In a decision that will impact every provider who supplies goods and services to the federal government, the Supreme Court today approved the implied false certification theory as a basis for liability under the False Claims Act (FCA). Specifically, in Universal Health Services v. Escobar, the Court ruled that the FCA is violated whenever a provider submits a claim for payment to the government yet misrepresents its compliance with material statutory, regulatory or contractual requirements—whether expressly or through omission. However, the Court emphasized that the misrepresentation must be “material” to the government’s payment decision in order to be actionable under the FCA. While it borrowed from a variety of sources, the Court was clear that “under any understanding of the concept, materiality looks to the effect on the likely or actual behavior” of the party receiving services.

The Court made clear that the materiality standard is a “demanding” one that prevents the government from imposing liability for all noncompliance; and the Court emphasized that the FCA is not “an all purpose antifraud statute” or a means for punishing “garden-variety breaches of contract and regulatory violations.” For a misrepresentation to be material, it must have “a natural tendency to influence, or be capable of influencing” the government’s payment decision. A plaintiff cannot prove materiality merely by showing that the government “would have the option to decline to pay if it knew of the defendant’s noncompliance.” Additionally, if the government chooses to “pay a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”

While the Court acknowledged that expressly designating a provision as a condition of payment is relevant to determining whether the provider “knowingly” submitted a false or fraudulent claim, the inquiry is not dispositive. For example, even if the government “failed to specify that guns it orders must actually shoot,” a provider of firearms could nonetheless face liability under the FCA if either (1) it has actual knowledge that the government “routinely rescinds contracts if the guns do not shoot” or (2) a “reasonable person would realize the imperative of a functioning firearm.” Similarly, the Court reasoned that simply labeling a regulatory requirement as a condition of payment does not necessarily give rise to FCA liability if violated, stating “[w]hat matters is not the label the Government attached to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

The Court’s analysis rejected UHS’s narrow interpretation (FCA liability attaches only if the regulation is expressly identified as a condition of payment) as well as the expansive view of the government and First Circuit (any violation is material if the defendant knows the government would be entitled to withhold payment). As the lower courts begin to apply the implied certification theory set forth in Escobar, it will be interesting to see the practical impact of the Court’s “demanding” materiality standard.