Loyola University Chicago School of Law, JD 2017
In a monumental decision for false claims cases, the Supreme Court of the United States (SCOTUS) unanimously affirmed the viability of the implied certification theory. The ramifications of this ruling may create additional stressors on small businesses and will likely create additional demand for compliance programs and policies.
The False Claims Act, imposes significant penalties on anyone who “knowingly presents . . . a false or fraudulent claim for payment or approval” to the Federal Government. Under the implied certification theory, liability may be imposed when an individual seeking reimbursement, who may have delivered or performed the materials or services claimed, violates a contract, statute or regulation. The Supreme Court held in Universal Health Services, Inc. v. United States ex rel. Escobar that implied false certification theory can be the basis for liability under the False Claims Act, but that liability under the FCA for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment.
Prior to the SCOTUS decision, almost every federal circuit court had weighed in on implied certification theory with the majority recognizing it to some extent. Some circuits construed implied certification broadly, viewing any failure to comply with any material requirement for payment, regardless of whether it was required for program participation, as a potential liability. Other courts adopted a narrower view, limiting the application to situations where compliance with the applicable statute, contract or regulation contained an express prerequisite to payment. With last week’s decision, SCOTUS affirmed that “at least in certain circumstances, the implied false certification theory can be a basis for liability,” but rejected the more expansive view adopted by the First Circuit.
This decision will likely have far reaching implications for federal contractors and health care providers, expanding false claims liability in many jurisdictions. The adoption of implied certification underscores the importance of maintaining compliance with all federal rules, regulations and contracts. One of the best ways to maintain compliance is to implement a comprehensive compliance program, staffed with individuals intimately familiar with any and all relevant regulations. While the government often uses weak or inadequate compliance programs as evidence of deliberate ignorance or reckless disregard, a strong, thorough compliance program may be utilized by defendants to demonstrate the alleged non-compliance was the result of a single or isolated group of individuals.
For many smaller providers or contractors, however, complying with current regulations is already difficult without the added pressure of attempting to decipher which regulations may be implied. In a June 2016 poll of small businesses (defined as less than 500 employees), nearly 60% of the 1,679 respondents identified some level of difficulty understanding and managing government regulations and the law. In a February 2016 survey of over 900 health care professionals in small practices: 60% of respondents are unaware of pending HIPAA audits; 54% of respondents did not have an appointed Security or Privacy Officer; while 70% of respondents had created a compliance plan (up from 61% in 2014).
For the majority of the 1,649 small business respondents, the owner was primarily responsible for handling the regulatory issues, requiring an average of 200 hours per year. Two-thirds of small businesses reported their primary source of information on regulatory changes came from a professional adviser or consultant and half reported relying on their trade association.
Even for companies with more substantial programs, capital and skilled employees, maintaining compliance can be a challenge. According to the 2015 Thomas Reuters annual survey from over 600 compliance professionals in the financial services industry, compliance officers are experiencing regulatory fatigue and overload while fighting to maintain compliance with an increasing number of regulations. More than a third of the respondents reported spending at least one entire day a week tracking and analyzing regulatory change – trying to interpret regulator’s expectations and requirements and keeping up to date on changes. Respondents also anticipated an increase in personal liability of compliance officers, making recruiting and retaining skilled staff a front line issues.
Recent data suggests the total economy-wide cost of regulation is around $1.75 trillion, which spread out evenly over the 28 million small businesses, would come to about $60,000 per business. Further, small businesses often lack the specialized educational training to properly understand the complex and increasingly layered regulations. However, to not protect against potential FCA liability through a substantial compliance program would be fatal to almost any business. In 2014, over $5.7 billion was recovered under the FCA and in 2015, over $3.6 billion.
How exactly the recent decision will affect small businesses remains to be seen. However, with the expansion of liability to include implied certifications to regulations, statutes and contracts, we will likely see a substantial increase in compliance efforts and costs. Small businesses will likely seek guidance from compliance professionals and should work to develop a compliance program that fits their needs. Monitoring false claims activity in the industry may help provide additional insight. Further, many regulatory agencies provide compliance support and guidelines for small business compliance on their websites. For health care providers and contractors alike, the affirmation of the implied certification theory of liability under the false claims act may be daunting, but thorough education, preparation and training may help deter and defend against false claims allegations.