Latest District Court Decision Confirms Escobar Two-Part Implied Certification Test
One of the most litigated issues following the Supreme Court’s Escobar decision is whether the Court created a limited, two-part test to define the implied certification theory under the False Claims Act. In the US Court of Appeals for the Second Circuit, the prevailing view confirms that the proper interpretation of Escobar is that the implied certification theory can only proceed when the defendant made specific representations about the goods or services provided and that those representations were rendered misleading due to its failure to disclose noncompliance with material statutory, regulatory or contractual requirements. On August 10, 2017, federal district judge Deborah Batts in the Southern District of New York joined the majority view of her colleagues in U.S. ex. rel. Forcier v. Computer Sciences Corporation and the City of New York in dismissing part of the government’s complaint.
In this case, the US Department of Justice (DOJ) filed a complaint in intervention alleging the City of New York (City) and its billing contractor, Computer Sciences Corporation (CSC), submitted false claims to the Medicaid program in two ways.
First, DOJ argued that the defendants failed to adhere to Medicaid secondary payor requirements concerning the state’s Early Intervention Program (EIP), which pays for services to children with developmental delays. These requirements obligate municipalities to take “reasonable measures” to determine whether third party insurance coverage was available for the EIP services and seek reimbursement from such available payors. DOJ alleged that CSC and the City did not comply with these requirements by submitting incorrect policy numbers to third party insurers knowing that such claims would be denied and by incorrectly informing Medicaid that no third party coverage existed or such coverage had been rejected.
Second, DOJ claimed that the compensation provisions of the contract between CSC and the City failed to comply with Medicaid requirements and that CSC induced the state to approve its enrollment as the City’s billing agent by concealing this compensation provision on its enrollment application. DOJ pled this allegation under two liability theories: implied certification and fraudulent inducement. The contract’s compensation paid CSC a flat fee for its billing services and, if CSC obtained Medicaid payments above a certain threshold dollar amount, CSC was entitled to receive an “incentive payment” equal to 15 percent of any amounts collected above the threshold. Medicaid regulations, however, condition Medicaid payment to billing agents whose compensation is “not related on a percentage or other basis to the amount that is billed or collected.” 42 CFR 447.10(f). Although CSC argued that this incentive payment was never earned or paid, DOJ alleged that CSC failed to disclose the existence of this potential incentive compensation in its Medicaid application to enroll as a billing agent, and this failure fraudulently induced the state to approve CSC and to make Medicaid payments that it would not otherwise have made.
The court permitted DOJ’s implied and express certification claims concerning compliance with secondary payor requirements. Regarding the fraudulent inducement claim concerning the CSC enrollment application, while the court stated that the Escobar limitations on implied certification claims would not control in a fraudulent inducement context, the court nonetheless relied on Escobar’s holding concerning “misleading half-truths” in allowing the government’s claim to survive defendant’s motion to dismiss.
However, the court dismissed the government’s implied certification claim regarding the CSC contract and affirmed the majority view the two-part implied certification test articulated in Escobar. In discussing implied certification, the court stated, even assuming that the submitted Medicaid claims could be considered “specific representations,” “it is hard to see how defendant’s failure to disclose its incentive-based fee structure rendered these representations misleading with respect to the goods or services provided.” The court agreed with defendants that the CSC compensation arrangement “had nothing to do with the services provided, and the rates of such services and the existence/nonexistence of private insurance coverage are not the type of representations that would lead a reasonable person to conclude anything about its compensation arrangement-much less that it was on a fixed-fee basis.”
While the government may attempt to use alternative theories, such as fraudulent inducement, to side-step Escobar, the government does not have a one-size fits all approach and Escobar’slimitations may continue to provide a bulwark in the implied certification context. Also, it is less than clear whether a fraudulent inducement theory would survive discovery into the state contract approval process to successfully prove that the provision in question was material to the state’s decision to approve CSC’s enrollment. Furthermore, a remaining question of damages would exist since arguably appropriately submitted claims remain payable, if not to CSC, to the City.
More importantly, this decision confirms that the better reading of Escobar requires close examination of the alleged specific representations to determine that those representations relate to the goods and services claimed as well as whether any potential regulatory noncompliance rendered the specific goods and services representations misleading. Holding otherwise would turn implied certification into a Leviathan that swallows any claim for payment regardless of how unrelated any potential noncompliance is to the claim itself.