Construction Law Update: Federal Contractor False Claims Liability
On June 16, 2016, the United States Supreme Court issued a decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), addressing the issues of whether the theory of “implied false certification” falls within the scope of the federal False Claims Act, 31 U.S.C. Section 3729 et seq., and, if so, the breadth of potential liability under the theory. The decision is important to federal contractors because submission of payment applications and of other payment claims to federal agencies is subject to the False Claims Act.
In Escobar, the Supreme Court described the implied-false-certification theory as follows: “[W]hen a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant’s violation of a material statutory, regulatory, or contractual requirement, . . . the defendant has made a misrepresentation that renders the claim ‘false or fraudulent’ under” the Act. 136 S. Ct. at 1995. The Court then ruled that the theory is applicable to the False Claims Act, and it explained the general circumstances when a defendant could be liable under the theory: “[L]iability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.” Id. Therefore, in addition to affirmative misrepresentations, the implied-false-certification theory makes the False Claims Act cover misleading half-truths.
The Supreme Court next explained what types of half-truths could result in liability under the theory: “Defendants can be liable for violating requirements even if they [the requirements] were not expressly designated as conditions of payment. . . . What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” 136 S. Ct. at 1996. In summary, half-truths that are “material” to the federal government’s payment decisions can give rise to False Claims Act liability. This is an alarmingly broad scope of potential liability for those, such as contractors, submitting payment requests to the federal government. It also begs that question of what is “material” to the government’s payment decisions.
The Court explained that the “materiality standard is demanding. The False Claims Act is not ‘an all-purpose antifraud statute,’ or a vehicle for punishing garden-variety breaches of contract or regulatory violations. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance. Materiality, in addition, cannot be found where noncompliance is minor or insubstantial.” 136 S. Ct. at 2003. This definition of “materiality” helps narrow the otherwise broad potential liability for contractors submitting payment applications to the federal government.
After Escobar, it is essential for any contractor on a federal construction project to become familiar with all of the federal statutory, regulatory and contractual requirements applicable to the project because the requirements could serve as the basis for False Claims Act liability if a payment application contains a misleading “half truth” that is “material” to the government’s payment decision.