In early coverage of the Supreme Court's decision in United Health Services, Inc. v. U.S. ex rel. Escobar, defense attorneys suggested that whistleblowers face new limits on their claims under the False Claims Act. The opposite is true: The 8-0 opinion in Escobar was a complete victory for the brave people who blow the whistle on fraud against the federal government.
This expert analysis by TELG managing principal R. Scott Oswald was published by Law360 on June 22, 2016. The full article is available at Law360. (Site requires paid subscription.)
Let’s Be Real: Escobar Was a Clear Defeat for FCA Defendants
Last week’s decision by the U.S. Supreme Court in United Health Services, Inc. v. U.S. ex rel. Escobar was — the spin of defense attorneys notwithstanding — an unvarnished victory for government prosecutors, taxpayers, and the qui tam relators who file lawsuits on their behalf under the venerable False Claims Act (FCA).
The 8-0 opinion by Justice Clarence Thomas clarified three key points of law, all in favor of those who battle dishonest contractors:
Grasping at straws, some defense-side commentators have trumpeted dicta that said the government's regular, knowing, and full payment for work that violates a certain rule would be evidence of that rule's immateriality. Well, of course it would — but that's a rare scenario, it's already the law, and it wouldn't be dispositive anyhow, according to Justice Thomas.
In short, the defense bar doth protest too much: Its panicky insistence that the playing field isn't much altered by the Supreme Court's unanimous embrace of what, at oral arguments, the United Health Services attorney derided as "a theory made up by the plaintiffs' bar" is, in fact, a sure indicator of Escobar's significance.
What was decided
Let’s review what the Court actually decided in Escobar. Two questions were accepted for review: Whether the theory of implied certification is viable under the FCA and, if it is, whether it applies only to rules that are express conditions of payment.
Until now, contractors who are accused of defrauding the government have regularly used both of these issues to disavow liability under the FCA. In Escobar, for instance, defendant UHS is accused of billing the federal government — via the Medicaid program in Massachusetts — for medical services that UHS provided without proper licensing and supervision, leading to the tragic death of the relators' teenage daughter.
In response, UHS argued that it can't be held liable under the FCA because, in relevant part, it never lied directly to the government about being licensed — and, in any case, that compliance with various licensing rules wasn't specified, in advance, as a condition of payment.
At their core, such arguments rely on weasel words — and, in his no-nonsense opinion for an undivided Court, Justice Thomas squarely rejected both of them.
First Justice Thomas tackled the question of implied certification: Does the FCA require an explicit falsehood in order for a payment claim to be actionable? Clearly not, he said — if a provider bills the government for a particular service while failing to disclose that it didn't follow material rules, it can be held liable for misrepresentation by omission. The idea of a misleading half-truth is well established in the law, he said, and it applies to the FCA.
Furthermore, noted Justice Thomas, the alleged actions of UHS in Escobar fit the bill exactly: Reimbursement claims that cited standard codes for specific medical services, along with provider codes for purportedly qualified professionals who delivered them, "were clearly misleading in context."
"Anyone informed that a social worker at a Massachusetts mental health clinic provided a teenage patient with individual counseling services would probably — but wrongly — conclude that the clinic had complied with core … requirements [and] that, at a minimum, the social worker possesses the prescribed qualifications for the job," said the opinion. "By using payment and other codes that conveyed this information without disclosing … violations of basic staff and licensing requirements for mental health facilities, Universal Health's claims constituted misrepresentations."
This is just common sense, yet its significance should not be understated: It overturns law in the Seventh Circuit, which had rejected implied certification, and it forestalls inane debates in countless FCA cases elsewhere involving defense contractors, medical providers, and others — as in Escobar itself, where the following exchange actually happened during April’s oral argument:
Justice Sonia Sotomayor, referring to Civil War scandals that prompted the FCA’s passage in 1863: Do you think that anybody, except yourself, would ever think that it wasn't a fraud to provide [the government with] guns that don’t shoot …?
Roy T. Englert, representing UHS: Yes … Yes, depending on additional facts …
Defense attorneys now tell their clients that the death of such convolutions is "neither surprising nor groundbreaking," and perhaps they are correct. But it certainly comes as a relief to taxpayers, who still spend billions each year on (usually metaphorical) guns that don't shoot — and who now can't be told simply to accept being suckered.
Conditions of payment
The second question was, in essence, whether government contractors must get advance warning of each specific rule violation that would trigger non-payment — thereby allowing them to violate any (or, indeed, all) other rules without liability under the FCA.
Once again, Justice Thomas applied common sense: No one needs notice in triplicate to understand that the government doesn't want to pay for guns that don't shoot — and besides, "[n]othing in the text of the False Claims Act supports [such a] restriction."
Since "a reasonable person would realize the imperative of a functioning firearm," he said, "a defendant's failure to appreciate the materiality of that condition would amount to 'deliberate ignorance' … even if the Government did not spell this out."
What matters, said Justice Thomas, is the knowing violation of a material rule: "A statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information."
Such an approach cuts both ways. As some defense attorneys have emphasized, Justice Thomas also rejected the notion that violating any express condition of payment, no matter how trivial, could translate into FCA liability.
This question was never officially at issue in Escobar, but it arose during oral arguments when Malcolm L. Stewart, the deputy solicitor general of the U.S., drew incredulous responses from the bench by asserting that healthcare providers could — in theory — be held liable for fraud if they failed to disclose that they had used the wrong kind of stapler.
Not so, said Justice Thomas, referring back to the stapler discussion: Implied certification is actionable only in matters that realistically could affect the government’s willingness to pay, so it is governed by the FCA’s fact-heavy inquiry into materiality — not by bright-line rules or close readings of contracts.
As a practical matter, of course, this affects mostly defendants: Arguments about express conditions of payment, now entirely moot, typically were deployed to defeat FCA complaints in their earliest stages — not by qui tam attorneys trying to assert fraud under a "stapler standard," who would have been laughed out of court even before Escobar.
Materiality has always been part of the FCA, and the qui tam bar picks its fights carefully as a result. In Escobar, for instance, any talk of staplers was entirely misplaced: Besides hurting taxpayers, UHS stands accused of playing with life and death, as do the defendants in many FCA cases involving Medicare and defense contractors.
A victory for spin only
On both the certified questions, in sum, the Court ruled explicitly against the defendants — rejecting their arguments and, indeed, the arguments of FCA defendants in general. Justice Thomas' opinion admittedly vacated the First Circuit, which also had favored the relators, but this was a technicality: The appellate panel simply was instructed to reevaluate the case through a new lens. Even if the Escobar relators happen to lose on remand, they have won a big victory for taxpayers and those who fight on their behalf.
So how could this decision have been portrayed last week as a tie — according to the Los Angeles Times, the Court ruled "without actually deciding who wins" — or even as "a win for health-care providers," as BNA mysteriously concluded?
In part, it's the fault of qui tam attorneys: Clearly we did not explain the decision to legal reporters with enough force or clarity. But it was also a victory for defense-side spin, which portrayed some of Justice Thomas' observations in the case as "strict new limits" on FCA liability.
In reality, Escobar places precisely zero new limits on what is actionable under the FCA. As Justice Thomas makes clear — relying heavily on statutory text and precedent, as is his wont — the Court still rejects "a circumscribed view of what it means for a claim to be false or fraudulent," and relies instead on the FCA's existing requirements of materiality and scienter.
The decision "clarifies" how courts should enforce the materiality requirement, it is true, but its thrust is to emphasize just how fact-intensive this inquiry must be: Justice Thomas systematically knocks down all proposed bright lines, leaving only the somewhat tautological rule that a defendant's noncompliance with rules cannot create liability if is "minor or insubstantial" — for which he cites a 1943 Supreme Court decision.
The defense bar has especially touted as a novelty the statement in Escobar that "if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material."
Of course this is true; it has always been true. It is dicta in this case, however — and anyhow, even "strong evidence" is not dispositive. Besides, how often is this scenario met? A defendant would need to marshal an awful lot of facts to establish that the government regularly, fully, and knowingly pays claims despite a certain type of noncompliance.
If this is the best news for defendants in Escobar, it is small beer indeed.
R. Scott Oswald represents whistleblowers under the FCA and other laws. He is managing principal of The Employment Law Group, P.C.