In its June 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Supreme Court held that implied certification claims are viable under the False Claims Act (FCA), but only in certain circumstances. In the year and a half since the Court handed down Escobar, dozens of lower courts have addressed issues left uncertain by the Supreme Court's ruling, above all: (i) when does a claim for payment constitute a false implied certification of compliance with a regulatory or contractual obligation; (ii) what suffices to allege or prove that alleged non-compliance was material to the government's decision to pay; and (iii) what suffices to allege or prove scienter. This article traces the debates in the lower courts concerning these issues, some of which are just now beginning to return to the Supreme Court in petitions for certiorari.1
A few key takeaways:
The lower courts remain divided over the circumstances in which false implied certifications may be found, with many treating the two conditions identified in Escobar as exclusive, but others, often relying on pre-Escobar Circuit precedents, finding implied certifications in other circumstances as well. Many courts have followed Escobar's instruction to treat continued government payment in the face of knowledge of alleged non-compliance as strong evidence of the alleged non-compliance's immateriality to government payment and so have dismissed complaints or granted summary judgment to defendants on that basis; but a minority of courts, sometimes with the urging of the Justice Department, have kept claims alive despite informed and ongoing payment of claims by the government. The issue may be headed up to the Supreme Court in a pending petition for certiorari filed by Gilead Sciences in Gilead Sciences, Inc. v. United States ex rel. Campie, No. 17-936 (docketed Jan. 3, 2018). Only a few courts have so far picked up on an aspect of Escobar that deserves more attention: the Court's holding that relators and the government must allege and prove not just that a defendant's non-compliance was material to the government's decision to pay, but also that the defendant knew the non-compliance was material at the time it sought payment. I. FALSE IMPLIED CERTIFICATIONS
Without "resolv[ing] whether all claims for payment implicitly represent that the billing party is legally entitled to payment," Escobar, 136 S. Ct. at 2000, the Escobar Court held that "the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths," id. at 2001. The Court's use of the phrase "at least" in describing the conditions giving rise to false implied certifications has caused disagreement among lower courts over whether Escobar created a mandatory two-prong test "or simply defined one situation in which liability may arise under this theory." United States ex rel. Forcier v. Computer Scis. Corp., 12 Civ. 1750, 2017 WL 3616665, at *12 (S.D.N.Y. Aug. 10, 2017). Three Circuitsthe Fourth, Seventh, and Ninthhave addressed this question in published opinions.2 The Seventh and Ninth have treated the two conditions identified by the Supreme Court as exclusive. The Fourth Circuit, by contrast, has appeared to treat them as non-exclusive, thus leaving in place pre-Escobar Circuit precedents defining additional circumstances in which implied certifications may be found. District courts, particularly in Circuits where the court of appeals has yet to address this issue, have also come to different conclusions.
The Seventh and Ninth Circuits treat Escobar's two-prong test as mandatory. In United States v. Sanford-Brown, Ltd., the Seventh Circuit before Escobar had affirmed summary judgment for the defendant because the only certifications allegedly violated were contained in an agreement to participate in the Department of Education's Title IV financial assistance program, not in claims for payment made at or after the time of the alleged violations. The Supreme Court vacated the decision and remanded for reconsideration in light of Escobar. United States v. Sanford-Brown, Ltd., 788 F.3d 696, 712 (7th Cir. 2015), cert. granted, judgment vacated, 136 S. Ct. 2506 (2016). On remand, the Seventh Circuit again held that the relator had failed to establish the elements of an implied certification claim. The court explained that under Escobar, an "implied false certification theory can be a basis for liability where two conditions are met" and then quoted the conditions set forth in Escobar. United States v. Sanford-Brown, Ltd., 840 F.3d 445, 447 (7th Cir. 2016). It found that the relator had failed to satisfy the first condition because he had "offered no evidence that defendant Sanford-Brown College (SBC) made any representations at all in connection with its claims for payment, much less false or misleading misrepresentations." Id.3
The Ninth Circuit has also held, in two post-Escobar cases, that successful implied certification claims must fulfill the two conditions set out in Escobar. "First, the claim must not merely request payment, but also make specific representations about the goods or services provided. . . . Second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements must 'make those representations misleading half-truths.'" United States ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 901 (9th Cir. 2017) (quoting Escobar, 136 S. Ct. at 2001; see United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 332 (9th Cir. 2017). In Kelly, the relator alleged that the defendant contractor had violated the FCA by failing to track project costs in accordance with a particular industry standard, and by falsifying monthly cost reports to match the expected budget. Kelly, 846 F.3d at 329. The Ninth Circuit affirmed the district court's grant of summary judgment to the defendant, for two reasons: the claims for payment did not contain a specific representation suggesting that the defendant maintained costs in accordance with the particular standard at issue, and there was no evidence showing that the claims for payment had contained false or inaccurate statements. Id. at 332-33.
In Campie, the Ninth Circuit reversed the dismissal of a qui tam complaint, but it did so because, in the panel's view, the relators' allegations satisfied Escobar's two-condition test for false implied certification. The relators alleged (among other things) that the defendant had submitted claims for payment for drugs the active ingredient of which had not been manufactured in Food and Drug Administration (FDA)-approved facilities. 862 F.3d at 895-98. The Ninth Circuit found the first Escobar conditionspecific representationsmet because the defendant had allegedly requested payment for the three drugs by their FDA-approved marketing names, which, in the court's view, "necessarily refer to specific drugs under the FDA's regulatory regime." Id. at 902-903. The Ninth Circuit found the second conditionmisleading half-truthsmet because the defendant had allegedly acquired the active ingredient from an unapproved supplier and relabeled it to conceal its true provenance. Id.4
Unlike the Seventh and Ninth Circuits, the Fourth Circuit has appeared to suggest that Escobar's two-prong test does not exhaust the circumstances in which implied false certifications may be found. In United States ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015), cert. granted, judgment vacated, 136 S. Ct. 2504 (2016), the court of appeals had, before Escobar, reversed dismissal of a complaint-in-intervention alleging that the defendant contractor had failed to provide security guards who had passed required marksmanship tests. After deciding Escobar, the Supreme Court granted certiorari in Triple Canopy, vacated the judgment, and remanded for further consideration. On remand, Triple Canopy relied on Escobar's two-prong test, in particular the "specific representation" language, to argue that the government had failed adequately to allege a false representation. Triple Canopy argued that, unlike the Medicare invoices submitted in Escobar, which contained specific billing codes for counseling services, its invoices had not contained "specific representations" about the services provided, but rather "merely . . . list[ed] the number of guards and hours worked and these invoices contained no falsities on their face." Triple Canopy, 857 F.3d 174, 178 (4th Cir. 2017), cert. denied, 138 S. Ct. 370 (2017). The argument failed. The Fourth Circuit held that the request for payment for "guards" whom the defendant allegedly knew had failed to meet required marksmanship tests was a misleading "half-truth" because "[j]ust as in Universal Health, anyone reviewing Triple Canopy's invoices 'would probablybut wronglyconclude that [Triple Canopy] had complied with core [contract] requirements." Id. (quoting Escobar, 136 S. Ct. at 2000).
Absent post-Escobar guidance from the court of appeals in their Circuit, a number of district...