District Court Rules that Claims Without Specific Misrepresentations Fail to Meet Escobar’s Test But Can Proceed Based on Fraudulent Inducement
In Escobar, the Supreme Court upheld implied certification claims “at least where two conditions are satisfied,” namely specific misrepresentations and noncompliance with a material requirement. Some courts have interpreted this phrase as defining two necessary conditions to establish implied certification liability under the FCA. Other courts view the phrase as introducing one potential path to liability, where the first condition, specific misrepresentations, is not required. Citing what has emerged as a “majority view” among district courts in the Second Circuit that the two conditions are mandatory, the Southern District of New York recently deepened the divide. See United States ex rel. Forcier v. Computer Scis. Corp., No. 12-cv-1750 (S.D.N.Y. Aug. 10, 2017).
The United States and the State of New York intervened in the relator’s suit against Computer Sciences Corporation (“CSC”), a billing service, and the City of New York. The state and federal governments alleged that the defendants violated two billing requirements relating to a state program (“EIP”) offering early intervention services to children with developmental delays. First, municipalities seeking reimbursement for program costs must attempt to recover from any applicable third-party payor before requesting funds from Medicaid or the state, but CSC allegedly failed to take reasonable steps to do so. Second, Medicaid payments may be made to a billing service like CSC—rather than to the provider—only if the billing service’s compensation is not tied to the amount collected. The intervening governments asserted that CSC failed to disclose in its application to serve as a billing service for the EIP that its compensation arrangement with the City of New York included a percentage bonus based on amounts collected.
The court assessed both allegations under Escobar’s test for implied certification liability. Surveying other district court rulings in the Second Circuit, the court concluded that plaintiffs must point to misrepresentations that are both “specific” and material. The court ruled that the secondary payor allegations satisfied this test. These allegations reflected specific misrepresentations, for example, because CSC supposedly added a claims modifier indicating that private payor coverage was absent or had been denied, even where relevant private payors were still adjudicating the coverage request. Furthermore, the misrepresentations were material because defendants’ allegedly deliberate actions to circumvent the Medicaid program’s efforts to enforce secondary payor requirements demonstrated that defendants “knew or had reason to know that [Medicaid] attaches importance to” the requirement.
In contrast, the court ruled that defendants’ failure to disclose their full compensation relationship did not constitute a specific misrepresentation because the specific statements the defendants made “had nothing to do with” CSC’s compensation arrangement with the city and would not “lead a reasonable person to conclude anything about [the] compensation arrangement.” Accordingly, those allegations could not advance as an implied certification case.
However, the plaintiffs also alleged that by omitting information about incentive compensation, CSC fraudulently induced the State to approve the company as a billing service. The fraudulent inducement theory posits that where an entity procures a government contract by fraud, subsequent claims submitted pursuant to the contract can be tainted as fraudulent. Courts have approved the theory in the context of direct government contracts but have been hesitant to bless recent efforts by plaintiffs to expand the theory to non-contract interactions with government regulatory bodies (as discussed here). In this case, the court concluded that CSC’s contract with the city violated the incentive compensation ban, and that the failure to disclose this compensation provision rendered the contract a fraudulent misrepresentation. As a result, the allegations could proceed as a fraudulent inducement case. Although the defendants pointed to a municipal agency report discussing the full compensation arrangement at issue, the court declined to rule that this report—published after the original complaint was filed and issued neither from nor to a state agency—constituted the type of “actual knowledge” of alleged misconduct that serves to undercut materiality post-Escobar.
The court’s emphasis on the fraudulent inducement theory as a backstop for reaching parties that, by virtue of their place in the claims submission process, are less likely to make specific misrepresentations highlights the importance of an ongoing debate as to the appropriate breadth of this theory of liability (discussed further here).
A copy of the court’s opinion can be found here.