First Circuit Rewrites False Claims Act Requirements and Significantly Expands Potential Liability

In two recent decisions, the Court of Appeals for the First Circuit parted ways with well-established standards applied by other courts for assessing liability under the Federal False Claims Act (FCA) and adopted an approach that may significantly broaden the risk of FCA liability for all companies that contract with or submit claims, or cause others to submit claims, for payment to federal or state governments. These decisions raise a number of practical concerns for companies including increased risk of FCA exposure, increased litigation costs, and a need for greater attention to FCA issues in contract negotiation. The First Circuit’s decisions also create a clear split among the federal circuits, increasing the likelihood of review of these issues by the U.S. Supreme Court.

Prior to the First Circuit’s recent decisions, a number of other federal courts had articulated the standards for what constitutes a “false” claim under the FCA. These courts had established that a claim could be either “factually false” or “legally false” See, e.g., Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001). A factually false claim incorrectly describes goods or services or lists goods or services that were never provided. A legally false claim is one in which a party certifies compliance with a statute or regulation as a condition to government payment where it had not actually complied with the statute or regulation. Courts had further identified two species of legally false claims: express or implied certification. Under the express certification theory, a claim is false if it expressly certifies compliance with a statute or regulation, but does not meet its requirements. Under the implied certification theory, the claim contains no express certification, but the claimant implies that it has complied with any preconditions to payment set forth expressly in statutes or regulations by submitting the claim for payment. A number of circuits have adopted similar interpretations of the “false or fraudulent” prong of the FCA, including the Second (United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94 (2d Cir. 2010), rev’d on other grounds, 131 S. Ct. 1885 (2011)), Third (United States ex rel. Wilkins v. United Health Group, Inc., 2011 WL 2573380 (2011)), and Tenth (United States ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163 (10th Cir. 2010)). Notably, the Third Circuit’s recent decision in Wilkins acknowledged but did not follow the First Circuit’s new approach, holding instead that the implied false certification theory “gives effect to Congress’ expressly stated purpose” for the FCA.

On June 1, 2011, in United States ex rel. Hutcheson v. Blackstone Medical, Inc., the First Circuit rejected this approach for FCA claims arising in the Medicare context. There, the Plaintiff, Susan Hutcheson, had brought a qui tam action alleging that Blackstone Medical, Inc. engaged in a nationwide kickback scheme to induce physicians to use its medical devices, a violation of the Anti-Kickback Statute (AKS). Hutcheson alleged that Blackstone knew this scheme would cause physicians and hospitals to present federal healthcare programs like Medicare with payment claims that contained material misrepresentations.

The district court had dismissed Hutcheson’s claims following the approach established in other circuits. Reversing, the First Circuit refused to “adopt any categorical rules as to what counts as a materially false or fraudulent claim under the FCA.” It held that “the text of the FCA does not exhibit an intent to limit liability in this fashion.” Instead, it held the proper inquiry is simply whether the claims misrepresented to the government that there had been compliance with a precondition of payment so as to render the claim false or fraudulent and whether those misrepresentations were material.

The First Circuit also loosened the standards for what may constitute a precondition of payment. First, it agreed with the District of Columbia’s decision in United States v. Sci. Applications Int’l Corp. (SAIC), 626 F.3d 1257 (D.C. Cir. 2010), rejecting the argument “that legal preconditions of payment must be expressly designated as such to give rise to false or fraudulent claims.” Moreover, the First Circuit held that a precondition of payment need not be found in a statute or regulation. Specifically, it concluded that the Provider Agreements and Hospital Cost Reports drafted by the Centers for Medicare and Medicaid Services and entered into by the physicians and hospitals, make “clear” that AKS compliance is a precondition of Medicare payment.

Lastly, and perhaps most critically, the court also rejected the argument that “a submitting entity’s representations about its own legal compliance cannot incorporate an implied representation concerning the behavior of non-submitting entities.” The Provider Agreements and Hospital Cost Reports, it concluded, make no exception for violations caused by third parties. Blackstone had argued that when a submitting entity expressly represented its own legal compliance, its representations could not encompass a precondition of payment applicable to non-submitting entities. The First Circuit disagreed, holding “[w]hen the defendant in an FCA action is a non-submitting entity, the question is whether that entity knowingly caused the submission of either a false or fraudulent claim or false records or statements to get such a claim paid.”

On July 22, 2011, in United States ex rel. Westmoreland v. Amgen, the First Circuit extended its approach to claims submitted to individual state Medicaid programs. There, Plaintiff Kassie Westmoreland brought a qui tam action alleging that Amgen, acting in concert with co-defendants International Nephrology Network and ASD Healthcare, had engaged in an elaborate kickback scheme to induce medical providers to prescribe a drug used to treat anemia.

Applying Hutcheson, the court asked whether the claims at issue misrepresented compliance with a material precondition of payment forbidding the alleged kickbacks, a “fact-intensive and context-specific inquiry.” Because Medicaid is run on a state basis, the court proceeded to analyze each individual state program’s statutes, regulations, and program documents. The court found the necessary preconditions of payment in relevant statutes and regulations in four states (Illinois, Indiana, Massachusetts, and New York) and in provider agreements in the remaining two (California and New Mexico). The court held that Westmoreland did not make an adequate showing that Georgia contained the requisite preconditions for payment. In so holding, it noted that unlike the other six states, Georgia has no state law analogue to the federal AKS.

Consistent with its holding in Hutcheson, the court also stated that while the “provider agreements speak to the compliance of the providers rather than third parties … this is of no moment as to whether they rendered the relevant claims false or fraudulent. The agreements amount to a representation of compliance with the relevant anti-kickback statutes” that the plaintiff alleges is incorrect because of the kickbacks.

These decisions represent a significant expansion of the FCA’s reach that will impact all companies contracting with or submitting claims to the government or “causing” others to do so. The court’s holdings permit much greater flexibility in finding claims to be “false or fraudulent” and allow for a claimant’s submission for payment to extend FCA liability to entities in the “supply chain” of the good or service being billed.

This raises a number of practical concerns for companies, including whether they may now be exposed to FCA liability for conduct typically challenged by private action. Given the First Circuit’s construction of the FCA, a qui tam relator may now claim FCA violations for an entity’s alleged failure to comply with a contract provision even when that provision is not expressly designated as a condition of payment. In rejecting this concern, the First Circuit stated that “other means exist to cabin the breadth of the phrase ‘false or fraudulent’ as used in the FCA.” Specifically, it referenced other prongs of the FCA, noting that “liability cannot arise under the FCA unless a defendant acted knowingly and the claim’s defect is material.” While these defenses certainly remain viable, they are inherently fact-bound and therefore much less susceptible to a motion to dismiss or for summary judgment. This increases companies’ cost of litigation and may well force more costly settlements of poorly-founded but expansive claims.

The court also invoked the FCA’s “causation” element in dismissing as “overblown” concerns that allowing a submitting entity’s representation of compliance to encompass a precondition of payment applicable to non-submitting entities would stretch FCA liability too broadly. However, this interpretation is likely to result in companies having much less notice ex ante about what conduct would trigger FCA liability. To address this lack of notice, companies dealing directly with the government should explore whether they can negotiate preconditions of payment expressly in their contracts.

While future litigation will likely attempt to limit the reach of the “false or fraudulent” component of the FCA in the First Circuit, the extent to which the FCA’s other requirements will successfully “cabin” its newly acquired breadth remains to be seen. It also remains to be seen which approach other uncommitted circuits will take.

It is likely that some companies that have heretofore enjoyed a relatively low FCA risk profile now face greater exposure. As a result, companies that provide a good or service for which the government is or may be billed should assess whether their exposure has changed. In recent years, federal prosecutors have dramatically expanded application of the FCA beyond the health care field to include the defense, financial services, and other industries. See, e.g., Mark D. Hopson & Kristin Graham Koehler, Financial Institutions Face New Challenges Under False Claims Act, BNA (2011). This trend is expected to continue.