By Beth McClain*
June 11, 2008
In a unanimous decision issued on Monday, the Supreme Court resolved a conflict among the circuits regarding the proof required to establish liability under the False Claims Act when claims are submitted to a non-federal entity. See Allison Engine Co. v. United States ex rel. Sanders (No. 07-214) (June 9, 2008).1 A copy of the decision is posted in the Fraud and Abuse Practice Corner. The facts of the Allison Engine case and possible implications of this decision for the healthcare industry are summarized briefly below.
The Facts Below
Allison Engine was a declined qui tam case that was litigated to trial by the relator; the United States participated in the Supreme Court appeal as amicus. The case involved allegedly false claims submitted by a subcontractor to a prime contractor shipbuilder for the Navy. The defendant/petitioners were accused of submitting false claims for products that did not conform with contract specifications (a "substandard product or service" theory of FCA liability that has also been invoked in healthcare cases). The case was tried to a jury, and the defendants successfully moved for judgment as a matter of law under Rule 50(a) of the Federal Rules of Civil Procedure. A key fact in the Allison Engine case—and the basis for the district court's dismissal—was that the relators did not introduce any evidence that claims were ever submitted to the federal government as a result of the defendants' alleged misconduct. A divided panel of the Sixth Circuit reversed, agreeing with the relators that proof of an intent to cause the submission of false claims to a private entity was sufficient if government funds would be used to pay the claim.
The Supreme Court's Analysis
Vacating this holding, the Supreme Court held that, even though it is not necessary to prove that a claim was actually presented to the federal Government for liability to arise under 31 U.S.C. §§ 3729 (a)(2) and
(a)(3), it is also not sufficient to merely show that a government prime contractor used "government money" to pay a subcontractor's false claim. The Court held that getting a false or fraudulent claim paid by the government is not the same as getting a false or fraudulent claim paid using 'government funds.'" Id. Rather, a plaintiff pursuing a claim under Section 3729(a)(2) "must prove that the false record or statement must induce payment by the Government and must be a material to the Government's decision to pay or approve the false claim." Slip op. at 2 (No. 07-214). Likewise, the Court held that, for there to be conspiracy liability under Section 3729(a)(3), "it must be shown that the conspirators intended 'to defraud the Government.'"
False Claim Must Be Intended for the Government
Proving a violation of Section 3729(a)(2) requires proof that the defendant had "the purpose of getting a false or fraudulent claim 'paid or approved by the Government,'" the Court held; otherwise, "[e]liminating this element of intent, as the Court of Appeals did, would expand the FCA well beyond its intended role of combating 'fraud against the government.'" Id. at 5. The Court further explained that a "direct link" between the false statement and loss to the Federal Treasury must be proven:
If a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim "by the Government." In such a situation, the direct link between the false statement and the Government's decision to pay or approve a false claim is too attenuated to establish liability.
Id. at 8. Without this link, the Court found, the FCA would be impermissibly expanded to recognize fraud directed at private entities, which "would threaten to transform the FCA into an all-purpose antifraud statute." Id. at 9. This holding can have implications in healthcare where, for an example, a private entity conducting federally funded medical research is defrauded by a vendor. Under Allison Engine, it appears that liability under Section 3729(a)(2) would require proof that the vendor knew that government funds were at stake and that its false statements would induce payment by the government.
Presentment Not Required
Another issue important for the healthcare industry resolved by the Allison Engine decision is the conflict among the circuits as to whether it is necessary to prove "presentment" under Sections 3729 (a)(2) and
(a)(3). Courts mostly agree that presentment is required for liability to arise under subsection (a)(1), but were split on the necessity of presentment under subsections (a)(2) and (a)(3). The Court held that Section 3729(a)(2) does not require proof that the false record or statement was actually submitted to the Government. Id. at 7-8. Under Allison Engine, therefore, the fact that false record was presented to a fiscal intermediary or to a state Medicaid program, rather than to the federal government, would not preclude liability under the FCA.
The Falsity Must Have Been Material and Induced the Government's Payment Decision
A more subtle, but perhaps even more important aspect of the Court's decision for healthcare cases is language indicating that FCA liability requires a showing of "materiality," and that a false statement must be a "condition of payment" in order to satisfy that materiality requirement. As the text quoted above reveals, liability under Section 3729(a)(2) requires proof that a defendant intended to the government to "rely" on a false statement relating to a "condition of payment" with "the purpose of inducing payment." Id. at 8.
A Legislative Response?
Of course, the full impact of the Court's decision in healthcare false claims cases will be revealed over time, but a more immediate response may occur in the legislature if, as is anticipated, whistleblower advocates use the Allison Engine decision to revive efforts to amend the False Claims Act. For more information on those efforts, see the February 26, 2008, email alert, False Claims Act Enforcement: Legislative and Supreme Court Updates, posted on the Fraud and Abuse, Self-Referrals, and False Claims Practice Group website.
1Readers should note that the author's Firm filed an amicus brief for the Washington Legal Foundation supporting the petitioner/defendant in this case. Portions of this email analysis were previously published in a June 9, 2008, FraudMail Alert® authored by John T. Boese.
*We would like to thank Beth McClain, Esquire (Fried Frank Harris Shriver & Jacobson LLP, Washington, DC) for providing this email alert.