The Supreme Court handed down its much-anticipated opinion in Universal Health Services, Inc. v. United States ex rel. Escobar et al. yesterday—a case addressing the viability of the implied certification theory in FCA litigation.  Justice Thomas, writing on behalf of a unanimous Court, found that the implied certification theory can in fact serve as a basis for FCA liability where a defendant has misleadingly failed to disclose its noncompliance with material statutory, regulatory, or contractual obligations.

The Court first addressed whether Universal Health Services, Inc. (“Universal Health”) impliedly certified that it had complied with Massachusetts Medicaid regulations by submitting claims for payment. Although the Court concluded that it did, the holding is narrowly drafted.  The Court held that the act of submitting a claim for payment is an actionable misrepresentation where two conditions are satisfied: (i) in addition to requesting payment, the claim also makes specific representations about the goods or services provided; and (ii) the failure to disclose noncompliance with material statutory, regulatory, or contractual requirements renders the representations “misleading half-truths.”  The Court expressly declined to address “whether all claims for payment implicitly represent that the billing party is legally entitled to payment.”

As discussed in a previous article, Escobar is a qui tam case in which two relators allege that Universal Health submitted claims for reimbursement that failed to disclose violations of Massachusetts Medicaid regulations governing the qualifications and supervision requirements for staff at a mental health facility.  The Court determined that when Universal Health submitted reimbursement claims for mental health services using certain payment codes, “anyone would [wrongly] conclude that Universal Health complied with core state Medicaid requirements regarding the qualifications and licensing requirements of its staff members.”  By submitting claims for payment without disclosing the alleged violations, the Court found that Universal Health’s claims constituted actionable misrepresentations.

Although many will be disappointed that the Court did not reject the implied certification theory, the Court’s limited ruling gives defendants room to argue that not all claims for payment implicitly represent compliance with statutory, regulatory, and contractual requirements. The Court looked to the common law to determine when nondisclosure constitutes an actionable misrepresentation, which is typically a fact-dependent, case-by-case inquiry.  The Court’s limited ruling leaves a lot of work left to be done in the lower courts and is sure to generate significant litigation.  Given that most jurisdictions had already adopted the implied certification theory, however, the Court’s limited ruling can be seen as a silver lining.

The second question the Court addressed was whether the implied certification theory is limited to instances where compliance with a statute, regulation, or contractual provision was a condition of payment. Most lower courts had adopted this bright-line rule to prevent nearly unchecked liability under the FCA for minor regulatory violations and contractual breaches.  The Court addressed this issue solely as a question of materiality, and concluded that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”

In a bid to give some teeth to the materiality standard, the Court called the FCA’s materiality standard “rigorous” and “demanding” and reiterated that the FCA is not to be used as “an all-purpose antifraud statute.”  The Court again turned to the common law, suggesting that materiality should be measured by whether noncompliance with a regulatory violation would influence the government’s decision to pay a claim.  The Court’s holding on this point was less precise, but it did reject the government’s argument that noncompliance with a regulatory violation is material simply because the government would be entitled to refuse payment.  Additionally, the Court appeared to suggest that defendants must have knowledge that noncompliance would be material.

From a litigation perspective, Escobar has swept away years of precedent on the bright-line rule.  Despite the Court’s effort to bolster materiality as a defense in implied certification cases, the loss of the bright-line rule will make it more difficult for defendants to win motions to dismiss.  The Court addressed this problem in a footnote, arguing that the pleading standards require the government and relators to plead facts to support their allegations of materiality.  No doubt the pleading standards will be an avenue to attack materiality on a motion to dismiss, but the Court may be overly optimistic.  Materiality is generally a mixed question of law and fact, meaning trial courts will be reluctant to dismiss a case before discovery.  As a result many cases that would have previously been dismissed will now go through expensive discovery.