Insights

Supreme Court in Universal Health Services Gives Some Relief to Government Contractors Under the FCA

August 30, 2016

Management Liability/D&O

Working as a government contractor carries with it significant potential liability for noncompliance with what can be a massive number or rules, regulations, and contractual terms. The ins and outs of being compliant are complex, and it can feel like one false move could get you into a world of hurt.

hand healthcare button

 

Some months ago, I discussed a Civil War-era law that’s still in effect today—the False Claims Act (FCA) and its qui tam provisions. The FCA was created to protect the government from contractors who might take advantage of it in times of need. The original situation involved unscrupulous people overcharging the government for goods during the Civil War.

In qui tam suits, “relators” aka whistleblowers (some refer to them as bounty hunters) bring a claim on behalf of the government and share in the monetary recovery.

An important provision of the FCA, and one that I’ll talk more about below, states that a person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” is subject to liability (31 U.S.C Section 3729(a)(1)(A)).

The FCA defines the term “knowingly” to:

A) mean that a person, with respect to information—

 

(i)has actual knowledge of the information;

(ii)acts in deliberate ignorance of the truth or falsity of the information; or

(iii)acts in reckless disregard of the truth or falsity of the information; and

 

(B)require no proof of specific intent to defraud

This past term, the Supreme Court tackled the issue of “knowingly” presenting fraudulent claims and the materiality of certain omissions in the context of presenting claims. While the Court helpfully clarified some issues, there is still a lot of grey area.

The Medicare/Medicaid Case in Front of the Supreme Court

The case in question was Universal Health Services v. United States ex rel. Escobar, a Medicaid case (if you remember from my last post on qui tam, the healthcare sector is one where these types of suits are prevalent.).

In Escobar, United Health Services (UHS) submitted claims to Medicaid for treatment at one of its facilities for a patient—a teenage girl—who reportedly had an adverse reaction to medication that was prescribed to her at that facility. The girl’s condition worsened, and she died from a seizure.

When her parents discovered that many workers at the facility weren’t properly licensed to provide the services or prescriptions for which the facility had billed the government, the parents filed a qui tam suit.

The parents alleged that UHS was liable under the implied false certification theory of liability, which “treats a payment request as a claimant’s implied certification of compliance with relevant statutes, regulations, or contract requirements that are material conditions of payment and treats a failure to disclose a violation as a misrepresentation that renders the claim ‘false or fraudulent.’” (From the syllabus of the decision.)

The district court granted Universal Health’s motion to dismiss, but the First Circuit Court of Appeals reversed. In June 2016, in a somewhat complex decision, the Supreme Court vacated and remanded the case.

The Supreme Court Decision

The Court held that the implied false certification theory can be basis for FCA liability when “a defendant submitting a claim makes specific representations about the goods or services provided, but fails to disclose noncompliance with material statutory, regulatory, or contractual requirements that make those representations misleading with respect to those goods or services.”

From the decision:

By submitting claims for payment using payment codes corresponding to specific counseling services, Universal Health represented that it had provided specific types of treatment. And Arbour staff allegedly made further representations by using National Provider Identification numbers corresponding to specific job titles. By conveying this information without disclosing Arbour’s many violations of basic staff and licensing requirements for mental health facilities, Universal Health’s claims constituted misrepresentations.

However, omissions and misrepresentations would need to be “material” in order for liability under the FCA, the Court said. And the FCA’s materiality requirement is “demanding.” In other words, if it’s a trivial breach, there is no FCA liability.

From the decision:

An undisclosed fact is material if, for instance, “[n]o one can say with reason that the plaintiff would have signed this contract if informed of the likelihood” of the undisclosed fact. Junius Constr. Co. v. Cohen, 257 N. Y. 393,

400, 178 N. E. 672, 674.

When evaluating the FCA’s materiality requirement, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive.

A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular requirement as a condition of payment. Nor is the Government’s option to decline to pay if it knew of the defendant’s noncompliance sufficient for a finding of materiality. Materiality also cannot be found where noncompliance is minor or insubstantial.

This was a point of debate during oral arguments. From an argument analysis:

On one side of the matter, Chief Justice John Roberts was sympathetic to the contractor’s concerns. For example, in a dialogue with Deputy Solicitor General Malcolm Stewart … he proposed a hypothetical involving a large government contract in which the contractor complies with all of the terms except for a “buy America” term for staplers.

Stewart agreed with the Chief Justice that the failure to buy American staplers would justify the government in withholding one hundred dollars (the cost of the staplers from the contract price).

Under the federal government’s theory of the case, because that defect was sufficiently material to justify withholding the contractor’s claim for payment, the contractor’s claim for payment would be actionable under the False Claims Act (and thus subject to punitive damages).

When Justice Elena Kagan followed up, pressing Stewart to explain what kinds of terms would be immaterial – so that their breach would not justify a False Claims Act suit – Stewart took the position that all of the government’s contract terms are material. It is pretty clear, at a minimum, that some of the Justices will not go that far.

And indeed, the Court did not.

Conversely, FCA liability is also not limited to the violation of requirements that are contractually listed as conditions to be fulfilled before payments. Contrary to the defendant’s arguments, “FCA liability for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment.”

In other words, something might rise to the level of liability under the FCA even though the government, for whatever reason, didn’t list the particular requirement as a pre-condition for payment.

This places the burden on contractors to understand—and maybe in some cases intuit—which potential violations are material or not.

What This Means for Government Contractors

It’s probably a relief to government contractors that the Supreme Court has clarified that immaterial non-compliance with rules and regulations will not give rise to liability under the FCA. There is still a lot of room, however, for government contractors to be uncomfortable.

On one hand, the Court takes very seriously the importance of complying with all the relevant provisions of the contract or regulation in question; on the other hand, the court limited the potential liability exposure of government contractors through the “strict enforcement of the FCA’s stringent materiality and scienter provisions.”

At the end of the day contractual pre-conditions of payment are neither a defensive shield for, nor necessarily a knock-out punch to, contractors when it comes to potential liability under the FCA. Conditions of payment under FCA may still be relevant in some cases, but they are not automatically dispositive as to the question of liability under the FCA.

Bottom line: it’s very clear that the standard is high for people working with the government, and we expect plaintiffs to continue to pursue these cases.

While it’s helpful for government contractors that the court emphasized materiality, the issue for anyone doing business with the government is how expensive it is to defend these cases in the first place.

That’s why having a rigorous internal compliance process whenever you do work with the government is important. As I have said before, the win is not being exonerated; the win is never having a suit brought against you in the first place.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn