When, as here, a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.

In an important victory for taxpayers, the United States Supreme Court has unanimously upheld and clarified the implied certification theory of liability in the case of Universal Health Services, Inc. v. United States ex rel. Escobar.

For much of the past decade, courts have distinguished between express certifications – in which a defendant expressly certifies compliance with the law or contract – and implied certification – in which a defendant submits a claim for payment, thereby implying it has met the requirements for said payment. The former, when false, is a clear false statement on a clearly false claim, in violation of the False Claims Act: “I am telling you I followed all the rules, when it is not true.” Implied certification has been a bit trickier, because it lacks an express false statement, but rather is a lie by omission: “I am billing you for this, but making no representations about whether I followed all the rules.” Defendants have hidden behind this facade, that if there is no lie on the claim, how could it be false?

Courts have further muddied the implied certification waters by then distinguishing what the lie by omission was about. If it was “a condition of payment,” then it was a false claim. If, for example, a defense contract says build these tanks with 2″ screws, and the vendor uses 1″ screws and then bills for the tanks, that would generally be considered a violation of a condition of payment. Even though the bill does not say “we used 1″ screws,” the Government was purchasing a tank with 2″ screws, and learning that the wrong screws were used would likely have influenced its decision to pay for the tanks. But if the contract says “use Union workers” and they don’t, courts would generally consider that to be a “condition of participation,” because the Government still got its tanks. Unless the contract says “we won’t pay you if you use non-Union labor,” courts may have declined to find a violation of the False Claims Act even though the defendant didn’t completely conform with the rules of participation.

This has been an area of frustration for well-meaning whistleblowers with considerably more obvious violations, with Escobar being a prime example. In that case, a healthcare provider used unlicensed, unqualified individuals to run a mental health counseling program. The relators were the parents of a young woman who had died after having an adverse reaction to a medication that a purported doctor had prescribed. Relators discovered that of the five professionals who had treated their daughter, only one was properly licensed. The defendants essentially said “So what? The Government never asked for our qualifications, and we never told them we were qualified, so where is the falsity?”

This entire line of defense is extremely counter-intuitive. It is difficult to comprehend that even though a defendant has knowingly violated the rules and regulations required to practice, and has submitted claims for payment to the government for that practice, that it may not be a violation of the False Claims Act.

Today’s decision in Escobar will go a long way towards closing that “loophole.” SCOTUS essentially tossed the “condition of payment vs. condition of participation” defense out the window. It held that falsity is either material or it is not, meaning would it have “a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” It is hard to argue (although the defendant certainly will) that if the Government knew that services were being provided by unlicensed individuals, that it would still pay the claims. The Court agreed:

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 Massachusetts Medicaid requirements (1) that a counselor “treating children [is] required to have specialized training and experience in children’s services,” 130 Code Mass. Regs. §429.422, and also (2) that, at a minimum, the social worker possesses the prescribed qualifications for the job, §429.424(C). By using payment and other codes that conveyed this information without disclosing Arbour’s many violations of basic staff and licensing requirements for mental health facilities, Universal Health’s claims constituted misrepresentations.

Would the defendant’s use of non-union labor in the scenario above be material? That’s hard to say. Conversely, if the defendant used sweatshops, it almost certainly would be material. These hypotheticals are essentially the same violation of “use of improper labor,” but of widely varying levels of egregiousness, illustrating that nothing is black-and-white when it comes to the law, especially with regards to the False Claims Act.