We previously reported on the viability of the “implied certification” theory of FCA liability based on oral argument before the Supreme Court in Universal Health Services, Inc. v. U.S. ex rel. Escobar. We concluded that the theory—under which a claim for payment can be false without an express certification, but because the government contractor has not complied with an applicable statute, regulation, or contractual provision—did not appear to be headed for extinction. It turns out we were right.
On June 16, 2016, in a unanimous decision authored by Justice Clarence Thomas, the Supreme Court endorsed the implied certification theory, while providing some guidance on its application. Significantly, the Supreme Court ruled that liability can be triggered without an express certification and regardless of whether the noncompliance concerned an explicit condition of payment, resolving some disagreement among lower courts. This was disappointing for the defense bar, which had advocated for such limitations. But, the Court still required a nexus between a specific representation by the contractor and the violation. The Court looked to common law fraud based on omissions to conclude that nondisclosed violations must make the contractor’s representations about goods or services “misleading” for potential FCA liability to arise.
In addition, although the scope of the materiality element was not a question presented for review, the Court addressed the materiality element separately at some length. The Court did not provide guidance in the form of bright line rules on what is or is not material (with the exception of “minor or insubstantial” noncompliance). This may, however, be a blessing in disguise. Calling materiality a “demanding” standard, the Court stated that materiality is not necessarily satisfied even where a contractor violates an express condition of payment or the Government could have declined to pay the claim had it known of a contractor’s violation of a legal requirement. The Court also identified some facts that would be relevant to, albeit not necessarily dispositive of, materiality, e.g., whether the Government “regularly pays a particular type of claim in full despite actual knowledge” of violations. In sum, it seems that materiality will remain a fact-specific issue subject to considerable wrangling by litigants to be resolved by lower courts.