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The Diagnosis: June 2016
June 2016

Oral Argument held in Universal Health Services, Inc. v. United States ex rel. Escobar

     

Supreme Court Likely to Approve Implied
False Certification in Some Form

The Supreme Court heard oral argument in the case of Universal Health Services, Inc. v. United States ex rel. Escobar, a case likely to yield the High Court’s most consequential decision on liability under the False Claims Act (FCA) in many years. The Court granted certiorari in this case to consider the viability and scope of the implied false certification theory of liability. Most federal circuit courts have embraced this theory in some form, and practitioners on the defense side believe it has led to a significant expansion in FCA liability. Our attorneys were in attendance at oral argument. Based on the Justices’ reactions to the arguments—the questions posed and colloquy with counsel—the Court seems likely to approve of liability based on implied false certification in some respect. Thus, the real question concerns the limits the Court imposes on this theory. The following highlights from the argument identify at least some of the issues of concern to the justices, and may foretell key elements in the Court’s ultimate opinion.
 

By way of brief background, the appeal to the Supreme Court came out of the First Circuit. See United States ex rel. Escobar v Universal Health Services, Inc., 780 F.3d 504 (1st Cir. 2015). Relators brought suit under the FCA and its state counterpart after the seizure-related death of their teenage daughter who had been treated at defendant’s mental health clinic by personnel who were neither licensed nor properly supervised, in violation of several state health regulations. Relators alleged that defendant’s invoices for Medicaid reimbursement of mental health services provided to Relators’ daughter and others were fraudulent insofar as the defendant misrepresented its compliance with these regulations. Notably, the invoices contained no express certification of regulatory compliance; rather, Relators claimed that such certification was implied. Neither the state nor federal government intervened in the case. The district court dismissed the complaint, finding that the regulations were conditions of participation, not conditions of payment, invoking an analytical methodology employed by many courts as a fair means of limiting liability for impliedly false claims. The First Circuit reversed, eschewing the district court’s participation/payment analysis and finding that in any event the evidence showed that certain regulations violated were clearly preconditions to government reimbursement. The First Circuit also held that Relators sufficiently pled the remaining elements under the FCA to meet the heightened pleading requirements under Federal Rule of Civil Procedure 9(b).
 

The case attracted significant attention from many interested parties. Fourteen amicus briefs supported the Petitioner, while a dozen supported the Respondents. The U.S. Chamber of Commerce and the Pharmaceutical Research and Manufacturers of America, among others, weighed in on the side of the Petitioner. The United States and the Commonwealth of Massachusetts naturally supported the Respondents. Petitioner’s principal argument was that no basis exists in either statutory or common law for the implied false certification theory, and thus the Court must reject it. Alternatively, if the Court recognizes implied certification liability at all, it must be limited to a circumstance where the underlying violation concerned a condition of payment expressly stated in the regulation or contract. Respondents argued that implied certification liability fell squarely within the scope of actions Congress intended the FCA to reach.
 

As a threshold matter, it seems likely that a majority of the current Court will issue an opinion in this case. In other words, based on the expressions of interest in the Respondents’ argument by a majority of the Court, a 4 to 4 tie is unlikely. And, although the opinion will surely not be unanimous, it may also likely reflect some disagreement among those participating in the Court’s judgment.
 

Justices Sotomayor, Breyer, Kagan, Ginsburg and Kennedy seemed sympathetic, in varying degrees, to the Respondents’ arguments. The Petitioner received a number of direct, challenging questions from Justices Sotomayor, Kagan and Breyer. Only the Chief Justice challenged the arguments of the Respondents and the United States arguing asamicus curiae. Neither Justice Thomas nor Justice Alito gave any signal, verbal or otherwise, as to their reactions to the arguments of the parties.
 

Given this, the Supreme Court is likely to affirm at least the judgment of the First Circuit Court of Appeals, if not the entirety of its rationale, thus sending the case back to the trial court for further proceedings. Justices Kagan and Sotomayor seemed to agree that the facts in Escobar adequately stated a claim for fraud under the FCA. Justice Sotomayor in particular seemed exasperated at Petitioner’s rebuttal argument: “If you claim money for a service that you don't render, not a qualified individual, unsupervised by a qualified individual, which is a requirement specifically in the regulations, I'm having a hard time understanding how you have not committed a fraud.” Notably, no other justice hinted at agreement with Petitioner that the facts in the case did not amount to fraud, or were not actionable under the FCA.
 

Rather, the Justices seemed most concerned with whether the Court could articulate workable limits to FCA liability. Justice Breyer acknowledged the concerns of amici that in light of the volume of regulations imposed by federal agencies, the law could have an unfairly harsh effect, without some reasonable limits. Petitioner advocated for a rule requiring government agencies to identify material regulations, while Respondents claimed that this would amount to a roadmap for fraud. Respondents argued that materiality and scienter were reasonable checks on the scope of FCA liability and would solve nearly all Petitioner’s concerns. And scienter, Respondents claimed, should require not only knowledge of the violation, but also that the violation if disclosed would result in refusal of payment. Petitioner rejected materiality as a limiting principle because, among other reasons, Congress has diluted the definition through recent statutory amendments. Relying on the common law as reflected in the Restatement (Second) of Torts, Petitioner suggested that “essentiality” was a more rigorous and fair standard. The government, however, argued against deviating from the statutory definition or the Court’s prior holdings on the issue of materiality.
 

The Chief Justice questioned the federal government’s claim that any instance justifying the government in withholding payment would comprise a false claim. He used the example of a contract for health services that also required the provider to use staplers made in America, and questioned whether the failure to disclose the use of foreign-made staplers would constitute a false claim. Invoking the contract law distinction between material and nonmaterial breaches, the former permitting repudiation and the latter only damages, Justice Breyer also took issue with the government’s claim that the failure to disclose the use of foreign staplers could give rise to a false claim.
 

The justices asked no questions about the FCA’s qui tam provisions. The lawyers appearing in court alluded to them only briefly. Thus, the bench gave no hint that those provisions in particular are deserving of judicially-imposed restraint. A decision is expected sometime in June. 

Client Alert authored by: Stephen A. Wood, Principal

Chuhak & Tecson, P.C.

 
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