The implied certification theory allows the government, or a private relator, to seek liability under the civil False Claims Act (FCA), 31 U.S.C. § 3729, even when a claim for payment contains no express false statement. A claim whose representations are made misleading by undisclosed noncompliance with a material legal requirement can trigger FCA exposure, including treble damages and per-claim penalties. In Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), the U.S. Supreme Court held that, at least in certain circumstances, the theory can be a basis for liability, within limits every compliance officer needs to understand before an audit, a subpoena, or a qui tam suit reaches the organization. Escobar identified two conditions under which the theory can support liability and, more significantly for defense purposes, described the FCA's materiality requirement as demanding.
Escobar's Two Conditions for Implied Certification
The Court held that the implied certification theory can be a basis for liability, at least where two conditions are satisfied. First, the claim does not merely request payment: it makes specific representations about the goods or services provided. Second, the defendant's failure to disclose noncompliance with a material statutory, regulatory, or contractual requirement makes those representations misleading half-truths. The full opinion rejected the argument that implied certification liability should be confined to violations of requirements expressly labeled conditions of payment, and it rejected the government's view that any statutory, regulatory, or contractual violation is material so long as the defendant knows the government would be entitled to refuse payment were it aware of the violation. The Court said it "need not resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment," because the claims in Escobar did more than merely demand payment.
The Escobar Materiality Standard
Escobar described the materiality standard as demanding, and it called the Act's materiality and scienter requirements rigorous. A misrepresentation is not automatically material merely because the government designates compliance with a particular statute, regulation, or contract term as a condition of payment. Materiality instead turns on facts such as whether the government has expressly identified a provision as a condition of payment, whether the alleged violation goes to the essence of the bargain, and how the government has responded to similar noncompliance in comparable matters.
If the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.
The sentence that follows it in Escobar adds: if the government "regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material." The Court set out both rules in a qui tam suit brought by private relators.
How Circuit Courts Have Applied Materiality
Since 2016, circuit courts applying Escobar have rejected some FCA claims for want of materiality and let others proceed; on remand in Escobar itself, the First Circuit held that the relators had sufficiently alleged materiality. On remand in a separate case, the Seventh Circuit in United States ex rel. Nelson v. Sanford-Brown, Ltd., No. 14-2506, 840 F.3d 445 (7th Cir. Oct. 24, 2016), affirmed summary judgment against a relator suing a for-profit college, holding that neither of Escobar's two conditions was met and, independently, that the relator offered no evidence that the government's decision to pay would likely or actually have been different had it known of the alleged noncompliance with Department of Education program requirements. The Fifth Circuit reached a comparable result in United States ex rel. Harman v. Trinity Industries, Inc., 872 F.3d 645 (5th Cir. 2017), reversing a $663,360,750 judgment entered on a jury verdict over highway guardrail certifications after finding that the Federal Highway Administration's repeated, unwavering position that the product remained eligible for reimbursement undercut any claim of materiality. The Supreme Court later denied certiorari, leaving that reversal in place. In the Seventh and Fifth Circuit decisions, the courts looked at the government's own conduct toward the alleged violation, not just the violation itself, in deciding whether the relator had proved materiality under Escobar. Providers responding to an active inquiry can review the firm's guide to responding to an FCA investigation for the procedural steps that can follow.
Why Early Legal Counsel Is Critical
It is critical that healthcare providers promptly retain experienced healthcare defense counsel upon receiving a subpoena, audit notice, investigative request, or other government inquiry touching potential implied certification exposure. Early legal intervention can help protect the provider's rights, prepare responses to government requests, preserve relevant defenses including the materiality arguments described above, and allow counsel to communicate with investigators on the provider's behalf.
How Health Law Alliance Can Help
Health Law Alliance defends False Claims Act matters across pharmacies, providers, manufacturers, and corporate defendants, including qui tam defense from the sealed-investigation stage forward. If your organization has received a subpoena, a civil investigative demand, or notice of a False Claims Act investigation, contact us for a free, confidential consultation to review the matter and discuss False Claims Act defense strategy specific to your facts.
