Client Alert- June 21, 2016.DOCX - Smith Currie



Client Alert- June 21, 2016Does the Supreme Court's Decision in Universal/Escobar Open the Door to Liability Under the False Claims Act?Under the doctrine of implied false certification, a request for payment submitted in connection with a federal contract, grant, or reimbursement system (such as Medicare) is a "claim" as defined by the False Claims Act ("FCA"). Such a claim constitutes an implicit representation that the person or business submitting the claim has complied with all "material" requirements, including any requirements imposed by statute or regulation, governing the contract, grant, or reimbursement system. A claimant may violate the FCA if not in full compliance with all material requirements when it submits the payment request or withholds information that would show a lack of compliance. Last week, the Supreme Court, in Universal Health Services, Inc. v. United States ex rel. Escobar, upheld the theory of implied false certification under the FCA. In Universal Health, a qui tam relator alleged that a health care provider had violated the terms of the Massachusetts Medicaid program agreement by failing to employ workers with necessary medical licenses and qualifications and by failing to provide proper supervision. Through that program, Universal Health provided services to individuals and submitted claims for Medicaid payments. In those claims, the Universal Health implicitly misrepresented the qualifications of unlicensed staff members by using payment codes that corresponded to services requiring licensure and using National Provider Identification (NPI) numbers that corresponded to specific job titles. The NPI numbers were obtained using falsified information. This violated regulations incorporated by reference into the Medicaid reimbursement agreement.The First Circuit earlier held that, while Universal Health never explicitly certified that it was in compliance with the conditions when seeking payment, implied false certification was sufficient for a claim under the FCA. Other federal courts of appeal have limited or denied the implied false certification theory of liability under the FCA.In the face of that circuit split, the Supreme Court unanimously held that:[The] implied certification theory can be a basis for liability at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.The Supreme Court further held that a person or company can be subject to FCA liability for failing to disclose noncompliance with material statutes and regulations that are not express conditions of payment. The Court reasoned that a person or company can have the requisite scienter, or knowledge, that a condition is material without it being an express condition of payment.The Supreme Court relied on materiality and scienter as bulwarks against overextension of FCA liability. However, the Court only limited the materiality requirement by stating that a condition cannot be material if it is "minor or insubstantial." The Court vacated the First Circuit's determination that materiality hinges on whether the Government would be entitled to refuse payment if it were aware of the violation. But the Court did not provide specific guidance concerning what is "minor or insubstantial" to assure dismissal of faulty FCA cases where there is a lack of materiality. Unfortunately, we believe that many more lower court decisions will be necessary to sort out the boundaries of materiality. In the interim, companies accused of civil FCA violations will have to make tough business decisions regarding whether to settle or to risk treble damages, penalties, and other adverse consequences if found liable. That "interim" time period to obtain more decisions may be a long one as the courts seem unwilling to make meaningful distinctions between "garden variety" breaches of contract and FCA violations.The scienter requirement would also appear to be an insufficient barrier to prevent an increase in FCA litigation. That is, while the Government or a qui tam relator must prove that a company knew that its claim was false to sustain an FCA action, proof of specific intent is not required. Scienter or intent may be demonstrated by proving actual knowledge of falsity or that the company or person acted in deliberate ignorance of the truth or falsity of a matter or with reckless disregard for truth or falsity. While the Supreme Court attempted to keep the holding in Universal Health narrow so as to limit the use of the FCA as a means to penalize persons or companies for insignificant violations, in actuality, the Court's holding solidifies a pathway for FCA claims against persons or companies for unintentional violations of federal procurement policies and programs such the Davis-Bacon Act, the Buy American Act, small business subcontracting requirements, and many more. The Court said that rigorous enforcement by the lower courts of the standards for scienter and materiality will keep the number of FCA claims in check. We are not convinced.For more information or if you have questions, you may reach the authors of this alert at the following email addresses:Steven L. Reed - slreed@ [mailto:slreed@]Alan I. Saltman - aisaltman@ [mailto:aisaltman@]Kathleen Hsu - khsu@ [mailto:khsu@] ................
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