implied certification theory

One of the most litigated issues following the Supreme Court’s Escobar decision is whether the Court created a limited, two-part test to define the implied certification theory under the False Claims Act. In the US Court of Appeals for the Second Circuit, the prevailing view confirms that the proper interpretation of Escobar is that the implied certification theory can only proceed when the defendant made specific representations about the goods or services provided and that those representations were rendered misleading due to its failure to disclose noncompliance with material statutory, regulatory or contractual requirements. On August 10, 2017, federal district judge Deborah Batts in the Southern District of New York joined the majority view of her colleagues in U.S. ex. rel. Forcier v. Computer Sciences Corporation and the City of New York in dismissing part of the government’s complaint.

In this case, the US Department of Justice (DOJ) filed a complaint in intervention alleging the City of New York (City) and its billing contractor, Computer Sciences Corporation (CSC), submitted false claims to the Medicaid program in two ways.

First, DOJ argued that the defendants failed to adhere to Medicaid secondary payor requirements concerning the state’s Early Intervention Program (EIP), which pays for services to children with developmental delays. These requirements obligate municipalities to take “reasonable measures” to determine whether third party insurance coverage was available for the EIP services and seek reimbursement from such available payors. DOJ alleged that CSC and the City did not comply with these requirements by submitting incorrect policy numbers to third party insurers knowing that such claims would be denied and by incorrectly informing Medicaid that no third party coverage existed or such coverage had been rejected. Continue Reading Latest District Court Decision Confirms Escobar Two-Part Implied Certification Test

We previously reported on the Seventh Circuit’s decision in United States ex rel. Nelson v. Sanford-Brown Ltd.,

in which the court rejected the implied certification theory of FCA liability and granted summary judgment for the defendant.  Following the Supreme Court’s decision in the Escobar case, the Seventh Circuit revisited its decision on October 24, 2016.  Once again, the Seventh Circuit affirmed the district court’s entry of summary judgment in the defendant’s favor, this time pursuant to the standards for implied certification claims announced in Escobar.

In Escobar, the Supreme Court held that implied certification can be a basis for liability when the claim for payment makes specific representations about the goods or services provided and the defendant’s failure to disclose noncompliance with material legal obligations makes those representations “misleading half-truths.”  In Sanford-Brown, the Seventh Circuit concluded that the relator failed to demonstrate any specific representations, never mind those that were misleading.

In addition, the court applied the Escobar court’s holding that FCA plaintiffs must demonstrate materiality, holding that the relator’s claims could not survive on that additional basis.  The Seventh Circuit quoted the Supreme Court’s characterization of the materiality standard as “demanding” and “rigorous.”  The Seventh Circuit observed that, under Escobar, courts must look to the “likely or actual” payment behavior of the government payor.  The Seventh Circuit held:

Here, Nelson has offered no evidence that the government’s decision to pay SBC would likely or actually have been different had it known of SBC’s alleged noncompliance with Title IV regulations.

In fact, the court observed that the government had examined the defendant multiple times.  The court concluded:

At bottom, even assuming Nelson’s allegations are true, the most he has shown is that SBC’s supposed noncompliance and misrepresentations would have entitled the government to decline payment.  Under [Escobar], that is not enough.

This decision is consistent with what the Supreme Court held in Escobar: the government’s mere option to decline to pay claims is insufficient to establish materiality and, thus, insufficient to establish FCA liability.

Yet another federal court has rejected a False Claims Act (FCA) lawsuit brought under an implied certification theory, finding that non-compliance with federal laws and regulations that are not express conditions of payment cannot form the grounds for a FCA suit. On March 31, 2016, the suit brought by two former employees of MD Helicopters, Inc. against their former employer, a retired Army Colonel was dismissed by the U.S. District Court for the Northern District of Alabama. In reaching this ruling, the court found that an implied certification FCA claim could not be premised on the violation of either a provision of the Federal Acquisition Regulation (FAR) titled ‘Contractor Code of Business Ethics and Conduct’ (48 C.F.R. § 52.203-13) or the Truth in Negotiations Act (10 U.S.C. § 2306(a)).

Continue Reading Implied Certification FCA Suit Against Defense Contractors and Retired Army Colonel Dismissed

We have previously written several articles regarding the circuit courts’ application of the so-called “implied certification” theory of liability under the False Claims Act (FCA). That theory is the subject of a petition for certiorari in the case of United States v. Triple Canopy, on which we have previously reported.

Under the implied certification theory, a government contractor submits a false claim to the government by impliedly misrepresenting compliance with a legal obligation, upon which the government conditions payment.  Contractors do not affirmatively represent compliance with said legal obligation, but they are deemed to be aware of all legal obligations that condition payment upon their compliance. In February, the Fourth Circuit formally adopted the implied certification theory for the first time in United States v. Triple Canopy, Inc. It also joined the First and D.C. Circuits in rejecting defendants’ arguments that conditions of payment be “expressly stated.” The Fourth Circuit’s holding has demonstrated the difficulty in evaluating the existence of “implied” conditions of payment through at least one district court decision.

By contrast, in June, the Seventh Circuit decided United States v. Sanford-Brown, Ltd., becoming the first court of appeals to reject implied certification as a viable theory of falsity altogether, concluding that implied certification was inconsistent with the primary purpose of the FCA: curbing fraud against the government.

In the face of these inconsistencies, the losing parties in both Triple Canopy and Sanford-Brown have now sought further appellate review. Triple Canopy petitioned for certiorari on June 8, 2015.  The relator in Sanford-Brown, meanwhile, has petitioned for rehearing en banc, arguing that the panel’s decision should be reversed because no other court has rejected implied certification. The United States has signed onto the relator’s petition, filing an amicus brief in support of rehearing on July 9, 2015. A decision on both petitions is pending.

If the Supreme Court does take up Triple Canopy’s certiorari petition, we could see the Supreme Court speak to the viability and scope of implied certification for the first time. The significance of any Supreme Court pronouncement on this issue is massive. For example, FCA cases are often based upon allegations that health care providers have provided medically unnecessary care to Medicare and Medicaid beneficiaries (a theory of relief rooted in implied certification). Whether an FCA plaintiff can succeed in such a case is dependent on the validity of the implied certification theory – and whether and how courts conclude that a legal obligation is a condition of payment.

A Supreme Court ruling on implied certification could also impact FCA claims arising out of alleged Stark Law and alleged Anti-Kickback Statute (AKS) violations. As we noted last week in our discussion of the Tuomey case, implied certification cases relying on the Stark Law can result in astronomical damages calculations. And as we noted last month in our discussion of the government’s settlement with Hebrew Homes Health Network, Inc., the same is true for cases based upon AKS violations.

We will continue to watch developments in Triple Canopy and Sanford-Brown.

We have previously posted about the United States Court of Appeals for the Fourth Circuit’s January 8 panel decision in U.S. ex rel. Badr v. Triple Canopy and its implications for “implied certification” False Claims Act (FCA) claims based on breaches of contract in the Fourth Circuit.  On Monday, March 9, the Fourth  Circuit denied Triple Canopy’s petition for rehearing en banc.  In seeking rehearing, Triple Canopy argued that, among other things, the Fourth Circuit’s decision expands the implied certification theory of FCA liability beyond the bounds recognized in other jurisdictions, rendering the Fourth Circuit an outlier:

Despite this clear and restrained jurisprudence, the panel decision embraced the theory of implied certification and expanded it beyond the bounds ever considered by this Court or applied by those circuits which recognize the theory. Under the panel’s theory, any knowing breach of contract is a violation of the FCA.

Further:

And by not even restricting viable implied certification claims to circumstances where compliance with a statute or contractual provision was an express condition of payment, the panel’s opinion abandoned that safeguard in favor of making every contract breach an FCA violation. This is a striking expansion of FCA liability, especially where this Court has repeatedly rejected such an outcome.

Triple Canopy cited the Western District of Virginia’s decision in Skinner v. Armet Armored Vehicles, Inc., on which we also recently posted, as an example of the potentially overly broad reach of the FCA in the Fourth Circuit after Triple Canopy.  While the arguments advanced in favor of rehearing were consistent with many of the criticisms the Triple Canopy opinion has drawn, the Fourth Circuit was not convinced, declining to revisit its decision.

We recently posted about the Fourth Circuit’s decision in United States ex rel. Badr v. Triple Canopy, — F.3d —-, 2015 WL 105374 (4th Cir. Jan. 8, 2015).  In that case, the court explicitly recognized the implied certification theory of liability under the False Claims Act (FCA) and held that some contractual violations can give rise to implied certification claims.  We also noted that the decision failed to provide meaningful guidance for lower courts to determine which types of contractual violations can give rise to such claims.  On February 10, 2015, the U.S. District Court for the Western District of Virginia issued a decision that demonstrates the uncertainty following Triple Canopy.

The district court in Skinner v. Armet Armored Vehicles, Inc., No. 4:12-cv-00045, 2015 WL 540156 (W.D. Va. Feb 10, 2015), granted a motion for reconsideration of its prior dismissal of a relator’s implied certification claims under the FCA, ostensibly as a result of Triple Canopy.  While the district court acknowledged that Triple Canopy was not “a reversal of standing precedent” (in that previously, the viability of implied certification claims had simply been questioned in the Fourth Circuit), the district court determined that Triple Canopy provided sufficient cause to reconsider.  The Skinner court then held:

Following the language in Triple Canopy, Plaintiff alleged that [Defendants] made a request for payment and knowingly “withheld information about its noncompliance with material contractual provisions.”  Plaintiff alleged that [Defendants] knew that the vehicles for which it was billing the government did not meet the ballistic protection requirements of its contracts with the government.  Nevertheless, Defendants billed and collected for vehicles it knew did not meet the contract specifications.  Under the guidance of Triple Canopy, the allegations make out a claim for “implied certification” claims[sic] under the FCA.

The district court also rejected the defendants’ argument that Triple Canopy should be cabined to its facts, instead finding that “the language employed by the Court was inclusive; they set forth the elements of an implied certification claim generally.”

What the Skinner opinion does not do is something the Triple Canopy court did: analyze whether the contractual provisions allegedly breached were sufficient to state a claim under the FCA.  While the “common sense” materiality analysis the Triple Canopy court employed to answer this question imparted little guidance for future courts dealing with other facts, the district court in Skinner did not undertake a similar analysis.  Nor did the Skinner court evaluate whether the alleged contractual breaches were conditions of payment, the essential cornerstone of the falsity analysis in an implied certification case.

Instead, the Skinner court appears to construe Triple Canopy to mean that any knowing contractual violation is sufficient to plead a false claim.  Assuming a complaint makes a conclusory assertion that a contractual term is or was material, evaluating that assertion seems, in the Skinner court’s view, to be a question for another day: “Defendants are free to argue that those specifications were immaterial.  This does not change, for pleading purposes, the fact that Plaintiff has alleged that Defendants’ implications to the government in submitting its invoices were demonstrably false.  For this reason, it does not negate the fact that, under Triple Canopy, Plaintiff has stated a claim for violation of the False Claims Act.”

The difficulty with this holding is the fact that, as even the Triple Canopy court recognized, an FCA claim is not a mere alternative to a breach of contract claim.  It is fundamental that not every contractual (or regulatory or statutory) violation states a claim for fraud under the FCA.  It will be interesting to see how other district courts within the Fourth Circuit apply Triple Canopy to implied certification claims in future cases.

The Fourth Circuit’s January 8, 2015 decision in United States ex rel. Badr v. Triple Canopy, Inc. is notable in several respects.  The decision announces the court’s explicit endorsement of the “implied certification” theory of False Claims Act (FCA) liability.  However, it leaves some uncertainty regarding how that theory is to be applied in courts within the Fourth Circuit.  The decision also contains language arguably suggesting that in such cases, Government-intervened FCA claims may have a higher likelihood of survival than FCA claims pursued exclusively by relators.

Triple Canopy contracted to provide security services at a military base in Iraq.  The Government’s complaint in intervention alleged that Triple Canopy’s employees did not possess the weapons qualifications they were required to have under the contract, that supervisors knew they were not qualified, and that they created false documents to hide the deficiencies.  The contract itself did not condition payment on compliance with the weapons qualification requirements.

The Fourth Circuit reversed the district court’s dismissal of the FCA claims.  While the Fourth Circuit acknowledged that the FCA cannot be used to “shoehorn” a breach of contract claim into a claim under the FCA, it held that noncompliance with a contractual term can give rise to an implied false certification claim under the FCA in some instances.  This holding in itself is not remarkable except inasmuch as the Fourth Circuit explicitly endorsed the implied certification theory of FCA liability for the first time.  What is notable, however, is the minimal guidance provided by the court regarding which types of contractual violations can support FCA claims.

Essentially sidestepping the FCA’s element of falsity, the court held that the elements of materiality and scienter are the best gatekeepers with respect to whether a contractual violation can give rise to a cognizable claim.  After finding the Government had easily pled scienter, the court then addressed materiality.  The court held that “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.  In addition, Triple Canopy’s actions covering up the guards’ failure to satisfy the marksmanship requirement suggest its materiality.  If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.”

While the court’s decision may have “common sense” appeal, it falls short of providing a clear standard for determining when a contractual violation can give rise to an FCA claim and when a violation is sufficiently benign that it cannot.  The Triple Canopy court was undoubtedly bothered by the idea of security forces lacking the requisite weapons training (as well as by the associated cover-up), but this begs the question of how the materiality determination should be made in other cases, when and by whom.

Triple Canopy stands in stark contrast to the clarity imparted by the Fourth Circuit’s own decision last year in United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2014), in which the relator alleged that violations of FDA safety regulations gave rise to FCA claims.  There, the Fourth Circuit affirmed the district court’s dismissal of the relator’s complaint, and clearly held that materiality and falsity are “distinct elements of an FCA claim.”  The court reviewed the relevant regulatory and statutory framework and determined that because Medicare/Medicaid payment was not conditioned on compliance with the safety regulations in question, the relator had failed to plead falsity.  Further, “were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction the use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.”

The Fourth Circuit’s objective analysis of the relator’s claim — and in particular the distinct element of falsity — in Omnicare differs substantially from its Triple Canopy decision, in which the court seemed to rest its holding on what is fundamentally a gut-driven assessment of materiality.

Finally, it is worth pointing out some interesting language in the Triple Canopy decision: the suggestion that the Government’s decision to intervene (or not) is relevant to whether a contractual violation is merely “garden-variety” or whether it can sustain an FCA claim.  The court stated in a footnote that “there are several key distinctions between this case and what we viewed as garden-variety breaches of contract in [previous cases].  First, this case does not involve uninjured third parties making claims against their former employers or contracts under which the Government does not ‘express dissatisfaction.’  To the contrary, the Government has clearly expressed its displeasure with Triple Canopy’s actions by prosecuting this action.”  Is this a signal from the court that unintervened claims pursued exclusively by relators will be subject to a more exacting level of scrutiny?  Maybe.  Indeed, Omnicare was just such a case.  However, the court’s language must be reconciled with the fact that even where the Government declines to intervene, a relator acts on its behalf.