OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
In a closely watched decision, the U.S. Supreme Court has unanimously endorsed a version of the "implied false certification" theory of liability under the False Claims Act ("FCA"). In a decision that leaves almost as many questions unanswered as it resolved, the Court held that a material omission on a claim for payment may give rise to liability where two conditions are met: (1) the claim does not merely request payment, but also makes specific representations about the nature of 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 case is Universal Health Services v. U.S. ex rel. Escobar. Despite the Court's endorsement of an implied false certification theory of liability, FCA defendants may find a silver lining in the Court's newly-clarified standard of materiality, which focuses on whether the defendant knowingly violated a requirement that the defendant knows is material to the government's payment decision. The decision rejects the distinction drawn by many other courts for FCA liability purposes between conditions of payment and conditions of participation, and it suggests that no liability should exist under the FCA if the government was fully aware of the alleged regulatory, statutory, or contractual violation but elected to pay a claim anyway.
Under the "implied certification" theory of legal falsity, a company may be subject to FCA liability for submitting a claim while failing to comply with any relevant statutes or regulations, even if the company was not required to expressly certify its compliance as a condition of payment. The theory is that by submitting a claim for payment, the company "implicitly certifies" that it has complied with all of these statutes and regulations. For healthcare providers, this can potentially include upwards of tens of thousands of pages of statutes and regulations.
In this case, the relators are family members of a woman who allegedly died as the result of a seizure at a Massachusetts mental health clinic. The relators alleged that the clinic failed to adequately hire and supervise its staff, as required by state regulations, and that noncompliance with these regulations resulted in FCA liability. The district court dismissed the case by distinguishing conditions of payment from conditions of participation in the Medicaid program, and ruled that "implied certification" liability will only attach when there is noncompliance with a condition of payment, which is the common distinction drawn by courts when determining whether to impose FCA liability. The First Circuit reversed, holding that state Medicaid regulations governing licensing and supervision for psychiatric care were, in fact, conditions of payment.
Two questions were before the Supreme Court: (1) whether "implied false certification" is a viable theory under the FCA, and (2) if so, under what circumstances? Although most circuit courts of appeal have recognized "implied false certification" as a viable theory of liability, there has been less uniformity with respect to its application. Some courts limited its application to cases where defendants failed to disclose violations of expressly designated conditions of payment, while others held that conditions of payment need not be expressly designated as such to serve as the basis for FCA liability. In 2015, the Seventh Circuit rejected "implied false certification" as a viable means of establishing FCA liability altogether, thus creating a circuit split and paving the way for the Court's decision.
The Court first held that "implied false certification" can, at least in some circumstances, provide a viable basis for liability. Specifically, when a defendant makes representations in submitting a claim, but omits any mention of its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant's representations misleading with respect to the goods or services provided.
The Court held that the claims did more than merely demand payment, and instead "fall squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations." In this case, the defendant submitted claims using payment codes that correspond to specific counseling services, and its staff used National Provider Identification codes that correspond to specific job titles. Because it used these codes to convey this information without disclosing multiple violations of staff and licensing requirements for mental health facilities, the Court held that the defendant's representations were misleading in context.
Ultimately, "implied false certification" can now serve as a basis for FCA liability, at least where two conditions are satisfied. First, the claim cannot merely request payment, but must also make specific representations about the nature of the goods or services provided. Second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements must make those representations misleading half-truths. If these conditions are met, a defendant may be liable for a misleading omission under the FCA.
After finding that implied false certifications can be a basis for liability under the FCA, the Court sought to clarify when such an implied certification gives rise to liability. The circuit courts that had addressed this issue were split as so whether the regulatory, statutory or contractual requirement with which a defendant failed to comply must be an express condition to the government's payment of a claim or instead merely allowed the government to elect not to pay. The Court chose a third option, holding that what matters is not the label that the government attaches to a requirement, but whether the defendant knows that the requirement is material to the government's payment decision. The FCA defines "material" as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." 31 U.S.C. § 3729(b)(4). Based on this definition and understanding of the term, the Court sought to clarify how the materiality requirement should be enforced in the context of an implied false certification.
The Court rejected the defendant's argument that the government must expressly designate a requirement as a condition of payment for that requirement to be material. As it explained, "[a] defendant can have 'actual knowledge' that a condition is material without the Government expressly calling it a condition of payment." As an example, the Court pointed to a hypothetical contractor providing the military with guns that do not shoot. The guns' ability to shoot is plainly material to the government's decision to pay for them, regardless of whether it expressly stated that fact. Also, in the Court's view, forcing the government to expressly designate a provision as a condition of payment could result in arbitrary decisions and a list of "material" conditions that is longer than is actually appropriate. Accordingly, it held that the government need not expressly designate a requirement as a condition of payment for that requirement to be material under the FCA.
Conversely, the Court made clear that "[t]he materiality standard is demanding" and held that a requirement is not material simply because the government expressly conditions payment on compliance with that requirement. Specifically, the Court held that the government's "decision to expressly identify a provision as a condition of payment is relevant," but not "automatically dispositive." There may be instances in which a requirement is listed as an express condition to payment but the government regularly pays contractors despite knowing that the requirement was violated. In instances like this, where the government clearly does not treat compliance with a requirement as material, it cannot be considered material by simple virtue of its inclusion on a list of express conditions. Similarly, the Court made clear that materiality "cannot be found where noncompliance is minor or insubstantial."
Finally, the Court held that defining materiality to cover all instances where "the government would have the option to decline to pay if it knew of the defendant's noncompliance" would result an "extraordinarily expansive view of liability" under the FCA. It noted several absurd scenarios that would create liability under this view, such as holding a defendant liable for false healthcare reimbursement requests simply because it used foreign-made staplers in its office in spite of a legal mandate to use US-made supplies. The Court concluded that considering as material any violation that would entitle the government to refuse payment would result in liability in situations beyond the text or intended scope of the FCA.
Despite this lengthy analysis and explanation of how the materiality requirement should be enforced, the Court provided no actual test for lower courts to use other than the definition itself that already exists in the statute. The closest the Court comes to defining materiality is the following:
In sum, when evaluating materiality under the [FCA], the Government's decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, 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. Or, 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.
Thus, although the Court appears to limit the expanded scope of FCA liability through a newly-clarified materiality standard, the application of that standard remains unclear. Nevertheless, the Court indicated that it views the failure to plead facts adequate to support materiality as grounds for dismissal and that allegations of materiality must be pleaded with specificity under Rule 9(b). Defendants are also likely to rely heavily on the Court's pronouncement that the government's election to pay, despite knowledge of a violation, "is very strong evidence that th[e violated] requirements are not material." This statement appears to endorse a concept similar to the "government knowledge" defense that many defendants have previously attempted to raise, but that courts have routinely rejected. FCA defendants now have support for the argument that they cannot be liable if the government was fully aware of the alleged regulatory, statutory, or contractual violation but elected to pay anyway. Thus, this clarification of the materiality requirement appears to provide some relief for FCA defendants amidst what is otherwise a potentially broad expansion of this powerful statute.
Despite the expanded scope of liability under the FCA, the Court's explanation of when an implied false certification gives rise to liability may provide a silver lining for FCA defendants by emphasizing a newly-clarified and "demanding" standard of materiality. The Court rejected arguments that non-compliance is material simply because the government could refuse payment, or even if compliance with the requirement has been specifically listed as an express condition to payment. And perhaps most importantly, the Court held that the government's decision to pay a contractor, despite knowledge that the contractor has failed to comply with a particular requirement, is "strong evidence" that the requirement is not material. This statement appears to endorse a concept similar to the "government knowledge" defense that courts previously rejected, and could revive the argument that the government's decision to pay a claim despite knowledge of a violation bars a relator's FCA claim. Thus, the Court's decision may ultimately provide a useful line of defense for FCA defendants.
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
On 5 September 2019, Professor John McMillan AO’s Final Report (Report) on the operation of the Narcotic Drugs Act 1967 (ND Act) was tabled in Parliament. Section 26A of the ND Act required the Minster to cause a review of the operation of the ND Act to be undertaken.