In a resounding victory for whistleblowers, the Supreme Court, in Universal Health Services, Inc. v. United States et al. ex rel Escobar et al., found that a defendant could be liable for violating the False Claims Act under a theory of implied false certification. This holding supports the proposition that when a defendant submits a claim for payment, but fails to disclose its non-compliance with a law, rule, or regulation, that defendant can be found liable under the False Claims Act, if the failure to disclose is misleading and material. The Court found that the government’s decision whether or not to make a requirement a condition of payment is not a prerequisite to liability. If it was, the Court reasoned, the government could simply make all rules and regulation a condition of payment. Instead the Court in a well-reasoned opinion, focused on materiality, and in doing so rejected the Seventh Circuit’s holding in United States v. Sanford-Brown, Ltd.
The Supreme Court first held that the implied false certification theory can create liability when a defendant makes misleading omissions, such as its violation of a regulation, if that omission relates to the goods or services provided. The court went on to explain that under common-law fraud, half-truths, not providing an important fact, is a misrepresentation, and a defendant must prevent his words from being misleading. However, the Court also held that to create liability, a defendant’s omission must be material, and a defendant must have the required knowledge or scienter. Knowledge is defined as actual knowledge, deliberate ignorance, or reckless disregard of the truth.
Materiality and fraud are closely aligned and the False Claims Act is a fraud statute. The False Claims Act itself defines materiality as “having a natural tendency to influence, or be capable of influencing.” 31 U.S.C. § 3729(b)(4). Materiality means that the omission, or misrepresentation, of compliance with a regulation must be important to the government’s decision to pay the claim. The Supreme Court gave the following examples of materiality:
“Having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property” 31 U.S.C. § 3729(b)(4).
Would a reasonable man think it important, or did the defendant know or have reason to know that the victim would think it was important.
On the other hand, the Court also stated that if the government has actual knowledge of the misrepresentation, yet still pays the claim, that is evidence that the misrepresentation is not material.
The Supreme Court vacated the case and remanded it for further proceedings consistent with its opinion.