Supreme Court sharpens False Claims Act definitions

A recent Supreme Court opinion concerning the False Claims Act has at once broadened and constrained liability implications for contractors who do business with the federal government.

The False Claims Act subjects government contractors who knowingly present fraudulent payment claims to damages in the amount of three times of the fraud.

One of the biggest points of contention surrounding the law is whether filing an invoice binds contractors to "material" government regulations, even if they are not explicitly spelled out in the contract -- so-called implied certification.

The Supreme Court's 8-0 June 16 ruling in United Health Services v. U.S. stretched the latitude of contractor liability by adopting this implied certification, but balanced that ruling by raising the standard of what constitutes a material violation.

In that case, Universal Health Services appealed an adverse False Claims ruling made on the grounds that the contractor used clinicians who didn't have legally required qualifications. Universal's claims to Medicare and Medicaid were considered fraudulent on that basis.

The court held that implied certification violations could be a "basis for liability," but also ruled that the False Claims Act is not "a vehicle for punishing garden-variety breaches of contract or regulatory violations."  A misrepresentation cannot be deemed material merely because the government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.

Implied certification is "bad news for contractors," said Mark Sweet, a partner at the law firm Wiley Rein. He noted, however, the more-rigorous definition of what constitutes a material violation means the scope of implied certification for contractors must be "fundamental to the type of service you're providing."

The new standard for what is a material violation means there's now a "high hurdle to be met before a company can be found to have violated the False Claims Act," said Alan Chvotkin, vice president and counsel of the Professional Services Council.

Sweet explained that the standard for "material" will likely be based on historical precedent of whether the government has rejected similar invoices in the past.

The False Claims Act also relies on a standard that a contracting firm "knowingly" deceived.

"'Knowingly' is the biggest issue in contention between parties," said Sweet. "And there's always room for corrective action… Where it turns into fraud is there's evidence you know about it, but you're not doing anything to correct it after some reasonable period of time."

This is a big deal for government contractors, Chvotkin said, because "there has been a significant growth in cases under the False Claims Act, and this opinion sets parameters for how those cases are to be conducted." But even with that uptick in False Claims Act cases, Chvotkin added, the number of fraud cases "still pales in comparison to the number of contracts that the government has."

So how does this ruling practically affect how contractors should handle their government business in the short term?

"Now that they're subject without a doubt to implied certification, companies need to take careful review" of the laws surrounding their practices and to "be careful not to make representations in their invoices that aren't necessary," said Sweet. "They need to ask themselves, 'Are we aware of regulatory or contractual violations that we haven't fixed?'"

Chvotkin posited that the ruling might also lead to more False Claims Act cases ending in settlements.

"I think this is going to encourage settlement because the court made it clear that knowledge and materiality are fact-based," Chvotkin said. "The only way you're going to get to those are by discovery and litigation, and that's expensive."