Lawsuits Since the Ruling in Universal Health Services v. U.S. ex rel. Escobar on June 16, 2016

Generally, the False Claims Act (“FCA”) imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the United States; [or] knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim 31 U.S.C. § 3729. The Supreme Court decided Universal Health Services v. U.S. ex rel. Escobar on June 16, 2016, which changes the way FCA lawsuits are litigated. The Supreme Court ruled in Escobar that the implied false certification theory can form the basis for False Claims Act (“FCA”) liability. In an implied false certification theory case, the defendant is alleged to have falsely certified that it complied with a statute or regulation, the compliance of which is a condition of Government payment.

However, in Escobar, the Supreme Court put limits on the application of the implied false certification theory. Importantly, it first emphasized the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.

Although the Supreme Court held that the implied certification theory can be a basis for liability, it requires that two conditions are satisfied. First, the claim must make specific representations about the goods or services provided. Second, the health care provider’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. Compliance with the statutory, regulatory or contractual requirements does not have to be an expressly stated condition of payment for liability under the FCA to attach. Rather, liability depends on whether the health care provider knowingly violated and/or misrepresented compliance with a legal requirement that the health care provider knew was material to the Government’s decision to pay the claim.

While the Supreme Court recognized the theory of implied certification, the theory does not turn upon whether the payment requirements are expressly designated as conditions of payment. “Statutory, regulatory and/or contractual requirements are not automatically material, even if they are labeled conditions of payment” and “[a] defendant can have ‘actual knowledge’ that a condition is material without the Government expressly calling it a condition of payment.” The Court further stated that requiring the Government to expressly designate conditions of payment for every regulation would be too burdensome, and the “rigorous” materiality and scienter threshold requirements in the FCA should suffice to ease health care provider’s concerns.

FCA analysis turns on whether the defendant knowingly violated a requirement that the health care provider knew was 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 Court provided clarification on how the “materiality requirements” should be enforced. The Court noted that the term “material” is defined in the FCA as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” The Court called the materiality standard “demanding” and largely dependent on the particular facts of the case rather than an objective bright-line standard. “[W]hen evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive…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.”

Escobar makes clear that the district court’s principal method for evaluating implied certification claims has changed. Since the ruling in Escobar, several federal circuit and district courts have taken the Supreme Court’s demanding materiality standard to heart and examines false claims cases using the criteria set out in Escobar. For example, the Eleventh Circuit recognized the district court should be given the opportunity to reconsider the allegations in false claims cases in light of the changed legal landscape. Marsteller for use & benefit of United States v. Tilton, 880 F.3d 1302, 1313 (11th Cir. 2018). The Eleventh Circuit states the Supreme Court explicitly rejected a standard for implied certification claims that focuses exclusively on whether the Government expressly designates a contractual, statutory, or regulatory obligation as a condition of payment. Whether a condition is so designated is “relevant to but not dispositive of the materiality inquiry,” but not a precondition to the theory of liability itself. Id. at 2001.

Escobar now provides the district court with a more refined framework to address false claims cases. The definition of “material” contained within the statute itself considers whether the misrepresentation had a natural tendency to influence or be capable of influencing, the payment or receipt of money or property. Escobar now instructs courts to consider whether noncompliance is “minor or insubstantial” and amounts to “garden-variety breaches of contract or regulatory violations,” or, conversely, whether the Government would have attached importance to the violation in determining whether to pay the claim. Id. at 2002–03.

As time goes on, the federal courts will continue refining what conduct warrants prosecution in FCA cases that can result in substantial civil monetary penalties. The meaning of “materiality” will continue to form a central consideration in litigation of any FCA case for years to come.

Jim Hoover is a partner in the Health Care Practice Group at Burr & Forman LLP and exclusively represents health care providers in false claims litigation and regulatory compliance. Burr & Forman LLP is a preferred partner with the Medical Association.