United States: Will The Supreme Court Weigh In? Implied Certification Theory Under The False Claims Act

Last Updated: October 26 2011
Article by Thomas S. Crane and Brian P. Dunphy

For many years, federal courts have grappled with the issue of whether factually accurate claims submitted to the government for payment can nevertheless be "false or fraudulent," pursuant to an implied certification theory, under the False Claims Act (FCA) because of an underlying violation of law. The First Circuit has become the most recent one to issue an opinion on this implied certification theory adding to a pre-existing split in the circuits about the viability of and standards applicable to the theory.  As a result, two petitions for certiorari have been filed in the United States Supreme Court in United States ex rel. Hutcheson v. Blackstone Med. Inc. and State of New York et al. ex rel. Westmoreland v. Amgen Inc. et al. Whether the Court takes up the issue bears watching because this area of the law requires clarification.

Two Types of False Claims: Factually and Legally False

Many courts have held that there are two types of false claims: factually false (e.g., services are billed for, but never provided), and legally false. A legally false claim arises when a claim fails to satisfy an underlying legal requirement because of a violation of a statute, regulation, or contract ("law"). The underlying violation of law can become actionable under the FCA through a certification, which can be either express or implied. First, express certification means that the party submitting the claim at some point in time affirmatively certified compliance with a law, and courts have generally held that the claims for payment are thereby false or fraudulent because of a violation of such law, especially whenever the certification of compliance is filed with the claim.

Second, implied certification generally means that a party had an ongoing obligation to comply with a law irrespective of whether the party submitting the claim made a direct certification of compliance. In other words, a court will hold a party liable under the FCA, typically where the underlying violation of law is sufficiently important to cause a court to view the claim as tainted — even though that party never directly certified its compliance to the government when submitting the claim. As explained by the Ninth Circuit Court of Appeals, "Implied false certification occurs when an entity has previously undertaken to expressly comply with a law, rule, or regulation, and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required in the process of submitting the claim." Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010), cert. denied, 131 S.Ct. 801 (2010) ("Ebeid").

The longstanding question under the FCA is whether it can be properly used to police underlying violations of law where such violation is not clearly tied to the payment of claims. This issue has been widely litigated, for example, in FCA cases predicated on alleged violations of the Anti-Kickback Statute (AKS). In the Affordable Care Act (ACA) in 2010, however, Congress attempted to end the uncertainty over the use of implied certification to prosecute FCA cases premised on alleged AKS violations by amending the AKS in the health care reform legislation to add the following language: "In addition to the penalties provided for in this section ..., a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of the [False Claims Act]." 42 U.S.C. § 1320a-7b(g).

These petitions for Supreme Court review are significant for a number of reasons. First, because the ACA amendment only has prospective effect, litigation will remain for AKS claims predating the ACA's enactment. Second, the ACA amendment does not address in any way the continuing uncertainty in the law regarding the use of the implied certification theory to invoke the FCA as an enforcement tool with regard to the myriad regulations under which providers and manufacturers operate. Third, while the Supreme Court declined to review the implied certification theory in Ebeid, the Supreme Court has a new opportunity to review this theory based on a different standard articulated by the First Circuit.

Circuit Courts Have Articulated Different Standards for Legally False Claims

The Second, Third, Sixth, Ninth, Tenth, Eleventh and District of Columbia Circuit Courts have all recognized implied certification in some form. Generally, these courts have applied the implied certification theory where the violation of law is an express condition of payment or an express condition for eligibility for payment, for example, where the violation of law, if true, would disqualify the party from eligibility for the contract. While these distinctions alone have created a split in the circuits, the First Circuit in United States ex rel. Hutcheson v. Blackstone Med. Inc. fashioned yet another approach. The various standards of liability are discussed below.

Standard 1: To be false, a claim must violate an express prerequisite to payment.

One approach has been to limit the reach of the FCA to claims where the condition violated is an express prerequisite to payment (i.e. the government wouldn't pay if there were a violation of a statute, regulation, or contract). The rationale is that the FCA is not a tool to enforce regulatory violations.

In a seminal certification case, the Second Circuit addressed this question in the context of alleged violations of the FCA where defendant physicians submitted claims to Medicare for reimbursement of spirometry procedures that did not comply with the standard of care. The Second Circuit was clearly troubled by the use of the FCA here, and held that "implied false certification is appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid." Mikes v. Straus, 274 F.3d 687, 700 (2d Cir. 2001) (emphasis added).

The Third and Sixth Circuits have relied on the reasoning in Mikes. The Third Circuit, finding that plaintiff stated a claim under the FCA based upon violations of the AKS, held that "to plead a claim upon which relief could be granted under a false certification theory, either express or implied, a plaintiff must show that compliance with the regulation which the defendant allegedly violated was a condition of payment from the Government." United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573380 (3rd Cir. June 30, 2011) (emphasis added).

Also following the reasoning in Mikes and rejecting a claim based upon violations of a standard of care and HIPAA, the Sixth Circuit recently held that "noncompliance [with a regulation] constitutes actionable fraud only when compliance is a prerequisite to obtaining payment." United States ex rel. Chesbrough v. VPA, P.C. dba Visiting Physicians Ass'n, No. 10-1494, 2011 WL 3667648, at *4 (6th Cir. Aug 23, 2011) (emphasis added); see also United States ex rel. Augustine v. Century Health Servs., Inc., 289 F.3d 409, 415 (6th Cir. 2002) ("liability can attach if the claimant violates its continuing duty to comply with the regulations on which payment is conditioned.").

Other circuits have followed a similar approach to Mikes. See e.g. United States ex rel. Conner v. Salina Reg. Health Ctr., Inc., 543 F.3d 1211, 1218 (10th Cir. 2008) ("the analysis focuses on the underlying contracts, statutes, or regulations themselves to ascertain whether they make compliance a prerequisite to the government's payment.") (emphasis added); see also Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010) (stating that although the Fifth Circuit has not yet recognizing implied certification, the claim should be dismissed because "unless the Government conditions payment on a certification of compliance, a contractor's mere request for payment does not fairly imply such certification.") (emphasis added).

The Ninth Circuit has used language similar to Mikes, finding the reasoning of the Second Circuit to be "persuasive." Ebeid, 616 F.3d at 998. The case involved allegations that the defendants violated the state's common law prohibition on the corporate practice of medicine, the Stark self-referral law, and certain Medicare regulations related to restrictions on self-referrals for home health services. Id. at 1000-1001. In that case, the Ninth Circuit affirmed dismissal of the complaint for failure to meet the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure, but also adopted the implied certification theory, without deciding the reach of this theory. Indeed, the court expressly declined to adopt the Mikes standard. Id. at 998 n.3.

Standard 2: The violation of law need not be a precondition for payment.

Other circuits have taken a more expansive view of the implied certification theory, finding it applicable even where the underlying violation of law is not a precondition of payment.

In a recent decision, the District of Columbia Circuit addressed this question in the context of allegations that defendant's business relationships with contractors participating in a project to decommission and decontaminate buildings at a Department of Energy site violated contract provisions related to conflicts of interest. United States v. Sci. Apps. Int'l Corp., 626 F.3d 1257, 1269 (D.C. Cir. 2010) ("SAIC"). In that case, the violation was not an express prerequisite to payment. The District of Columbia Circuit fashioned a broad reading of the FCA holding that "to establish the existence of a 'false or fraudulent' claim on the basis of implied certification of a contractual condition, the FCA plaintiff ... must show that the contractor withheld information about its noncompliance with material contractual requirements." Id. at 1269. The "non-compliance with contract terms may give rise to false or fraudulent claims, even if the contract does not specify that compliance with the contract term is a condition of payment." Id. at 1269.

The Eleventh Circuit also departed from Mikes when it held that a violation of either conditions of payment or conditions of participation could give rise to FCA liability under an implied certification theory. McNutt ex rel. United States v. Haleyville Med. Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005) ("When a violator of government regulations is ineligible to participate in a government program and that violator persists in presenting claims for payment that the violator knows the government does not owe, that violator is liable, under the Act, for its submission of those false claims.").

Standard 3: To be false, a claim must misrepresent compliance with a material condition for payment.

The First Circuit adopted another approach in a case that involved claims submitted by innocent third-parties. The court reversed the dismissal of an FCA case against a medical device manufacturer premised on the manufacturer's violations of the AKS. The court rejected the "judicially created categories" of express or implied certification. Instead, it held that compliance with the AKS is an "implied condition of payment" and the submission of a claim is a representation that such condition has been met. If there has been a violation of the AKS, the representation of compliance with the AKS, through the submission of a claim for reimbursement, is false, because the Provider Agreement and Hospital Cost Report made compliance with the AKS a precondition of payment. See United States. ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377, 392-93 (1st Cir. 2011), pet'n for cert. pending, No. 11-269.

More recently, the First Circuit relied upon Hutcheson and again reversed the dismissal of FCA claims premised upon violations of the AKS. Picking up on the District of Columbia Circuit's focus in SAIC on materiality, the court held that to be false, claims must misrepresent "compliance with a material precondition of Medicaid payment such that they were false or fraudulent." State of New York et al. ex rel. Westmoreland v. Amgen Inc. et al., No. 10-1629, 2011 WL 2937420, at *6 (1st Cir. July 22, 2011), pet'n for cert. pending, No. 11-363.

What to Watch For and Why

While a very technical area of FCA law, the basic effect of certification theories is important as the narrower certification theory, the narrower the reach of the FCA. Health care providers and pharmaceutical and medical device manufacturers should watch to see if the Supreme Court decides to provide guidance as to how far the FCA should be used to police violations of the myriad other laws and regulations under which providers operate today.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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