Factual Flsities Versus Legal Falsities

At the core of FCA liability is the submission of a claim for payment that is ""false," a concept that has proven remarkably elusive for federal courts to define. [FN11] At its most basic formulation, a *109 claim for payment is "false" when something renders the claim not payable, although the party requesting the payment passes off the claim as though it is. [FN12]

The reasons that render a claim not payable fall under two broad categories. The first category involves factual falsities. [FN13] A factually false claim is rendered not payable because it rests on inaccurate factual information about the product or service billed. [FN14] For example, a claim for 100 units of an injectable drug, when only 10 units were provided, is factually false and provides a basis for liability under the FCA.

The second category that renders a claim not payable involves legal falsities. [FN15] This category refers to situations in which a factually accurate claim--one that bills for 100 units where 100 units were actually provided-- violates a legal condition of payment for the product being billed. [FN16] For example, a claim to the government for 100 units of an injectable drug that is administered by a non-licensed health care professional despite government regulations to the contrary is factually accurate, but nevertheless violates a condition of payment. Submission of such a claim would constitute a legally false claim. [FN17]

*110 Importantly, not all factual or legal falsities render a claim to the government "false" under the False Claims Act. In order for a factual or legal falsity to render a claim not payable or "false" within the meaning of the Act, the factual or legal falsity must pertain to something that is important or goes to the essence of that for which the government agreed to pay. [FN18] In other words, the factual or legal falsity must be "material" to the government's willingness to enter into a contract or pay for the goods or services in question. [FN19]

*111 Drawing the line between what is important or unimportant to the government's contracting and/or payment decision has proven remarkably difficult for the courts to articulate. A big reason for such a difficulty is that there is no comprehensive source of information that lists all the rules that, if broken, render the claims affected by those broken rules not payable by the government. Rather, the rules that affect the government's decision to pay for goods and services are not only scattered, but can be unwritten. Sometimes a contract between the government and the contractor lays out the rule; [FN20] sometimes a statute provides the rule; [FN21] sometimes a penal code stipulates the rule; [FN22] and sometimes no authority explicitly states the rule because it is so basic to the integrity of the government program in question that the government expects the rule to be known and observed by its contractors. [FN23] As an example of the latter, there is no need to write a rule that provides that an injectable drug is not payable if administered to a deceased person, for everyone would agree that dispensing the injectable drug on a *112 live person is inherently material to the right to payment. Unfortunately, the materiality of many conditions of payment--both written and unwritten--is sometimes less obvious than the last example.

Needing to separate the material from the immaterial insofar as FCA falsity was concerned, federal courts developed legal constructs to assist in the materiality inquiry. These constructs were built around the question of ""certification," a concept that has taken a life of its own over time.

[FN11]. The Act does not define what it means for a claim to be "false" or ""fraudulent." Therefore, courts have looked to common definitions of those terms in defining the boundaries of what constitutes a false or fraudulent claim. See, e.g., Mikes v. Straus, 274 F.3d 687, 696 (2d Cir. 2001) ("Regarding the third element, the term 'false or fraudulent' is not defined in the Act. A common definition of 'fraud' is 'an intentional misrepresentation, concealment, or nondisclosure for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right.' Webster's Third New International Dictionary 904 (1981). 'False' can mean 'not true,' 'deceitful,' or 'tending to mislead.' Id. at 819. The juxtaposition of the word 'false' with the word 'fraudulent,' plus the meanings of the words comprising the phrase 'false claim,' suggest an improper claim is aimed at extracting money the government otherwise would not have paid.").

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[FN12]. Mikes, 274 F.3d at 696.

[FN13]. See, e.g., United States ex rel. Wilkins v. United Health Grp., Inc., No. 08-3425, 2010 WL 1931134, at *3 (D.N.J. May 13, 2010), aff'd in part and rev'd in part, 659 F.3d 295 (3d Cir. 2011) (citations omitted) ("FCA violations are generally of two types: 1) factually false claims, and 2) legally false claims. The former . . . is of the variety where a person misrepresents what if any goods and services were provided to the Government. The latter . . . arises where the person certifies compliance with a statute or regulation that is a condition of Government payment, while knowing that no such compliance exists.").

[FN14]. Id.

[FN15]. Id.

[FN16]. See id.

[FN17]. Litigants have not always found it easy to fit inaccuracies in the correct category. See, e.g., United States v. Kellogg Brown & Root Servs., Inc., 800 F. Supp. 2d 143, 155 (D.D.C. 2011) ("[T]he government argues initially that the KBR claims at issue here fall in the first category of "factually false' claims. . . . [because] 'KBR is liable . . . for submitting claims for costs that . . . were not allowed under or even within the scope of the contract at issue.' . . . The government cites no case providing direct support for this interpretation of factual falsity. The reason for the lack of authority is clear: determining the scope of a contract is a quintessentially legal, not factual, question.").

[FN18]. A claim is materially false if it has "a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property" from the government. 31 U.S.C. s 3729(b)(4) (2006 & Supp. V 2011); see also United States ex rel. Longhi v. United States, 575 F.3d 458, 470 (5th Cir. 2009) (involving FCA action against a technology company, alleging a scheme to defraud the government in contracts solicited under the federal Small Business Innovation Research Program).

[FN19]. Despite differences in articulation, all courts recognize some type of materiality requirement or limitation for liability under the False Claims Act. For pre-FERA actions, see, for example, United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1019 (7th Cir. 1999) (explaining that the "FCA is not an appropriate vehicle for policing technical compliance with administrative regulations"); United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) (holding that "[v]iolations of laws, rules, or regulations alone do not create a cause of action under the FCA"). For post-FERA actions, see, for example, United States ex rel. Loughren v. Unum Grp., 613 F.3d 300, 307 (1st Cir. 2010) ("[T]he FCA is subject to a judicially-imposed requirement that the allegedly false claim or statement be material."); United States ex rel. Nowak v. Medtronic, Inc., 806 F. Supp. 2d 310, 344 (D. Mass. 2011) ("The FCA cabins the fraud that is actionable under the FCA not by limiting the scope of misrepresentation or fraud that is actionable but rather by requiring a showing of . . . knowledge under s 3729(a)(1)(B) . . . and materiality."); see also Loughren, 613 F.3d at 307-08 n.8 (holding that the Supreme Court had recently found a materiality requirement applicable to 31 s USC 3729(a)(2) and (a)(3), but that such holding does not disturb the court's "previous reading of a materiality requirement into the statute more generally[,]" and, further, that the FERA amendment that incorporated an explicit materiality requirement into the former s 3729(a)(2) does not alter this conclusion). There are not many examples of cases in which a factual misrepresentation was considered not material to the decision to pay, possibly because it would be rare for someone to make a knowing misrepresentation of a fact in connection with a claim for money unless that fact mattered to the right to or amount of payment. But see United States ex rel. Berge v. Bd. of Trs. of the Univ. of Ala., 104 F.3d 1453, 1462 (4th Cir. 1997) (holding a factually false statement pertaining to the identity of research contributors was not material to the government's decision to award the university funding).

[FN20]. See, e.g., Kellogg Brown, 800 F. Supp. 2d at 158-59 (involving contract provisions relative to private security expenses that were material to the government's decision to pay for costs of contractor); United States ex rel. Tyson v. Amerigroup Ill., Inc., No. 02 C 6074, 2006 WL 4586279, at *7-8 (N.D. Ill. Sept. 13, 2006) (addressing violations of anti-discrimination statutes and contract terms as basis for FCA liability).

[FN21]. See, e.g., United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 917 (7th Cir. 2005) (finding violations of statute and regulation forbidding the payment of contingent fees to college recruiters as basis for FCA liability); Tyson, 2006 WL 4586279, at *7-8 (addressing violations of anti-discrimination statutes and contract terms as basis for FCA liability).

[FN22]. See, e.g., 42 U.S.C. s 1320a-7b (2006 & Supp. IV 2010) (providing the Anti-Kickback Statute, a criminal statute prohibiting the exchange (or offer to exchange) of anything of value in an effort to induce (or reward) the referral of federal health care program business). Although the Anti-Kickback Statute does not afford a private right of action, the False Claims Act provides a vehicle whereby individuals may bring qui tam actions alleging violations of the Anti-Kickback Statute. See 31 U.S.C. ss 3729-3733 (2006 & Supp. V 2011).

[FN23]. There has been significant litigation and difference of opinion as to where a rule must "reside" in order to be an appropriate basis for FCA liability. See discussion infra Part IV.