On Friday, December 4, 2015, the Supreme Court of the United States (SCOTUS) granted review in United States v. United Health Services, Inc., 780 F.3d 504 (1st Cir. 2015) cert. granted in part, 84 U.S.L.W. 30337 (U.S. Dec. 4, 2015) (No. 15-7), to determine important issues about the scope of the federal False Claims Act (FCA), 31 U.S.C. § 3729, a statute that makes it unlawful for any person to knowingly submit a false or fraudulent claim for payment to the federal government. The FCA applies to both federal contractors and recipients of federal grant and cooperative agreement assistance. The steep damages associated with an FCA violation (three times the damage sustained by the government, plus civil penalties of $5,500 to $11,000 per claim) have enabled the federal government in recent years to recover billions of dollars from various entities, including numerous nonprofit organizations, in both court victories and FCA settlements.
Much of the significant uptick in government enforcement actions is a result of the government's increasingly aggressive assertion of the "implied certification" theory under the FCA. Under this theory, a claim for reimbursement submitted when a recipient of federal funds is noncompliant with a grant, regulation, or other federal, state, or local law is "false" under the theory that the government would not have paid for the services had it known of the nonprofit's noncompliance. Under the implied certification theory, this is true even where the government does not expressly condition payment on the breached provision, regulation, or law. The theory raises important questions about the difference between a breach of the contract or grant agreement and "defrauding" the government.
Circuit Courts are split over how to interpret and administer the implied certification theory. The Seventh Circuit rejected implied certification altogether, stating that the theory "lack[ed] a discerning limiting principle." See United States v. Sandford-Brown, Ltd., No. 14-2506, 2015 WL 3541422, at *12 (7th Cir. June 8, 2015). The Second and Sixth Circuits recognize the implied certification theory, but only if the government expressly conditions payment on compliance. See Mikes v. Strauss, 274 F.3d 687, 700 (2d Cir. 2001); Chesbrough v. VPA, P.C., 655 F.3d 461, 468 (6th Cir. 2011). The First, Fourth, and D.C. Circuits recognize the condition of payment requirement; they do not require the legal obligation in question to be explicitly designated as a condition of payment. See U.S. ex rel. Hutcheson v. Blackstone, 647 F.3d. 377, 386-388 (1st Cir. 2011); United States v. Triple Canopy, Inc., 775 F.3d 628, 636 (4th Cir. 2015); United States v. Sci. Apps. Int'l Corp., 626 F.3d 1257, 1269 (D.C. Cir. 2010).
The specific questions before the Court are:
- Whether the "implied certification" theory of legal falsity under the FCA—applied by the First Circuit below but recently rejected by the Seventh Circuit—is viable; and
- Whether, if the "implied certification" theory is viable, a government contractor's reimbursement claim can be legally "false" under that theory if the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment, as held by the First, Fourth, and D.C. Circuits; or whether liability for a legally "false" reimbursement claim requires that the statute, regulation, or contractual provision expressly state that it is a condition of payment, as held by the Second and Sixth Circuits.
Preparing for the SCOTUS Decision
The SCOTUS decision could substantially affect the way that nonprofit organizations manage their risk of noncompliance, particularly where the newly implemented Uniform Guidance governing grant and cooperative agreements now requires more contract-like requirements, including conflicts of interest and mandatory disclosure. The increased federal regulations pose greater risk for noncompliance and, consequently, greater concern that nonprofits will be increasingly subject to the implied certification theory for failing to comply with these regulations. However, regardless of outcome, nonprofits should remember that:
- Robust compliance programs are the best defense under any theory of FCA liability.
- An ethical culture will arm nonprofits with the personnel needed to make reasonable, appropriate, and, sometimes, difficult decisions that are thoughtful and above reproach. Underscoring the importance of ethics must come from the highest levels of management. Nonprofit organizations that operate oversees must carefully choose their overseas partners and establish rigorous subrecipient and subcontractor vetting and monitoring processes.
- Nonprofits should continually seek to detect and prevent fraud, waste, and abuse within the organization through:
- Internal reporting procedures. Each employee, down to the lowest-paid employee, must be encouraged to report problems and concerns. Nonprofits should follow up with employee concerns, explaining how the organization is either working to resolve or has resolved the employee's concerns.
- Information-sharing. If a nonprofit detects a potential noncompliance issue within the organization, that issue should be shared with appropriate personnel across other business units to ensure that the scope of the problem is contained.
- Systematic audits by neutral personnel or third parties. Nonprofits should provide a schedule for auditing each of their contracts and grants that seeks to examine whether their current policies and procedures are effective. Smaller nonprofits may work with their A-133 auditors to ensure proper auditing of their policies and procedures in a more cost-efficient manner.
- Training of and communication with its employees. Again, employees are an organization's frontline access to mounting problems. Management should try to discover its weaknesses by establishing a rapport with the frontline employees who are best positioned to spot issues. To that end, nonprofits must give their employees relevant, practical training on an ongoing basis.
- Certifications should be thoughtfully given and should comprehensively include all relevant personnel—including finance, program, and legal personnel—to the certification.
- Outside counsel may be able to provide helpful third-party review and enable the organization to take advantage of the protections afforded by the attorney-client privilege.
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While SCOTUS has not set a briefing schedule in United States v. Universal Health Services, Inc., Venable will be providing updates as more information becomes available. The Court will issue a decision no later than the end of June 2016.