The False Claims Act – Enforcement of the Regulatory State: Time for A Change?

Administrative Law & Regulation Practice Group Teleforum

Since the Supreme Court’s June 2016 decision in Universal Health Services, Inc., v. United States ex rel Escobar, 136 S. Ct. 1989 (2016), there has been much discussion about whether the Court’s reformulation of the standards applicable to implied false certification benefits relators or defendants.  However, the use of implied certification by relators and the DOJ to impose on defendants their interpretation of a regulation or term of a contract or grant has received much less attention.

Increasingly, relators and the DOJ have been using the FCA to pursue civil fraud claims not based on factual misrepresentations, but rather on the relator’s or the Government’s view of what the “correct” interpretation of a regulation or a contract or grant term should be.  It is not unusual for that interpretation to be different than the interpretation advanced in the promulgation of the regulation or different than the approach practiced by the promulgating agency.  As the DOJ speaks officially for the sovereign United States, the DOJ (and relators suing on behalf of the United States) reserves the right to make interpretative disagreements into claims of fraud.

This teleforum will explore implied certification where the dispute involves issues of regulatory or contractual interpretation and whether such a matter is really an administrative law dispute or fraud.   

Featuring:

• Marcia G. Madsen, Partner, Mayer Brown LLP

• Brian D. Miller, Shareholder, Rogers Joseph O’Donnell

Since the Supreme Court’s June 2016 decision in Universal Health Services, Inc., v. United States ex rel Escobar, 136 S. Ct. 1989 (2016), upholding implied false certification as a valid theory of False Claims Act liability, there has been much discussion about whether the Court’s reformulation of the standards applicable to implied false certification benefits relators or defendants.  However, the use of implied certification by relators and the DOJ to impose on defendants their interpretation of a regulation or term of a contract or grant has received much less attention.

In Escobar, the Court held that the implied certification theory “can be a basis for liability” under the FCA, “at least where two conditions are met: (i) the claim does not merely request payment, but also makes “specific representations” about the goods or services provided; and (ii) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths.”

The Court stated that any “concerns about fair notice and open-ended liability” raised by the defendant and other critics of false certification “can be effectively addressed through strict enforcement of the Act’s materiality and scienter requirements.” The Court emphasized that the materiality standard is “demanding” and “rigorous” and must be pleaded with particularity.

Nonetheless, the Court did not provide a clear test for determining whether a particular misrepresentation is material or not. At the outset, the Court noted that under both the statutory  “natural tendency to influence” standard and the common law, materiality “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” The Court emphasized that proof or refutation of materiality must be based on the conduct of the parties, which is a fact-based inquiry. The Court, accordingly, noted that “the Government's decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive.”

The Court emphasized that the subjective intentions of both the Government and the defendant are important considerations, although the examples it provided all focused on the conduct or pattern of conduct of the Government. For instance, the Court explained that proof of materiality can include the fact that the defendant knows the Government consistently refused to pay certain claims in the “mine run of cases based on noncompliance” with certain requirements. Conversely, if the Government has “actual knowledge” of the alleged violation but pays anyway, “that is very strong evidence that those requirements are not material.” The Court did not provide further discussion of the FCA’s scienter requirement.

Increasingly, relators and the DOJ have been using the FCA to pursue civil fraud claims not based on factual misrepresentations, but rather on the relator’s or the Government’s view of what the “correct” interpretation of a regulation or a contract or grant term should be.  It is not unusual for that interpretation to be different than the interpretation advanced in the promulgation of the regulation or different than the approach practiced by the promulgating agency.  As the DOJ speaks officially for the sovereign United States, the DOJ (and relators suing on behalf of the United States) reserves the right to make interpretative disagreements into claims of fraud.

This teleforum will explore implied certification where the dispute involves issues of regulatory or contractual interpretation and whether such a matter is really an administrative law dispute or fraud.   

Featuring:

• Marcia G. Madsen, Partner, Mayer Brown LLP

• Brian D. Miller, Shareholder, Rogers Joseph O’Donnell

Call begins at 1:00 p.m. Eastern Time.

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