The recent U.S. Supreme Court decision in Universal Health Services Inc. v. U.S. ex rel. Escobar has significant implications for all federal-government contractors and the outside counsel who represent them. The False Claims Act is a strong enforcement tool for punishing bad actors, but it also presents a serious risk to anyone doing business with the federal government. Full compliance with federal contracts can be especially difficult given the intricate mass of laws, rules, and regulations that govern federal contracting. Many of these are incorporated by reference or do not appear in the contract at all, and they may also be vague or contradictory. The stakes are also quite high as the False Claims Act can impose trebled damages in addition to fines.
Escobar contained two primary findings. First, it confirmed the theory of implied certification. This means that by submitting an invoice, the contractor automatically certifies that it is in compliance with all material requirements of the contract. No explicit representation of compliance is needed to trigger liability. The False Claims Act and implied certification are intended to safeguard public funds by ensuring that the government receives the full benefit of its bargain, but they can also ensnare a well-meaning contractor who simply fails to exercise sufficient caution.
The second finding in Escobar helps to limit the potentially extreme nature of implied certification liability. It defines a test for determining whether a term is “material” and thus predicates potential liability. There were numerous standards proposed in briefs by the parties and amici covering the entire spectrum of possibilities. The court settled on a test rooted in the behavior of the government. For a term to be deemed material the government must actually treat it that way. The classical definition of material—having a natural tendency to affect the decision—has been superseded in cases where the government is aware of contractor non-compliance. Per the opinion this is designed to be a rigorous standard and to prevent application of the False Claims Act to “garden variety breaches of contract or regulatory violations.” The court did not give us a bright-line rule to apply, but it did provide several examples: It is not sufficient that the non-compliance could possibly impact the government’s decision to pay. It is not even enough for the government to explicitly mark a term as material. On the other hand, if the government chooses to pay a type of invoice in full despite having knowledge that the contractor has not complied with a term of the contract, that is strong evidence that the term is not material.
This provides an incentive for federal contractors to be open with government contracting officers. By addressing problems with contract compliance early, the contractor reduces the chances of incurring False Claims Act liability and avoids the appearance of impropriety. This also increases the odds that the government will actually get what it is paying for. False Claims Act suits often arise late in the life of the contract, or even after the contract ends. By encouraging early self-disclosure, Escobar helps to ensure that non-compliance is addressed and resolved during the life of the contract rather than punishing a contractor for past actions as a deterrent to others.
It is also imperative that contractors exercise great care regarding performance and invoicing. A strong internal set of checks and balances beginning as early as the business-development phase is critical. Full understanding of requirements and applicable regulations during the proposal phase will help generate a pricing strategy that ensures profitability while supporting full contract performance. A strong audit function that spot-checks compliance during performance ensures that program staff continue to abide by the requirements. Finally, a careful screening of invoices to ensure that they are accurate and contain the required level of detail will help to prevent false or misleading statements to the government. Implied certification requires a misrepresentation to take effect, and the best means to avoid a False Claims Act case is not to make one.
Keywords: litigation, corporate counsel, “Escobar”, “Universal Health”, “False Claims”, and “FCA
Taylor Brown is associate general counsel with PAE in Washington, D.C.