Seventh Circuit Reconsiders Case in Light of Supreme Court’s ‘Implied False Certification’ Holding

December 20, 2016
Mehreen Rasheed

Although the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) widened the scope of potential claims that qui tam relators may bring under the False Claims Act (FCA), 31 U.S.C. § 3729 et seq., this expansion did not revive the relator’s claim in United States ex rel. Nelson v. Sanford-Brown, Ltd., 840 F.3d 445 (7th Cir. 2016), which the Seventh Circuit reconsidered in light of Escobar.

Implied False Certification Theory

The FCA imposes penalties on those who defraud the United States government by, for example, submitting knowingly false claims for payment or records in support of such claims. Before Escobar, circuit courts were split in their recognition of implied false certification theory. Under this theory, a claim could be considered “false” for FCA purposes when the claim itself was accurate but the claimant violated a condition of payment that arose from the underlying government contract, or from statutory or regulatory obligations.

Sanford-Brown Background

The Seventh Circuit joined the split in its first consideration of United States ex rel. Nelson v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), ultimately rejecting implied false certification theory. Relator Brent Nelson, a former director of education at the for-profit college Sanford-Brown College, alleged that Sanford-Brown had violated the FCA because a number of its recruiting and retention practices violated the college’s contract with the U.S. Department of Education. In order to receive subsidies under the Higher Education Act, colleges like Sanford-Brown must enter into agreements with the Department of Education, which condition the institution’s eligibility on compliance with various requirements, including those prescribed by a number of federal statutes and regulations incorporated into the agreement by reference. By entering into the agreement, Sanford-Brown had agreed to comply with such regulations, Nelson argued, and therefore violated the FCA when it applied for federal subsidies with the knowledge that it was not in compliance.

The Seventh Circuit rejected this argument, holding that Sanford-Brown’s noncompliance with its agreement was not grounds for FCA liability unless it fraudulently entered into the contract at the outset, which Nelson did not allege. The court further noted that it would be unreasonable to consider a condition of payment ongoing compliance with the agreement, which incorporated by reference “thousands of pages of other federal laws and regulations.” Agency adjudication rather than the FCA, the court reasoned, was the proper mechanism to enforce such violations.

The Supreme Court’s Escobar Decision

In Escobar, the relator alleged that the defendant counseling service defrauded Medicaid by having under-licensed employees perform certain services in contravention to regulatory requirements, as well as by using improper payment codes when submitting reimbursement requests. The Supreme Court resolved the circuit split by holding FCA suits may be premised on implied false certification as long as (1) “the claim does not merely request payment, but also makes specific representations about the goods or services provided,” and (2) the defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

The Court also rejected the notion that the underlying breach must be a breach of a “condition of payment,” but emphasized a rigorous materiality requirement: The defendant must knowingly violate a requirement that the defendant knows is material to the government’s payment decision. The Supreme Court ordered the Seventh Circuit to reconsider Sanford-Brown in light of its new guidance. 84 U.S.L.W. 3349 (U.S. June 27, 2016), vacating 788 F.3d 696 (7th Cir. 2015).

Effects of Escobar

On remand, the Seventh Circuit employed the new rule but affirmed its original dismissal in favor of Sanford-Brown. The court found that the relator’s implied false certification claim failed both prongs of the Escobar rule: He had offered no evidence of specific representations about the goods or services provided, and that any claim such representations were false or misleading amounted to “bare speculation.” The court also dismissed the claim on the independent ground that it failed the materiality requirement articulated under Escobar, as the relator brought no evidence that Sanford-Brown’s violations would have affected the government’s decision to pay.

The Supreme Court also remanded two other cases for reconsideration in light of Escobar. In United States ex rel. Miller v. Weston Educational, Inc., 840 F.3d 494 (8th Cir. 2016), the Eighth Circuit found that the defendant for-profit college’s alleged misrepresentations were material, allowing the false implied certification case to move forward. The Fourth Circuit has not yet ruled on the other remanded case, Triple Canopy, Inc. v. United States ex rel. Badr, 83 U.S.L.W. 3905 (U.S. June 27, 2016), vacating 775 F.3d 628 (4th Cir. 2015), which initially succeeded on its implied false certification claim. So while the Seventh Circuit’s reconsideration of Sanford-Brown did little to move the needle in favor of qui tam relators post-Escobar, time will tell how the new implied false certification rule will play out in the federal courts.

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