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False Claims Act Litigation Update: US Supreme Court Decision Broadens the Target List of Potential Defendants

O n June 16, 2016, the US Supreme Court issued one of the most important False Claims Act (FCA) decisions in recent history, Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). The decision is sweeping in scope and concerns any attorney whose client receives money from federal or state governments (through contracts, healthcare programs such as Medicare or Medicaid, or other federal and state programs).  

Escobar confirmed the existence of the implied certification theory as a basis of liability. Under the implied certification theory, liability may be found when a person (entity or individual) submits a claim for payment to the federal government without meeting all of the statutory, regulatory, or contractual compliance standards associated with that claim.

Under the implied certification theory, a person seeking the payment of government funds is impliedly certifying compliance with all attendant laws, regulations, and rules. The implied certification theory expands the scope of potential FCA liability exposure exponentially by making it so anyone receiving state or federal dollars could be subject to FCA liability, which includes ruinous penalties and treble damages.

On the other hand, Escobar requires that alleged implied certification violations be tested under a "rigorous" materiality standard that the Court set forth in its decision. Under Escobar, a violation of a statutory, regulatory, or contractual obligation must be material to the government's decision to pay. Over the last two years, the materiality inquiry has become a bulwark against transforming run-of-the-mill breach of contract claims into FCA actions.

[Related: Ask Aliya: How to Manage Non-Disclosure Agreements]


It is this materiality standard that you must understand in order to best protect your corporate clients when a subpoena is served or a qui tam case is unsealed. In the FCA context, materiality asks whether the alleged violations in the complaint mattered to the government agent responsible for paying claims. Thus, if the government agent responsible for paying claims knew of all the allegations in the complaint as to why your client's claims were allegedly false, and it paid those claims anyway, then there can be no FCA liability under Escobar.  

So what should in-house counsel do in light of Escobar when a subpoena is served or a qui tam complaint is unsealed? First, take an active role in the factual development of the case. This is especially important for defendants who do not have independent in-house litigation counsel and whose in-house legal function is mostly focused on transactional matters. In particular, consider the centrality of "government knowledge" to the analysis (i.e., what did the government know about the allegations when it paid claims). To accomplish this, interviews with employees who interact with the government will be key.  

Second, consider the discovery that will be required as the case progresses. There is a movement in FCA litigation to request increased discovery from a variety of different government decision-makers early and often. Engaging employees who are familiar with how the government works (and in particular, how the government pays claims) will help in-house and outside counsel formulate the best and most effective discovery requests.  

Third, engaging employees or in-house or outside counsel who understand the government agency's functions is incredibly important. Administrative agencies are typically more flexible than government prosecutors. Additionally, agency decision-makers often have greater discretion over how to address non-compliance.

In fact, agency officials are generally expected and required to consider programmatic needs when deciding the appropriate response to non-conforming goods, services, or regulatory paperwork. Proving that the administering agency has elected not to deny payment in favor of a more measured remedy may be a decisive defense.  

[Related: Proterra's Kent Leacock Explains How to Interact with Regulators]


Fourth, identify the employees who are well-versed in the range of responses the regulatory agency makes to instances of non-compliance. If an agency routinely pays a particular deficient claim, a government contractor or healthcare provider would reasonably expect that deficiency was immaterial to the government's decision to pay claims. Knowing what an agency routinely does comes only with experience.

After all, many agencies are notorious for giving vague, little, or no guidance concerning what they expect from contractors in terms of regulatory compliance or how the agency will respond to non-compliance. Indeed, it is the dearth of agency guidance that has spawned an entire industry of compliance consultants. This reality of agency practice will likely make it difficult for the government to show a contractor knew or should have known a particular non-compliance would be material to the agency's decision to pay.

By validating the implied certification theory, Escobar has certainly opened the door to more FCA litigation. But its imposition of a rigorous materiality standard gives potential defendants a solid platform from which to defend cases that are nothing more than mere regulatory violations. In this vein, Escobar rebalances FCA jurisprudence to prevent well-intentioned companies from being subjected to the Act's draconian penalties based on technical regulatory non-compliance or post hoc rationalizing.

About the Authors

Mitchell CohenMitchell S.Y. Cohen is senior vice president and general counsel at Vituity. mitchell.cohen@vituity.com

Robert RhoadRobert T. Rhoad is a partner in the Government Contract, Investigations, and International Trade practice at Sheppard, Mullin, Richter and Hampton. rrhoad@sheppardmullin.com

Matthew TuretzkyMatthew Turetzky is an associate in the Government Contracts, Investigations, and International Trade practice at Sheppard, Mullin, Richter and Hampton. mturetzky@sheppardmullin.com


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