Supreme Court Hears Arguments in Major False Claims Act Case

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As we previewed a few months ago, the United States Supreme Court will hear arguments in Universal Health Services v United States ex rel. Escobar today, which has the potential to significantly change the scope of potential liability under the federal False Claims Act. As one Department of Justice lawyer in the civil fraud division joked recently, if the outcome is not favorable, he might be looking for a new job in the near future.

Humor aside, Escobar could significantly reshape the legal landscape for the False Claims Act. At issue are two questions that the courts of appeals have wrestled with in recent years: (1) does the Act impose liability for fraudulent nondisclosure, so-called “implied certification” claims, and (2) if so, what are the contours of that legal doctrine.

These are not merely technical questions. If the False Claims Act does not recognize liability for what amounts to fraudulent nondisclosure, then government contractors and others who receive government money can avoid liability for fraud, even if their actions do not comply with the law, so long as they don’t actually say they are complying. Merely by remaining silent, contractors can avoid liability under the Act if the implied certification claims are not recognized by the Act.

The famous SCOTUSblog already has a good preview of the oral arguments slated for today, so rather than rehash what is anticipated during today’s oral arguments, we wanted to share a summary of the arguments of the federal government in its amicus brief.

Not surprisingly, the federal government took the position that the False Claims Act did indeed recognize liability for implied false certifications. As the federal government argued in its amicus brief, “[a] request may … be ‘false or fraudulent’ if the claimant knows that legal or contractual requirements have not been met but seeks payment from the government without disclosing that fact.”

In particular, the federal government argued that the contrast between Sections 3729(a)(1)(A) and 3729(a)(1)(B) demonstrated that Congress intended for fraudulent nondisclosures to be actionable under the False Claims Act. Unlike subsection (B), Section 3729(a)(1)(A) does not require a false record or statement, but merely requires that the claim itself be false. The government’s argument is that a claim premised on compliance with certain legal restrictions is false if the party receiving the money is not in compliance, even if the party doesn’t actually say it is in compliance when it requests the money.

As the Solicitor General explained in the government’s amicus brief, the Supreme Court has often looked to common-law principles when construing the False Claims Act. The government explained in its brief, “[a] variety of common-law concepts reflect the understanding that a statement may be ‘false or fraudulent’ if it omits information necessary to keep it from being misleading, even if the statement itself contains no express untruths.”

The government continued, “[j]udicial references to the ‘implied certification’ theory of FCA liability are best understood as shorthand for the established principle that a communication can be materially misleading, and can give rise to liability for fraudulent misrepresentation if the requisite scienter is established, even though it contains no explicit false statement.”

According to the Justice Department, “[e]very claim for payment constitutes the claimant’s affirmative representation that it is entitled to be paid.” Accordingly, “[t]hose affirmative representations trigger the corollary principle that, ‘if the defendant does speak, he must disclose enough to prevent his words from being misleading.’”

On the second question of whether such implied certification liability should be limited to only those circumstances where compliance with a certain legal requirement is a “condition of payment” as opposed to merely a “condition of participation,” the government urged the Court to extend the liability to all material misstatements.

The government explained that the restrictive interpretation urged by the Petitioner did not reflect the practical reality of the numerous government programs covered by the Act. As the government explained,

“Many government programs and contracts involve sequential steps. At the first step, by forming contracts with the government or establishing their eligibility to participate in federal programs, would-be recipients obtain initial access to a continuing stream of federal funds. Once initial eligibility to receive those funds has been established, contractors and program participants often submit periodic requests for payment, as goods are delivered or services performed, without being required to reaffirm their continued compliance with all relevant conditions. The recipient’s continued compliance with those conditions, however, still lies at the heart of ‘what [the government] bargained for.’”

In light of these realities, the government argued that “given the wide variety of governmental contracts, programs, and awards, FCA liability should not depend on whether the claim form itself reiterates all contractual and legal requirements,” but instead, “when a claimant requests full payment from the government, despite ‘knowing’ that it has violated ‘material’ requirements, that claimant has submitted a ‘false or fraudulent claim.’” (citation omitted).

As for the arguments that the government may have other regulatory tools at its disposal for addressing violations, the government explained that the False Claims Act is part of that toolkit and that it should be the government’s discretion to choose the remedy that best fits its needs under the circumstances. As the government explained, “[w]ithholding payment is one of many tools that the government uses when a claimant has failed to live up to its end of the deal” but the “government … must decide whether to impose a lesser sanction, to renegotiate the deal, or to demand a different form of performance; and its choice of a response other than non-payment does not imply that the breached condition was unimportant.”