June 17, 2016

SCOTUS Rules on “Implied Certification” Theory of Liability Under Federal False Claims Act

Yesterday, the US Supreme Court decided that, “at least in certain circumstances,” the so-called “implied false certification theory of liability” under the federal False Claims Act, 31 U.S.C. § 3729 (FCA) can be a basis for liability. Universal Health Services, Inc. v. Escobar, 579 U. S. ____ (2016). Writing for a unanimous Court, Justice Thomas found that the theory is applicable where “the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” While not spelling out precisely how a statutory, regulatory or contractual requirement would be material, the Court stated that the materiality standard is “demanding” and “rigorous” and would not be met simply because the Government designates a requirement as a payment condition. Even though the Court provided some guideposts regarding materiality, implementation of this standard by lower courts is bound to be case-specific, with divergent outcomes that appellate courts will need to harmonize to a workable materiality standard.

The “Implied Certification” Theory of FCA Liability

For years, plaintiffs in FCA cases have asserted claims under a theory of “implied certification,” claiming that, when a defendant submits a claim to the government for payment, it impliedly certifies that it has complied with all statutory, regulatory and contractual requirements in order to be paid. Given the numerous regulations and other requirements imported into government contracts, this doctrine had the potential to create FCA liability for defendants for routine or tangential violations of such requirements, leading some circuit courts (such as the Seventh Circuit) to reject the doctrine, while other courts applied different standards to implied certification claims.

The District and Circuit Court Decisions

The Escobar case involved an allegation that the defendant hospital had submitted false claims because it failed to comply with certain regulatory requirements regarding the qualifications of, and supervision over, its staff providing mental health services. Relators in Escobar, a mother and stepfather of a deceased mental health patient, alleged that the hospital had submitted claims in which the mental health treatment of their daughter (who later died after experiencing a seizure) was provided by unlicensed and unsupervised staff, in violation of Massachusetts Medicaid regulations. Relators argued that the Government would not have reimbursed the claims had it known of the alleged violations, and therefore the omissions were “material.” The District Court dismissed Relators’ claims, finding that the regulations at issue were not a condition of payment. United States ex rel. Escobar v. Universal Health Servs., Inc., No. 11-11170, 2014 U.S. Dist. LEXIS 40098 (D. Mass. Mar. 26, 2014). The First Circuit reversed. 780 F.3d 504, 517 (1st Cir. 2015). The Supreme Court granted certiorari “to resolve the disagreement among the Courts of Appeals over the validity and scope of the implied false certification theory of liability.” Universal Health Services, Inc. v. Escobar, 579 U. S. ____ (2016).

The Supreme Court Embraces the Implied Certification Theory

Relying on common law fraud doctrine regarding misrepresentation by omission, the Court held that an FCA case can be asserted where a defendant’s claim “does not merely request payment, but also makes specific representations about the goods or services provided,” but fails to “disclose noncompliance with material statutory, regulatory, or contractual requirements.” The Court stated that the failure to disclose noncompliance with material requirements renders the statement that goods or services were provided—such as the mental health services at issue in Escobar—“misleading half truths” and therefore actionable under the FCA. To pursue a claim under this theory, the plaintiff must allege that the defendant knew (actually or constructively) that the requirement was a material condition of payment.

The Materiality Requirement

After finding the implied certification theory viable, the Court then held that, contrary to what some circuits have held, the Government need not have “expressly designated” a requirement as “a condition of payment” for a claim to be actionable under an implied certification theory. The Court stated that nothing in the text of the statute supported such a restriction and that such express designation was not necessary to show that a defendant has knowledge that the requirement is material.

The Court then tackled the issue of “how [the] materiality requirement should be enforced.” The Court stated that the standard for materiality is a “demanding” one that can include, but is not limited to, “evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.” The Court also found that “the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive.” Notably, the Court rejected the Government’s “extraordinarily expansive view of liability,” which was “whether the person knew that the government could lawfully withhold payment” for noncompliance. Justice Thomas used an example from oral argument to point out the flaw in the Government’s reasoning: Under the Government’s view, if it mandated that those who submit claims only use American-made staplers, a defendant would face FCA liability for failure to reveal its use of foreign-made staplers, regardless of whether the Government normally refuses to pay claims for noncompliance with this regulation.

The Court also provided some guideposts for determining when violations are not material to the Government’s decision to pay a claim. For example, noncompliance is not material “merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment” or where “noncompliance is minor or insubstantial.” Nor is it sufficient for a finding of materiality “that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Additionally, “very strong” evidence of nonmateriality would exist if “the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated” or when “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.”

As to the case at hand, the Court vacated the First Circuit judgment and remanded for a determination of whether an FCA claim had been sufficiently pled in light of the Court’s decision. In so doing, the Court emphasized that the FCA “is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations,” noting that Relators had alleged noncompliance with requirements “so central to the provision of mental health services” that Medicaid would not have paid had it known of it.


The Court’s decision provides more clarity on the contours of the implied certification theory of FCA liability than had existed, and provided some guideposts as to how courts should determine whether an alleged statutory, regulatory or contractual violation is material to the Government’s payment decision. The inquiry is likely to vary from case to case, with divergent decisions being issued even where the facts appear similar. Some implied certification cases may fail under the new standard, especially where the Government continues to pay claims even after having knowledge of the alleged noncompliance.

It remains to be seen whether and how this decision will impact many types of FCA cases, such as healthcare fraud cases premised on allegations of off-label marketing and Anti-Kickback Statute violations. The decision will likely have greater implications for defendants in FCA cases alleging violations regarding direct contractual relationships with the Government.


—Summer associate Ciara Grubbs also contributed to this alert.

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