Ninth Circuit Rules Supreme Court’s Two-Part Test of Implied Certification under the False Claims Act Mandatory

For those contractors in the government arena, read on.

The False Claims Act (“FCA”) was enacted to deter knowingly fraudulent actions by contractors which resulted in a loss of property to the Government. Intent to defraud with resulting financial hardship was required. Contrary to popular misconception, the statute was not designed to punish all false submissions to the Government simply because those submissions, or claims, are later found to be false. The statute’s inclusion of the requisite element of knowledge is consistent with this notion:

(1) A defendant must submit a claim for payment to the Government;

(2) the claim must be false or fraudulent;

(3) the defendant must have known the claim was fraudulent when it was submitted (also known as scienter); and

(4) the claim must have caused the Government to pay out money.

See 31 U.S.C. § 3729(a).

Despite these explicit elements (in addition to common law elements of fraud), over the last two decades, contractors have seen ever-expanding theories of FCA recovery presented by qui tam plaintiffs and the Government. For example, under the FCA, the false “claim” evolved over time: the claim no longer needs to be an express false claim (i.e. the truthfulness of the claim is a direct condition of payment); the claim can be “implied” misrepresentation or “half-truth”.

The United States Supreme Court in its paramount 2016 Escobar decision dealt squarely with the issue and interpretation of “implied” false certifications. The High Court, in pertinent part, ruled that implied certification is a viable theory of FCA liability at least where two conditions are met: (1) first, the claim does not merely request payment, but also makes specific representations about the goods or services provided, and (2) second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.” Escobar went on to provide an exact test for the FCA’s materiality requirement, clarifying that, even when a provision is labeled an express “condition of payment”, not every violation of that requirement will give rise to liability. Instead, materiality looks to the effect on the likely or actual recipient of the alleged misrepresentation; i.e. the Government. Put another way, the Government’s designation of compliance with a particular statutory, regulatory, or contractual requirement is not dispositive on the issue of materiality.

On August 27, 2018, the U.S. Court of Appeals for the Ninth Circuit, in U.S. ex rel. Scott Rose, et al., v. Stephens Institute, No. 17-15111 (9th Cir. August 24, 2018), affirmed both express and implied certification theories under the FCA, finding that falsity can be had by (1) an express certification; i.e. where the contractor seeking payment falsely certifies compliance with a law, rule, or regulation as part of the process for which its claim for payment is made/submitted, or (2) an implied false certification; i.e. the contractor has previously undertaken to expressly comply with a law, rule, or regulation (but does not do so as to the instant claim), and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required as part of the process in submitting the claim in question.

With respect to the later, the Ninth Circuit mandated Escobar’s two-part test for implied certification, but only where the two conditions enumerated in Escobar are satisfied: again, (1) the claim 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.”1

The take away: the Ninth Circuit’s latest opinion is generally helpful for some defendant contractors: in cases where the now-mandatory two-part test is not met, absent appeal, the defendant may be absolved of FCA liability. That being said, government contractors and others participating in federally-funded programs must be prepared to defend against FCA suits based on an implied certification theory, which still very must exists.

The opinion in U.S. ex rel. Scott Rose, et al. v. Stephens Institute was issued by a three-judge panel. The Ninth Circuit left open the possibility that the issue may be revisited en banc.

1 Although beyond the scope of this article, “misleading half-truths” are often found when the withholding of certain data by the defendant from the Government caused, or was material to, the Government’s decision to purchase the goods or services; i.e. the data was a condition of payment even if not designated an express condition of payment. For example, when the defendants had knowledge that the degradation of bullet-proof vests which they sold to the Government contradicted the defendants’ misrepresentations about the superiority of those vests. Note, the inquiry is highly factual and must be analyzed on a case-by-case basis.