20, 2017 136 s.ct. 1989 universal health services, inc. v. u.s., 136 … · 2019-12-23 ·...

Universal Health Services, Inc. v. U.S., 136 S.Ct. 1989 (2016)

195 L.Ed.2d 348, 84 USLW 4410, 41 IER Cases 709, Med & Med GD (CCH) P 305,647...

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

Declined to Extend by United States v. Raza, 4th Cir.(Va.), November

20, 2017

136 S.Ct. 1989Supreme Court of the United States

UNIVERSAL HEALTH SERVICES, INC., Petitionerv.

UNITED STATES and Massachusetts, exrel. Julio Escobar and Carmen Correa.

No. 15–7.|

Argued April 19, 2016.|

Decided June 16, 2016.

SynopsisBackground: Parents, as relators, brought qui tam suitagainst healthcare provider under the False Claims Act(FCA) after their daughter died of a seizure when shewas being treated at a mental health clinic by variousunlicensed and unsupervised staff in violation of stateMedicaid regulations. The United States District Courtfor the District of Massachusetts, Douglas P. Woodlock,J., 2014 WL 1271757, dismissed, and parents appealed.The United States Court of Appeals for the First Circuit,Stahl, Circuit Judge, 780 F.3d 504, affirmed in part,reversed in part, and remanded. Certiorari was granted.

Holdings: The Supreme Court, Justice Thomas, held that:

[1] the implied false certification theory can be a basis forliability under the FCA in some circumstances, abrogatingU.S. v. Sanford–Brown, Ltd., 788 F.3d 696, and

[2] the FCA does not limit liability only to instanceswhere the defendant fails to disclose the violation of acontractual, statutory, or regulatory provision that thegovernment expressly designated a condition of payment,abrogating Mikes v. Straus, 274 F.3d 687.

Vacated and remanded.

West Headnotes (26)

[1] United StatesFalse certification

The “implied false certification theory,”providing that when a defendant submitsa claim it impliedly certifies compliancewith all conditions of payment, can be abasis for liability under the False ClaimsAct (FCA), at least where two conditionsare satisfied: (1) the claim does notmerely request payment, but also makesspecific representations about the goods orservices provided; and (2) the defendant'sfailure to disclose noncompliance withmaterial statutory, regulatory, or contractualrequirements makes those representationsmisleading half-truths; abrogating U.S. v.Sanford–Brown, Ltd., 788 F.3d 696. 31U.S.C.A. § 3729(a)(1)(A).

112 Cases that cite this headnote

[2] United StatesFalse claim

By punishing defendants who submit “falseor fraudulent claims,” the False ClaimsAct (FCA) encompasses claims that makefraudulent misrepresentations, which includecertain misleading omissions. 31 U.S.C.A. §3729(a)(1)(A).



When a defendant makes representations insubmitting a claim but omits its violationsof statutory, regulatory, or contractualrequirements, those omissions can, pursuantto the implied false certification theory, bea basis for liability under the False ClaimsAct (FCA) if they render the defendant'srepresentations misleading with respect to thegoods or services provided. 31 U.S.C.A. §3729(a)(1)(A).

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[4] StatutesStatutory terms with common law

meanings

Absent other indication, Congress intends toincorporate the well-settled meaning of thecommon-law terms it uses.


[5] United StatesStatutory provisions

Although the False Claims Act (FCA)abrogated the common law in certain respects,including that the Act's scienter requirementrequired no proof of specific intent to defraud,the court would presume, when interpretingcommon-law terms used in the Act, thatCongress retained all other elements ofcommon-law fraud that were consistent withthe statutory text, because there were notextual indicia to the contrary. 31 U.S.C.A. §3729 et seq.



Because common-law fraud has longencompassed certain misrepresentations byomission, “false or fraudulent claims” withinthe meaning of the False Claims Act (FCA)include more than just claims containingexpress falsehoods. 31 U.S.C.A. § 3729(a)(1)(A).



“Half-truths,” that is, representations thatstate the truth only so far as it goes, whileomitting critical qualifying information, canbe actionable misrepresentations under theFalse Claims Act (FCA). 31 U.S.C.A. §3729(a)(1)(A).


[8] FraudDuty to disclose facts

In tort law, if the defendant does speak, hemust disclose enough to prevent his wordsfrom being misleading.

Cases that cite this headnote

[9] FraudFraudulent Concealment

A statement that contains only favorablematters and omits all reference to unfavorablematters is as much a false representation as ifall the facts stated were untrue. Restatement(Second) of Torts § 529.



United StatesMateriality

The False Claims Act (FCA) does not limitliability only to instances where the defendantfails to disclose the violation of a contractual,statutory, or regulatory provision that thegovernment expressly designated a conditionof payment; abrogating Mikes v. Straus, 274F.3d 687. 31 U.S.C.A. § 3729(a)(1)(A).




Not every undisclosed violation of an expresscondition of payment automatically triggersliability under the False Claims Act (FCA). 31U.S.C.A. § 3729(a)(1)(A).

Cases that cite this headnote

[12] United States

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Materiality

Whether a provision allegedly violated by thedefendant is labeled a condition of paymentis relevant to but not dispositive of themateriality inquiry into whether defendanthas made an actionable false or fraudulentclaim under the False Claims Act (FCA). 31U.S.C.A. § 3729(a)(1)(A), (b)(4).


[13] FraudFraudulent Concealment

A statement that misleadingly omits criticalfacts is a fraudulent misrepresentationirrespective of whether the other party hasexpressly signaled the importance of thequalifying information.


[14] StatutesPolicy considerations; public policy

Policy arguments cannot supersede the clearstatutory text.


[15] United StatesMateriality

A misrepresentation about compliance witha statutory, regulatory, or contractualrequirement must be material to thegovernment's payment decision in order to beactionable under the False Claims Act (FCA).31 U.S.C.A. § 3729(a)(1)(A), (b)(4).



Materiality, for purposes of determiningwhether a misrepresentation is actionableunder the False Claims Act (FCA), looks tothe effect on the likely or actual behavior ofthe recipient of the alleged misrepresentation.31 U.S.C.A. § 3729(a)(1)(A), (b)(4).


[17] FraudMateriality of matter represented or

concealed

In tort law, a matter is “material” in onlytwo circumstances: (1) if a reasonable manwould attach importance to it in determininghis choice of action in the transaction; or(2) if the defendant knew or had reason toknow that the recipient of the representationattaches importance to the specific matter indetermining his choice of action, even thougha reasonable person would not. Restatement(Second) of Torts § 538.



The False Claims Act's (FCA) materialitystandard for an actionable false or fraudulentclaim is demanding. 31 U.S.C.A. § 3729(a)(1)(A), (b)(4).


[19] United StatesFalse Claims

The False Claims Act (FCA) is not an all-purpose antifraud statute or a vehicle forpunishing garden-variety breaches of contractor regulatory violations. 31 U.S.C.A. § 3729 etseq.



A misrepresentation cannot be deemed“material,” as required to give rise toliability under the False Claims Act (FCA),merely because the government designatescompliance with a particular statutory,regulatory, or contractual requirement as acondition of payment; nor is it sufficient fora finding of materiality that the government

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would have the option to decline to pay if itknew of the defendant's noncompliance. 31U.S.C.A. § 3729(a)(1)(A), (b)(4).



The materiality required for amisrepresentation to be actionable underthe False Claims Act (FCA) cannotbe found where noncompliance witha particular statutory, regulatory, orcontractual requirement is minor orinsubstantial. 31 U.S.C.A. §§ 3729(a)(1)(A),(b)(4).



Proof of the materiality of a misrepresentationabout compliance with a statutory,regulatory, or contractual requirement, asrequired for the misrepresentation to beactionable under the False Claims Act (FCA),can include, but is not necessarily limitedto, evidence that the defendant knows thatthe government consistently refuses to payclaims in the mine run of cases based onnoncompliance with the particular statutory,regulatory, or contractual requirement. 31U.S.C.A. § 3729(a)(1)(A), (b)(4).



It is strong evidence that particular statutory,regulatory, or contractual requirements arenot material, and thus violations of therequirements do not give rise to liabilityunder the False Claims Act (FCA), ifthe government pays a particular claimin full despite its actual knowledge thatcertain requirements were violated, or if thegovernment regularly pays a particular typeof claim in full despite actual knowledge that

certain requirements were violated, and hassignaled no change in position. 31 U.S.C.A. §3729(a)(1)(A), (b)(4).


[24] Federal Civil ProcedureFraud, mistake and condition of mind


False Claims Act (FCA) plaintiffs must pleadtheir claims with plausibility and particularityby, for instance, pleading facts to supportallegations of materiality. 31 U.S.C.A. § 3729et seq.; Fed.Rules Civ.Proc.Rules 8, 9(b), 28U.S.C.A.



A statutory, regulatory, or contractualviolation is not “material,” and thus cannotgive rise to liability under the False Claims Act(FCA), merely because the defendant knowsthat the government would be entitled torefuse payment were it aware of the violation.31 U.S.C.A. § 3729(a)(1)(A), (b)(4).



United StatesDouble or treble damages

The False Claims Act (FCA) is not a means ofimposing treble damages and other penaltiesfor insignificant regulatory or contractualviolations. 31 U.S.C.A. § 3729 et seq.


*1993 Syllabus *

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* The syllabus constitutes no part of the opinion ofthe Court but has been prepared by the Reporterof Decisions for the convenience of the reader. SeeUnited States v. Detroit Timber & Lumber Co., 200U.S. 321, 337, 26 S.Ct. 282, 50 L.Ed. 499.

Yarushka Rivera, a teenage beneficiary of Massachusetts'Medicaid program, received counseling services forseveral years at Arbour Counseling Services, a satellitemental health facility owned and operated by a subsidiaryof petitioner Universal Health Services, Inc. She had anadverse reaction to a medication that a purported doctorat Arbour prescribed after diagnosing her with bipolardisorder. Her condition worsened, and she eventually diedof a seizure. Respondents, her mother and stepfather,later discovered that few Arbour employees were actuallylicensed to provide mental health counseling or authorizedto prescribe medications or offer counseling serviceswithout supervision.

Respondents filed a qui tam suit, alleging that UniversalHealth had violated the False Claims Act (FCA). That Actimposes significant penalties on anyone who “knowinglypresents ... a false or fraudulent claim for payment orapproval” to the Federal Government, 31 U.S.C. § 3729(a)(1)(A). Respondents sought to hold Universal Healthliable under what is commonly referred to as an “impliedfalse certification theory of liability,” which treats apayment request as a claimant's implied certificationof compliance with relevant statutes, regulations, orcontract requirements that are material conditions ofpayment and treats a failure to disclose a violationas a misrepresentation that renders the claim “false orfraudulent.” Specifically, respondents alleged, UniversalHealth (acting through Arbour) defrauded the Medicaidprogram by submitting reimbursement claims that maderepresentations about the specific services providedby specific types of professionals, but that failed todisclose serious violations of Massachusetts Medicaidregulations pertaining to staff qualifications and licensingrequirements for these services. Universal Health thusallegedly defrauded the program because UniversalHealth knowingly misrepresented its compliance withmental health facility requirements that are so centralto the provision of mental health counseling that theMedicaid program would have refused to pay these claimshad it known of these violations.

The District Court granted Universal Health's motion todismiss. It held that respondents had failed to state a claimunder the “implied false certification” theory of liabilitybecause none of the regulations violated by Arbour wasa condition of payment. The First Circuit reversed inrelevant part, holding that every submission of a claimimplicitly represents compliance with relevant regulations,and that any undisclosed violation of a precondition ofpayment (whether or not expressly identified as such)renders a claim “false or fraudulent.” The First Circuitfurther held that the regulations themselves providedconclusive evidence that compliance was a materialcondition of payment because the regulations expresslyrequired facilities to adequately supervise staff as acondition of payment.

Held :

1. The implied false certification theory can be abasis for FCA liability when a defendant submitting aclaim makes specific representations about the goods orservices provided, but fails to disclose noncompliancewith material statutory, regulatory, or contractualrequirements that *1994 make those representationsmisleading with respect to those goods or services. Pp.1999 – 2001.

(a) The FCA does not define a “false” or “fraudulent”claim, so the Court turns to the principle that “absentother indication, ‘Congress intends to incorporate thewell-settled meaning of the common-law terms it uses,’” Sekhar v. United States, 570 U.S. ––––, ––––, 133S.Ct. 2720, 2724, 186 L.Ed.2d 794. Under the common-law definition of “fraud,” the parties agree, certainmisrepresentations by omission can give rise to FCAliability. Respondents and the Government contend thatevery claim for payment implicitly represents that theclaimant is legally entitled to payment, and that failing todisclose violations of material legal requirements rendersthe claim misleading. Universal Health, on the other hand,argues that submitting a claim involves no representationsand that the nondisclosure of legal violations is notactionable absent a special duty of reasonable care todisclose such matters. Today's decision holds that theclaims at issue may be actionable because they do morethan merely demand payment; they fall squarely withinthe rule that representations that state the truth only so faras it goes, while omitting critical qualifying information,can be actionable misrepresentations. Pp. 1999 – 2000.

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(b) By submitting claims for payment using payment codescorresponding to specific counseling services, UniversalHealth represented that it had provided specific typesof treatment. And Arbour staff allegedly made furtherrepresentations by using National Provider Identificationnumbers corresponding to specific job titles. By conveyingthis information without disclosing Arbour's manyviolations of basic staff and licensing requirementsfor mental health facilities, Universal Health's claimsconstituted misrepresentations. Pp. 2000 – 2001.

2. Contrary to Universal Health's contentions, FCAliability for failing to disclose violations of legalrequirements does not turn upon whether thoserequirements were expressly designated as conditions ofpayment. Pp. 2000 – 2004.

(a) Section 3729(a)(1)(A), which imposes liability onthose presenting “false or fraudulent claim[s],” doesnot limit claims to misrepresentations about expressconditions of payment. Nothing in the text supports sucha restriction. And under the Act's materiality requirement,statutory, regulatory, and contractual requirements arenot automatically material, even if they are labeledconditions of payment. Nor is the restriction supportedby the Act's scienter requirement. A defendant can have“actual knowledge” that a condition is material even ifthe Government does not expressly call it a conditionof payment. What matters is not the label that theGovernment attaches to a requirement, but whetherthe defendant knowingly violated a requirement thatthe defendant knows is material to the Government'spayment decision. Universal Health's policy argumentsare unavailing, and are amply addressed through strictenforcement of the FCA's stringent materiality andscienter provisions. Pp. 2001 – 2003.

(b) A misrepresentation about compliance with astatutory, regulatory, or contractual requirement must bematerial to the Government's payment decision in orderto be actionable under the FCA. The FCA's materialityrequirement is demanding. An undisclosed fact is materialif, for instance, “[n]o one can say with reason that theplaintiff would have signed this contract if informed ofthe likelihood” of the undisclosed fact. Junius Constr. Co.v. Cohen, 257 N.Y. 393, 400, 178 N.E. 672, 674. Whenevaluating the FCA's materiality *1995 requirement, theGovernment's decision to expressly identify a provision as

a condition of payment is relevant, but not automaticallydispositive. A misrepresentation cannot be deemedmaterial merely because the Government designatescompliance with a particular requirement as a conditionof payment. Nor is the Government's option to decline topay if it knew of the defendant's noncompliance sufficientfor a finding of materiality. Materiality also cannot befound where noncompliance is minor or insubstantial.Moreover, if the Government pays a particular claim infull despite its actual knowledge that certain requirementswere violated, that is very strong evidence that thoserequirements are not material. The FCA thus does notsupport the Government's and First Circuit's expansiveview that any statutory, regulatory, or contractualviolation is material so long as the defendant knows thatthe Government would be entitled to refuse payment wereit aware of the violation. Pp. 2002 – 2004.

780 F.3d 504, vacated and remanded.

THOMAS, J., delivered the opinion for a unanimousCourt.

Attorneys and Law Firms

Roy T. Englert, Jr., Washington, DC, for Petitioner.

David C. Frederick, Washington, DC, for Respondents.

Malcolm L. Stewart for the United States as amicuscuriae, by special leave of the Court, supporting therespondents.

Mark W. Pearlstein, Laura McLane, Evan D. Panich,McDermott Will & Emery LLP, Boston, MA, M. MillerBaker, McDermott Will & Emery LLP, Roy T. Englert,Jr., Gary A. Orseck, Mark T. Stancil, Michael L.Waldman, Donald Burke, Robbins, Russell, Englert,Orseck, Untereiner & Sauber LLP, Washington, DC, forPetitioner.

Thomas M. Greene, Michael Tabb, Elizabeth Cho,Greene LLP, Boston, MA, David C. Frederick, DerekT. Ho, Katherine C. Cooper, Kellogg, Huber, Hansen,Todd, Evans & Figel, P.L.L.C., Washington, DC, forRespondents.

Opinion

Justice THOMAS delivered the opinion of the Court.

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The False Claims Act, 31 U.S.C. § 3729 et seq.,imposes significant penalties on those who defraud theGovernment. This case concerns a theory of False ClaimsAct liability commonly referred to as “implied falsecertification.” According to this theory, when a defendantsubmits a claim, it impliedly certifies compliance withall conditions of payment. But if that claim fails todisclose the defendant's violation of a material statutory,regulatory, or contractual requirement, so the theory goes,the defendant has made a misrepresentation that rendersthe claim “false or fraudulent” under § 3729(a)(1)(A). Thiscase requires us to consider this theory of liability andto clarify some of the circumstances in which the FalseClaims Act imposes liability.

We first hold that, at least in certain circumstances,the implied false certification theory can be a basisfor liability. Specifically, liability can attach when thedefendant submits a claim for payment that makes specificrepresentations about the goods or services provided, butknowingly fails to disclose the defendant's noncompliancewith a statutory, regulatory, or contractual requirement.In these circumstances, liability may attach if the omissionrenders those representations misleading.

*1996 We further hold that False Claims Act liabilityfor failing to disclose violations of legal requirements doesnot turn upon whether those requirements were expresslydesignated as conditions of payment. Defendants canbe liable for violating requirements even if they werenot expressly designated as conditions of payment.Conversely, even when a requirement is expresslydesignated a condition of payment, not every violationof such a requirement gives rise to liability. Whatmatters is not the label the Government attaches toa requirement, but whether the defendant knowinglyviolated a requirement that the defendant knows ismaterial to the Government's payment decision.

A misrepresentation about compliance with a statutory,regulatory, or contractual requirement must be materialto the Government's payment decision in order to beactionable under the False Claims Act. We clarify belowhow that rigorous materiality requirement should beenforced.

Because the courts below interpreted § 3729(a)(1)(A)differently, we vacate the judgment and remand so that

those courts may apply the approach set out in thisopinion.

I

A

Enacted in 1863, the False Claims Act “was originallyaimed principally at stopping the massive fraudsperpetrated by large contractors during the Civil War.”United States v. Bornstein, 423 U.S. 303, 309, 96 S.Ct.523, 46 L.Ed.2d 514 (1976). “[A] series of sensationalcongressional investigations” prompted hearings wherewitnesses “painted a sordid picture of how the UnitedStates had been billed for nonexistent or worthlessgoods, charged exorbitant prices for goods delivered, andgenerally robbed in purchasing the necessities of war.”United States v. McNinch, 356 U.S. 595, 599, 78 S.Ct. 950,2 L.Ed.2d 1001 (1958). Congress responded by imposingcivil and criminal liability for 10 types of fraud on theGovernment, subjecting violators to double damages,forfeiture, and up to five years' imprisonment. Act of Mar.2, 1863, ch. 67, 12 Stat. 696.

Since then, Congress has repeatedly amended the Act,but its focus remains on those who present or directlyinduce the submission of false or fraudulent claims. See31 U.S.C. § 3729(a) (imposing civil liability on “anyperson who ... knowingly presents, or causes to bepresented, a false or fraudulent claim for payment orapproval”). A “claim” now includes direct requests tothe Government for payment as well as reimbursementrequests made to the recipients of federal funds underfederal benefits programs. See § 3729(b)(2)(A). The Act'sscienter requirement defines “knowing” and “knowingly”to mean that a person has “actual knowledge of theinformation,” “acts in deliberate ignorance of the truth orfalsity of the information,” or “acts in reckless disregardof the truth or falsity of the information.” § 3729(b)(1)(A).And the Act defines “material” to mean “having a naturaltendency to influence, or be capable of influencing, thepayment or receipt of money or property.” § 3729(b)(4).

Congress also has increased the Act's civil penalties sothat liability is “essentially punitive in nature.” VermontAgency of Natural Resources v. United States ex rel.Stevens, 529 U.S. 765, 784, 120 S.Ct. 1858, 146 L.Ed.2d836 (2000). Defendants are subjected to treble damages

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plus civil penalties of up to $10,000 per false claim. §3729(a); 28 CFR § 85.3(a)(9) (2015) (adjusting penaltiesfor inflation).

B

The alleged False Claims Act violations here arosewithin the Medicaid program, a *1997 joint state-federal program in which healthcare providers serve pooror disabled patients and submit claims for governmentreimbursement. See generally 42 U.S.C. § 1396 et seq.The facts recited in the complaint, which we takeas true at this stage, are as follows. For five years,Yarushka Rivera, a teenage beneficiary of Massachusetts'Medicaid program, received counseling services at ArbourCounseling Services, a satellite mental health facilityin Lawrence, Massachusetts, owned and operated bya subsidiary of petitioner Universal Health Services.Beginning in 2004, when Yarushka started havingbehavioral problems, five medical professionals at Arbourintermittently treated her. In May 2009, Yarushka hadan adverse reaction to a medication that a purporteddoctor at Arbour prescribed after diagnosing her withbipolar disorder. Her condition worsened; she suffered aseizure that required hospitalization. In October 2009, shesuffered another seizure and died. She was 17 years old.

Thereafter, an Arbour counselor revealed to respondentsCarmen Correa and Julio Escobar—Yarushka's motherand stepfather—that few Arbour employees were actuallylicensed to provide mental health counseling and thatsupervision of them was minimal. Respondents discoveredthat, of the five professionals who had treated Yarushka,only one was properly licensed. The practitioner whodiagnosed Yarushka as bipolar identified herself as apsychologist with a Ph. D., but failed to mention thather degree came from an unaccredited Internet collegeand that Massachusetts had rejected her application tobe licensed as a psychologist. Likewise, the practitionerwho prescribed medicine to Yarushka, and who was heldout as a psychiatrist, was in fact a nurse who lackedauthority to prescribe medications absent supervision.Rather than ensuring supervision of unlicensed staff,the clinic's director helped to misrepresent the staff'squalifications. And the problem went beyond those whotreated Yarushka. Some 23 Arbour employees lackedlicenses to provide mental health services, yet—despite

regulatory requirements to the contrary—they counseledpatients and prescribed drugs without supervision.

When submitting reimbursement claims, Arbour usedpayment codes corresponding to different services that itsstaff provided to Yarushka, such as “Individual Therapy”and “family therapy.” 1 App. 19, 20. Staff members alsomisrepresented their qualifications and licensing status tothe Federal Government to obtain individual NationalProvider Identification numbers, which are submittedin connection with Medicaid reimbursement claims andcorrespond to specific job titles. For instance, one Arbourstaff member who treated Yarushka registered for anumber associated with “ ‘Social Worker, Clinical,’ ”despite lacking the credentials and licensing required forsocial workers engaged in mental health counseling. 1 id.,at 32.

After researching Arbour's operations, respondentsfiled complaints with various Massachusetts agencies.Massachusetts investigated and ultimately issued areport detailing Arbour's violation of over a dozenMassachusetts Medicaid regulations governing thequalifications and supervision required for staff at mentalhealth facilities. Arbour agreed to a remedial plan,and two Arbour employees also entered into consentagreements with Massachusetts.

In 2011, respondents filed a qui tam suit in federalcourt, see 31 U.S.C. § 3730, alleging that UniversalHealth had violated the False Claims Act under animplied false certification theory of liability. The operativecomplaint asserts that Universal Health (acting throughArbour) submitted *1998 reimbursement claims thatmade representations about the specific services providedby specific types of professionals, but that failed todisclose serious violations of regulations pertainingto staff qualifications and licensing requirements for

these services. 1 Specifically, the Massachusetts Medicaidprogram requires satellite facilities to have specific typesof clinicians on staff, delineates licensing requirementsfor particular positions (like psychiatrists, social workers,and nurses), and details supervision requirements forother staff. See 130 Code Mass. Regs. §§ 429.422–424,429.439 (2014). Universal Health allegedly floutedthese regulations because Arbour employed unqualified,unlicensed, and unsupervised staff. The MassachusettsMedicaid program, unaware of these deficiencies, paidthe claims. Universal Health thus allegedly defrauded the

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