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The U.S. Supreme Court has agreed to decide a critical issue relating to the federal False Claims Act (FCA). The Court will clarify (and possibly eliminate) the “implied certification” theory of FCA liability. This decision could tremendously affect the compliance risk for healthcare providers and government contractors.

The FCA makes it illegal to “knowingly” present or cause to be presented a false or fraudulent claim for payment to the United States. The FCA has criminal penalties and treble damages for civil liability. In recent years, there has been an explosion in whistleblower qui tam claims against healthcare providers and government contractors under this statute. Often, there is extreme economic and reputational pressure for businesses to settle these claims, regardless of the underlying merits.

The paradigm FCA claim is a contractor billing the United States for services that were not rendered. Another popular theory that has developed is based on the concept of “implied certification.” Under that theory, the contractor has billed only for services that were actually provided, but has failed to comply with one or more government regulations or contract requirements. For example, the case before the Supreme Court involves a mental health clinic that provided treatment to patients, but whose staff allegedly did not have the professional qualifications mandated by the Massachusetts Medicaid program and were not supervised as required by that program. A whistleblower brought an FCA claim against the clinic based on the implied certification theory.

Given the myriad of governmental regulations and the fine print of most Government contracts, there is great risk that even minor violations could be the basis for an FCA claim. One federal appeals court rejected the implied certification theory completely, on the theory that it was unreasonable to expose businesses to such broad liability. Other federal courts have tried to limit this liability through new rules. Several have said that implied certification liability arises only from violating a regulation or contract provision that is a “condition of payment.” Unfortunately, there is no clarity as to what constitutes a “condition of payment.” To address that concern, other courts have said that the FCA only reaches those contractual or regulatory requirements that are expressly stated to be prerequisites for receiving payment from the Government.

The Supreme Court is taking up two issues. First, whether the implied certification theory should exist, at all, under the FCA. Second, if the theory exists, whether the contract or regulation must expressly identify which provisions are conditions of payment that could be the basis for FCA liability.

Importantly for businesses, if the Supreme Court rejects or limits the implied certification theory, it would remove a powerful, and seemingly limitless, tool being used by whistleblowers who may be seeking a financial windfall for identifying minor violations of complex regulations or contracts. Don’t fear that eliminating the implied certification theory would end enforcement of governmental rules, however – the Government has recourse even without the implied certification theory. Although it could not seek treble damages under the FCA, the Government could still sue for breach of contract or seek to enforce penalty provisions of its own regulations.

The implied certification theory has created a trap for unwary businesses. Despite employing robust compliance procedures, these businesses remain at risk for an FCA claim based on an innocent violation of an obscure regulation or contract provision. Many times, these businesses are under tremendous pressure to settle these cases so that they can minimize business disruption, reputational damage, and litigation costs. Whatever it decides, the Supreme Court will bring consistency and clarity to this issue, which will allow businesses to better assess their compliance risk.

A decision is expected by June 2016.

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