Apr 202016

Active Supreme Court Bench Probes Scope of “Fraudulent” Claims

Jaime L.M. Jones, Brenna E. Jenny and Paul E. Kalb, M.D.
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As we have discussed here and here, yesterday the Supreme Court heard oral arguments in Universal Health Services v. United States ex rel. Escobar, which presents questions over the viability and scope of the implied certification theory.  The justices actively questioned the advocates, raising concerns over whether the position of the government and the respondents (“Escobar”) contains logical limitations, and pressing the petitioner (defendant Universal Health Services (“UHS”)) over whether the limitations it proposes truly are consistent with common understandings of fraud.

UHS began arguments with the premise that implied certification sounds in fraud, and therefore the meaning of the term “fraudulent” was more appropriately decided under tort law, rather than contract law.  Citing the Restatement (Second) of Torts § 551, UHS argued that liability under the FCA for non-disclosure should occur only in very narrow circumstances where there is a duty of disclosure, namely, failure to disclose either a party’s non-compliance with “facts basic to the transaction” or a fact that otherwise would render a partial or ambiguous statement misleading.  Justice Breyer asked why the scope of fraudulent claims could not be viewed through the lens of contract law, such that a material breach of a term of the arrangement would render the request for payment fraudulent.  Observing that lower courts routinely determine whether contract terms are “material” in the context of breach of contract disputes, Justice Breyer questioned why the same distinction of materiality could not be applied in the FCA context.  UHS responded that the FCA definition of materiality—capable of influencing a decisionmaker—was greatly watered down from the common law meaning (a point subsequently disputed by the government).  Furthermore, UHS argued, materiality stands as a separate element under the FCA, distinct from the threshold question of whether a claim was “false or fraudulent.”  However, Justice Kennedy wondered whether it was truly possible to “think about fraud unless we have materiality in some sense,” caveating that it could be “a very strict standard of materiality.”

Escobar encouraged the Court to adopt the common lower court rule that liability can arise whenever claimants violate a material condition of payment.  Chief Justice Roberts inquired whether every undisclosed material breach of a contract creates potential FCA liability, and Escobar responded no, because defendants must have knowledge of a regulation and know when violating the regulation that it is material to the government’s decision to pay.  Chief Justice Roberts raised concerns over the practical implications of this approach, citing the “thousands of pages of regulations under Medicaid or Medicare programs.”  Escobar acknowledged concerns raised by UHS and amici regarding a lack of fair notice, but insisted that alternatives such as catchall “compliance with all laws” certifications or appending all material regulations to contracts would realistically also not provide notice.  Instead, Escobar insisted the elements of materiality and scienter would protect defendants.

The government advanced two potential frameworks for when liability could arise under an implied certification theory: 1) “a person asserts that he is legally entitled to be paid, and he knows that he has no such legal entitlement” because the “person knows that he has failed to comply with a material term” or 2) a withholding of facts essential to making a representation non-misleading.   Under its preferred approach of the first formulation, the government encouraged the Court to look to contract law.  However, the government adopted a broad interpretation of materiality, equating it to whether the government would have a right to withhold any portion of payment.  Citing a hypothetical failure to use “made in America” staplers where called for under a contract, Chief Justice Roberts asked whether this could create liability under the FCA.  The government advocate responded that it could, and Justice Breyer in particular seemed troubled by the scope of potential liability under this conception of the implied certification theory.

A decision is expected by the end of June.

Jaime L.M. Jones

Chicago

jaimejones@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

Paul E. Kalb, M.D.

Washington, D.C.

pkalb@sidley.com

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