Here at Bugg & Wolf, many of our clients frequently contract with government entities, and as such we have been keeping tabs on the development of a particular case relating to the False Claims Act (“FCA”). The FCA, first enacted in the mid-1800s, is meant to deter fraudulent claims against the government. Typically, this means requesting payment from the government, either directly or indirectly, in an amount greater than the work actually performed. The FCA allows the government to retroactively punish those who attempt to defraud the government in this way, imposing steep fines as well as up to triple the amount the contractor billed for in damages.

In recent years, enforcement of the FCA has risen dramatically. Last year, the federal government recovered $1.1 billion dollars from FCA claims relating to government contracts. This trend is multifaceted, but a powerful factor has been the willingness of many courts to expand what constitutes “fraud” under the terms of the FCA.

In an attempt to bring clarity to the FCA, the Supreme Court decided Universal Health Services v. United States last week. The decision did not, however, bring closure to the case at hand, and instead gave both sides of the case some new material to argue.
In Universal Health Services, a Massachusetts teenager suffered seizures and died after being prescribed medicine by a mental health clinic. The parents later learned that some of the child’s counselors and their supervisors were not properly licensed as required by the Medicaid program they were providing services under. The parents elected to bring suit under the FCA.
The parents, suing on behalf of the government, alleged that the health care provider had “implicitly” certified that they had complied with the extensive rules, laws, and regulations relating to payment under the Medicaid program. The contractor argued that compliance was not explicitly agreed to in each payment application and that therefore they had committed no fraud.

In its opinion, the Supreme Court approved the theory of “implied certification,” which allows the government (and third parties suing on its behalf) to imply compliance with laws and regulations which may not have been included in the contract. However, they limited this theory by holding that any such violations of these laws or regulations must have been “material” to the contract.
For contractors, this case is generally worrying. The Court attempted to narrow this ruling, explicitly stating that contractors couldn’t be expected to comply with “the entire U.S. Code and Code of Federal Regulations”. However, the Court did not rule for the contractor. As a result, the Court seems open to a case-by-case assessment of how “material” a law or regulation may be to a specific contract.

Unfortunately, the Supreme Court decision does not make it clear where the line will be drawn for what constitutes “fraud” and what does not. It is now clear that contractors can be liable under the FCA for violating anything a court may consider “material” to a contract. What is not clear is how to define what is “material.” Could employing illegal immigrants be considered material? Could failing to comply with an OSHA handrail regulation lead to charges of fraud? As it stands, the Supreme Court decision only seems to suggest, “maybe.”

We will be keeping our eyes on the further development of the Supreme Court’s new “materiality” test under the FCA. The development of this test over the next few years will be critical to government contractors and potential FCA liability.

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