On Thursday, the U.S. Supreme Court ruled that corporations can be held liable under the False Claims Act (known as the Whistleblowers Law) if they bill the government while out of compliance with regulations that are not explicit conditions of payment.

At the same time, the court ruled that noncompliance is not automatically a violation that invokes liability under the False Claims Act.

Justices reached a unanimous decision in a First Circuit case, adding validity to the theory of False Claims Act liability called “implied certification.”

This means that companies imply certified compliance with regulations when they seek payment from the government. The company could be guilty of fraud if it is actually out of compliance.

Violated regulations do not need to be stated as explicit conditions of payment in order to be held liable for those violations, said the ruling.

While the defense bar has insisted that it’s only fair to clearly state which conditions are necessary, the government does not want corporations to simply ignore regulations that aren’t explicitly stated as conditions of payment.

Basically, the False Claims Act has more teeth to it if all regulations are necessary, not just those explicitly tied to payment.

False Claims Act Case

The First Circuit case in question involves a mental health center’s alleged disregard of staffing regulations while a young woman was treated for a seizure and died in 2009.

The Massachusetts mental health clinic did not explicitly certify compliance with the staffing regulations. It is unclear that the regulations made proper staffing a condition of payment.

Social workers at the clinic allegedly were not properly supervised and not licensed as required by state law.

The victim’s parents filed suit under the False Claims Act on the basis that even though claims sent to Medicaid for payment by the health center did reflect actual services provided, the claims should be deemed false because the clinic had not complied with state regulatory laws.

In this case, the parents are the whistleblowers.

Not All Violations Equal

Interestingly, in their recent ruling, the U.S. Supreme Court also noted that not all violations are actionable under the False Claims Act.

“Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment,” the court said in an opinion written by Justice Clarence Thomas. “Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability.”

The False Claims Act requires that violations be “material,” defined in the status as something “capable of influencing” the government’s decision on whether or not to pay the company.

This interpretation is different than the First Circuit’s take on materiality, which held that all violations knowingly made were to be treated equally.

“[We] disagree with the government’s and First Circuit’s view of materiality: that any statutory, regulatory or contractual violation is material so long as the defendant knows that the government would be entitled to refuse payment were it aware of the violation,” the justices wrote.

The court deemed materiality to be a “demanding” standard that doesn’t cover “minor or insubstantial” violations.

Fallout from False Claim Act Ruling

Reaction from the legal world has been mixed following the U.S. Supreme Court’s ruling. Some see it as a greater victory for whistleblowers. Others feel it muddied regulatory waters. Thomas J. Finn of McArter & English LLP said:

“Today’s Supreme Court decision reaffirms the implied false certification theory of liability. In doing so, the court held that liability can be imposed upon a government contractor for its knowing non-compliance with federal statutes, regulations, or contract requirements, regardless of whether the requirements were an express condition of payment. The court’s decision, in my view, added further ambiguity to this theory of liability under the FCA. The practical effect is that government contractors are left with no greater clarity as to what would be considered material to the government’s payment decision, thus subjecting them to liability for criminal penalties, civil penalties, and treble damages.”

The Whistleblower Lawsuit is Case No. 15-7 in the Supreme Court of the United States.