U.S. Supreme Court Adopts Implied False Certification Theory of Liability

On June 16, 2016 the United States Supreme Court ruled that government contractors can violate the Civil False Claims Act under the theory of “Implied False Certification.” It is a violation of the False Claims Act to knowingly present a fraudulent or false claim for payment to the Federal Government. In Universal Health Servs., Inc. v. United States ex rel. Escobar 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016) the Court held that such liability can attach when the government contractor makes specific representations about the goods or services provided but fails to disclose noncompliance with material legal requirements under the contract thereby making those representations misleading half-truths. Liability can attach even if the misrepresentation does not relate to an express condition of payment if the misrepresentation is "material” to the Government's payment decision.

It has always been a violation of the False Claims Act (“FCA”) for a claimant to knowingly submit a false certification in a request for payment. This can occur when a claimant expressly certifies it has complied with a statute or regulation or complied with the specifications of the contract that are prerequisites to payment when in fact it has not complied. However, some federal circuit courts had developed what is referred to as the “implied false certification” theory of liability. The implied false certification is a legal doctrine under which when a claimant submits a claim for payment the claimant impliedly certifies that it has complied with certain laws and regulations even though the claim is factually accurate and contains no express certification. The theory is based on the proposition that compliance with laws and regulations is a condition of payment and submitting a claim for payment without disclosing the violations constitutes a false claim. Other federal circuits had rejected the implied false certification theory. Hence, the split in the circuits required the Supreme Court to resolve the conflict.

The Universal Health case arose from the treatment of Yarushka Rivera, a teenage beneficiary under the Massachusetts Medicaid program. Yarushka received counseling services at Arbour Counseling Services, a mental health facility owned and operated by a subsidiary of Universal Health Services. Yarushka received treatment from a number of individuals who purported to be licensed medical professionals. She was diagnosed with a bipolar disorder and prescribed a medication to which she had an adverse reaction which ultimately resulted in her death. Yarushka’s parents brought a qui tam action under the FCA alleging that the Arbour employees who treated her were not actually licensed to provide mental health counseling or to prescribe medication. The parents asserted under an implied false certification theory that Universal defrauded the government in its billing for services by failing to disclose these serious violations of Massachusetts Medicaid regulations and licensing requirements for these services. The District Court dismissed the case finding that none of the regulations that Arbour violated was a condition of payment and, therefore, did not constitute an implied false certification in violation of the FCA.

The Supreme Court found that Arbour had violated the FCA under a theory of implied false certification. The Court found that Arbour knowingly submitted bills which contained billing codes corresponding to licensed professionals where those individuals were not licensed thereby misleading the Government into paying the invoices. The Court said that an implied false certification can occur when: 1) the claimant “does not merely request payment, but also makes specific representations about the goods or services provided,” and 2) “the defendant's failure to disclose noncompliance with material legal requirements makes those representations misleading half-truths." The Court further held that the undisclosed violation does not have to be an express condition of payment to constitute a violation but must only be “material” to the Government’s payment decision.

This case is a significant decision for anyone doing business with the federal government. Government contractors can now be liable under the FCA based on the implied false certification theory if the violation is “material” to the government’s payment decision. For example, under a construction contract a contractor can be liable for implied false certification for knowingly supplying materials of lesser quality than specified or billing for work performed by a non-engineer when the contract requires work to be done by a licensed professional engineer even though it does not expressly certify those requirements have been met. In light of this, contractors must insure that the work performed under the contract complies with the contract specifications.