By Marcia Coyle, Supreme Court Brief

The federal False Claims Act is the government’s chief fraud-fighting tool, and a lucrative one at that. On Tuesday, the U.S. Supreme Court wrestled with how false a claim for payment must be in order to earn the law’s punishing penalties.

In Universal Health Services v. Escobar, a major health insurer, backed by medical, pharmaceutical, private colleges, criminal defense groups and others, attacked a theory of liability known as “implied certification.”

“This is a theory made up by the plaintiff’s bar and it has run amok,” argued Universal’s counsel Roy Englert Jr. of Robbins, Russell, Englert, Orseck, Untereiner & Sauber.

Englert’s proposed solution “creates a roadmap for fraud,” countered Julio Escobar’s counsel, David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who is supported in the high court by the United States, 22 states, mental health organizations, National Whistleblower Center, a public employee union and others.

At issue is a provision in the False Claims Act that prohibits “knowingly presenting or causing to be presented a false or fraudulent claim for payment or approval.” Penalties can total three times the amount of the claim plus fines of $5,500 to $11,000 per claim.

The two veteran high court litigators made their arguments with the tragic death of a teenager as a backdrop. Yarushka Rivera, a special-needs teen, was diagnosed with bipolar disorder and put on an anti-seizure drug at a mental health clinic in Massachusetts run by Universal. She suffered an adverse reaction to the drug, went to the hospital twice with seizures and died in 2009.

The state Department of Public Health later determined that the teenager had been treated by staff without the proper licenses and supervision in violation of a number of regulations. In 2013, Yarushka’s parents filed a so-called qui tam suit under the state and federal false claims acts, alleging that Universal had sought payment for its services despite knowing that its operations failed to comply with a variety of licensure and supervision requirements.

The U.S. Court of Appeals for the First Circuit ruled that Escobar’s claims could go forward. It held that a claim for government funds may be “false or fraudulent” within the meaning of the False Claims Act even if no express falsehood appears on the face of the claim itself.

This “implied certification” theory holds that when a claimant explicitly or implicitly represents to the government that it has satisfied all material contractual or legal requirements, it can be held liable under the False Claims Act if it knows that representation to be untrue. There is a circuit split over whether False Claims Act cases may be brought under this theory.

During Tuesday’s arguments, Englert told the justices that the implied-certification theory did not exist from the origin of the False Claims Act in 1863 until 1994. In the latter year, the U.S. Court of Federal Claims used the theory for the first time. The theory has been responsible for the “dramatic” expansion of the act for the last 22 years, he added.

Englert essentially argued that a claim for payment is not false under the act if it does not contain an explicit misstatement, and it also cannot be fraudulent unless the claimant was under a duty to disclose its violation of legal requirement.

Justice Elena Kagan had trouble with that argument. In demanding payment for satisfaction of the contract, you are not making a recommendation that you have satisfied the contract?” she asked.

“Not that broadly,” he replied. “Not every jot and tittle of the contract.” He argued that breaking a promise is a contract breach, but fraud depends on what was in the claim for payment.

But Frederick, his opponent, told the justices, “When a claimant asserts a right to government funds without disclosing that it has knowingly violated the government’s material payment conditions, that claim is both false and fraudulent regardless of whether it contains” an express false statement.

Chief Justice John Roberts Jr. asked: “Is your position that every material breach of a contract gives rise to a claim under the False Claims Act as false and fraudulent?”

Frederick said no, adding that the act has two other requirements. “One is that they be done knowingly and it was going to be material to the government,” he said.

Those two requirements—materiality and knowledge—will solve the bulk of the problems cited by his opponents, Frederick said. He cited Stanford Law School professor David Engstrom’s amicus brief and his empirical research on the False Claims Act to show that the implied certification theory has not created a spike in FCA cases and the bulk of cases in which the United States does not intervene are dismissed.

Supporting Frederick, deputy solicitor general Malcolm Stewart noted that the implied certification theory’s name may be just 22 years old, “but the concept that a person can be held liable for fraud even though he says nothing explicitly false but labors to create a false impression, that’s been around for ages.”

IMAGE: Credit: NLJ

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