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Lebau & Neuworth Article in Trial Magazine: ‘Implied’ Fraud Under the FCA

Lebau & Neuworth Article in Trial Magazine: ‘Implied’ Fraud Under the FCA

The following article by Lebau & Neuworth attorneys Richard Neuworth and Devan M. Wang was published in the August 2018 issue of Trial, the American Association for Justice's award-winning magazine for attorneys, law professors, judges and others in the legal community. (For the full publication of this article, including citations, visit Trial.)

In Universal Health Services, Inc. v. United States ex rel. Escobar, the U.S. Supreme Court resolved a circuit split over whether the False Claims Act (FCA) recognizes only claims for misrepresentations regarding express conditions of payment. The relators in Escobar alleged that a counseling center had committed fraud— violating the FCA under the  “implied false certification” theory—by submitting Medicaid claims for services that it knew had been provided by unlicensed staff in violation of state regulations. The district court dismissed the relators’ case, holding that they failed to state an FCA claim because none of the violated state regulations involved a condition of payment. The First Circuit reversed, holding that the language of the regulation in question and “repeated references to supervision” throughout the regulations constituted dispositive evidence that supervision was a material condition of payment.

The Court ruled that implied certification is an appropriate basis for FCA liability when two conditions are satisfied: The claim “makes specific representations about the goods or services provided,” not merely requests payment, and the defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

Escobar’s significance is two-fold: By resolving the circuit split on this issue, arguably, the decision may have opened the door for more cases to be brought under the FCA based on implied certification. But it also established a heightened standard for determining materiality, which has created new hurdles for plaintiffs at both the pleading/motion to dismiss and summary judgment stages. The Court in Escobar emphasized that this materiality standard is a “rigorous” one that relators cannot meet simply by stating that the government designated a particular requirement as a payment condition—or that the government would have had the option to decline payment if it knew of the misrepresentation.

Pleadings and motions to dismiss. Before filing suit, investigate all potential fraudulent claims, including whether the government paid those claims after discovering state or federal regulations were violated and if the regulatory violation is connected to the payment decision. After Escobar, the principal arguments raised in motions to dismiss concern materiality, focusing on whether the government continued payment after the fraud was discovered and whether the complaint contains specific allegations that the violations would have influenced the government’s decision to pay.

To survive these motions, plead facts that support materiality, such as “evidence that the defendant knows that the Government consistently refuses to pay claims . . . based on noncompliance” with the particular requirement. Include facts that show the connection between the violation and the payment decision and that the government lacked knowledge of the violation. Thoroughly review the statutes and regulations at issue, talk to government regulators, and work closely with the relator to obtain appropriate documentation such as bills for payment that were denied for violations or citations from regulators about the violations at issue. Also try to locate any position statements written by the government concerning the violations and any cases in which similar violations were alleged and the government intervened. To the extent possible, investigate the government’s treatment of similar claims—if you learn that the government has knowingly disregarded this violation when paying claims, then do not file suit. Although some district courts have dismissed implied certification cases even when the government has not consistently rejected similar payment claims, other district courts have not been so restrictive.

Two circuits have reaffirmed reversals of district court decisions that granted motions to dismiss implied certification claims. On remand, the First Circuit in Escobar held that the relevant regulations were material to payment and not merely “preconditions to participation” in the state’s Medicaid program. It ruled that the plaintiff satisfied the materiality standard because “the fundamental inquiry is ‘whether a piece of information is sufficiently important to influence the behavior of the recipient’” and that, while not dispositive, the fact that regulatory compliance was a condition of payment was relevant to materiality. The First Circuit adopted an approach to materiality that is flexible and includes the “natural tendency test” to determine whether regulatory violations would affect the government decision-maker’s ability to authorize payment.

In United States of America ex. rel. Campie v. Gilead Sciences Inc., the Ninth Circuit noted that a claim regarding nonconforming goods, such as pharmaceutical compounds, must include an intentionally false statement or fraudulent conduct material to the government’s decision to pay and held that the payment at issue would not have occurred but for the contractor’s misconduct. Relators have been much less successful opposing these motions when they cannot show that the payment would not have been made without the fraud or that the violations were not factually connected to a specific paid claim.   

Summary judgment motions. The same types of issues arise when facing motions for summary judgment. As with motions to dismiss, relators may face greater difficulty with summary judgment motions under Escobar’s rigorous materiality standard,  yet relators are still having success. For example, in Miller v. Weston Educational Inc., the Eighth Circuit reversed summary judgment for the defendant, finding that a college’s failure to maintain records showing proper administration of specific funds was considered material because the college had agreed, in writing, to keep such records. In United States ex rel. Johnson v. Golden Gate Nat'l Senior Care, L.L.C., a district court denied the defendants’ motion for summary judgment after the relator alleged under the implied certification theory that the defendants violated the FCA by failing to properly supervise therapy assistants.

Prepare to oppose these motions by conducting discovery regarding the government’s response to similar claims. To identify any potential weaknesses concerning materiality early on, request that the government attorneys investigate past treatment of such violations. Discovery regarding whether the government ever contacted the defendant about the alleged violations or issued warnings about the violations will be useful for proving materiality. It may also be valuable to obtain affidavits or depositions from the officials who paid the claim to learn more about their knowledge of the violation.

Although the materiality standard established by Escobar is rigorous, the expansion of the implied certification theory of liability is a valuable tool for FCA practitioners.

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