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Client Alert: U.S. Supreme Court Adopts Implied Certification Liability for Federal Contractors under the False Claims Act and Leaves it to the Courts to Sort out the Rest

Last week, a federal contractor’s job just got harder. The United States Supreme Court held in U.S. ex rel. Escobar v. Universal Health Services, Inc.,1 that a federal contractor implies that it is in compliance with all the material conditions of the contract, regulations, and laws when it submits a claim for payment to the federal government. If a contractor has not complied with a material term, the contractor has violated False Claims Act (FCA) and will be subject to treble damages and civil penalties. The contractor does not have to say a word – all this will be implied from the submission of a claim for payment. The contractor does not have to make any representations that it is in compliance. A simple submission of a bill or request for payment carries an implied certification that it has complied with all the material terms of regulatory schemes that are often confusing and complex.

This is discouraging for busy federal contractors struggling to understand and comply with often complex regulatory schemes, but the Court provides a glimmer of hope. Liability for implied certification requires noncompliance with a material term of the contract. But what is material? The False Claims Act defines material as “having a natural tendency to . . . be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. Section 3729 (b) (4). The Court, however, specifically held open the question of whether to apply the FCA’s rather broad definition of materiality or the common law’s understanding of materiality.2 The Court says, “The materiality standard is demanding.” Id. at 15. But if the FCA’s definition of materiality is used, which the Court leaves open, then materiality really is not all that demanding.

The Court went on to give a few pointers of what it thinks is material. Specifically, if a contractor knows that the government consistently requires compliance with a specific condition before it makes payment, then that may be material. That kind of evidence can be used as proof of materiality. The Court also states that if the government regularly pays despite actual knowledge that a condition is not being complied with, then that is strong evidence of non-materiality. Notice that even in these safe harbors, there is no certainty that the condition is material or non-material, only that this is evidence of materiality. The Court also uses terms such as “critical,” Slip op. at 12, “minor” or “insubstantial,” Slip op. at 16, or “insignificant,” Slip op. at 18, to flesh out what is material.

On a positive note, it is refreshing to see the Court state that such evidence of materiality may be considered at the motion to dismiss phase of the litigation. Slip Op. at 16 n. 6. This may save contractors some litigation costs.

The effect of today’s decision is that federal contractors will have to go to court to determine these issues. FCA litigation will thrive. Materiality is not clear, so judges and juries will have to decide. Every jot and tittle of often complex regulatory schemes will have to be analyzed, because failure to comply with any one may be a “material” non-compliance subjecting the federal contractor to FCA liability, which is often in the millions of dollars. The bottom line is that the Court’s FCA opinion is bad news for federal contractors.

If you have questions, please contact the Rogers Joseph O’Donnell attorney with whom you regularly work, or any member of our Government Contracts Practice Group.

The content of this article is intended to provide a general guide to the subject matter, and is not a substitute for legal advice in specific circumstances.

1 The facts of the case are discussed in a previous Client Alert. This could be another example of the old adage that bad facts make bad law. The facts look bad in this case. The relators’ daughter suffered a fatal adverse reaction to medication prescribed to her by a practitioner at the clinic, owned by Universal Health Services, Inc. Following the death of their daughter, the relators filed an FCA claim based on the Department of Public Health’s finding that the mental health clinic violated applicable regulations in failing to adequately supervise its psychiatric service providers. Neither the Commonwealth of Massachusetts nor the federal government intervened in the relators’ FCA lawsuit at the district court level. The issue was whether Universal Health Services, Inc. impliedly certified that it was in compliance with all the Medicaid regulations, especially the one requiring supervision of psychiatric service providers, when it submitted a simple request for payment on a form prepared by Medicaid.

2 Specifically Justice Thomas writes: “We need not decide whether section 3729(a)(1)(A)’s materiality requirement is governed by section 3729(b)(4) or derived directly from the common law.” Slip op. at 14. Having read into 3729(a)(1)(A) an implied certification, the Court now also reads into 3729(a)(1)(A) an extra materiality requirement, and now says it does not have to decide whether this read-in materiality requirement is governed by the FCA’s specific definition of materiality in 3729(b)(4) or the common law definition.

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