The Law Firm of Piacentile, Stefanowski & Malherbe LLP

How the Universal Health Services, Inc. v. U.S. Ex Rel. Escobar Case Changed FCA Litigation

The False Claims Act ("FCA") is a law that prohibits the submission of fraudulent claims to the United States government. This law was implemented to discourage and punish individuals who submit fraudulent invoices to the government, or those who broadly speaking, abuse taxpayer money. In addition, this law also ensures that people are not using false statements or documents to obtain government benefits, contracts, or money.

Whistleblowers looking to file a qui tam complaint under the FCA must be mindful that the alleged wrongdoer's conduct must have been "material" to the government's payment decision. That is to say, the false claim in question must have had some impact on the government deciding to make the payment to the alleged wrongdoer. This term of “materiality” was broadly analyzed by the Supreme Court in Universal Health Services, Inc. v. US ex rel. Escobar (2016) from here on now Escobar.

In Escobar, a Medicaid patient undergoing treatment at a Massachusetts mental health clinic died of a seizure. In 2011, her parents filed a qui tam lawsuit under the FCA in federal district court, alleging staff members treating their daughter were not properly licensed or supervised, violating Massachusetts mental health regulations. They contended that, by submitting Medicaid invoices for services performed in violation of those regulations, the clinic and its parent corporation Universal Health Services, Inc. submitted false and fraudulent claims to the Medicaid program. And, because the claims for government payment did not expressly certify that the services were performed in compliance with state regulations, the complaint rested on the theory that the clinic implied its regulatory compliance when it submitted the claims.

In 2014, the government decided not to intervene in the suit. The district court granted the defendant's motion to dismiss based on the court concluding that the complaint did not state any implied falsity, because it relied on non-compliance with regulations that were conditions of participation in the Massachusetts Medicaid program rather than conditions of payment by the program. The US Court of Appeals for the First Circuit reversed, holding that conditions of payment, which may be found in sources such as statutes, regulations, and contracts, need not be ‘expressly designated”. The court added that the supervision regulations at issue did, indeed, impose conditions of payment, and therefore were “dispositive evidence of materiality.”

The Supreme Court granted certiorari to answer whether the implied certification theory was a viable one, and if so, whether it could only apply where a contractor violated a legal requirement that the government had expressly designated as a condition of payment. In their analysis, the Court held that “the implied false certification theory can, at least in some circumstances, provide a basis for liability.” The court based its reasoning on that the FCA’s term “fraudulent” is a paradigmatic example of a statutory term that incorporated the common-law meaning of fraud which has long encompassed certain misrepresentations by omission.

The Court also explained that the misrepresentation must relate to the submitted claim’s specific representations about the goods or services provided. The Medicaid claims made by the defendant were allegedly representations about the specific services provided by specific types of professionals. The defendant failed to disclose serious violations of regulations about some of the staff qualifications and licensing requirements for these services. Therefore, these claims were misleading in the context in which they were made, since they used specific billing codes and identifiers concerning certain types of treatment made by specific job titles, implying that the clinic’s personnel had the requisite training and qualifications for their jobs.

Lastly, the Court explained that a misrepresentation about legal compliance does not become “material” simply because the government expressly labeled the legal requirement as a condition of payment, or because the government could choose to withhold payment if it knew about the non-compliance. What certainly matters is not the label the government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the government payment decision.

Escobar created new areas for litigation by clarifying what makes a falsehood “implied,” and by imposing a new contextual standard for what makes undisclosed legal violations “material” misrepresentations. Escobar's real meaning and reach will start to become clearer as district courts consider more motions to dismiss FCA cases for failure to properly plead a claim of contracting fraud. This new emphasis on the “materiality” element could also reshape the theory of express false certifications, where FCA liability is triggered by affirmative misrepresentations on a claim for payment.

As time has gone on, the Escobar case has also highlighted a loophole in the FCA. As mentioned before, the Court provided a list of factors that courts could use when determining whether fraud under the FCA is material. One of them is the government's knowledge of the fraud. This has allowed government contractors to escape liability for fraud by claiming that the government had consented to the fraud, because of lack of materiality. This has also caused many lower courts to use “government knowledge” of mere allegations of fraudulent conduct as grounds to dismiss FCA cases.

To conclude, relators must now show that the government would not have made payment had the defendant made legitimate claims. This means relators will have to be prepared to overcome many new arguments to obtain relief in qui tam cases involving the submission of false claims and Congress must clarify the FCA materiality standard in order to prevent future meritorious lawsuits from being dismissed along these lines.