More on Fraud in the Performance, this time from the Supreme Court — Greg Klass

Post by Greg Klass

A few weeks ago I posted on the Second Circuit’s decision in US ex rel. O’Donnell v. Countrywide Home Loans, which held that Countrywide’s knowing delivery of effectively worthless loans to Fannie Mae and Freddie Mac, without disclosing that fact, was not fraudulent. One way to read the decision is as affirming the well established, and to some baffling, rule that a party to a contract has no duty to disclose its breach of the contract, no matter how knowing or material. (For more evidence of bafflement on this count, see Brandon Garrett’s fine post on the case.)

I mentioned in my post that the result might have been different had the Countrywide plaintiffs’ False Claims Act claim not been dismissed. Those who are interested in that road not taken in Countrywide might take a look at the Supreme Court’s decision last Thursday in Universal Health Services v. United States ex rel. Escobar, which addressed the implied certification doctrine under the FCA. In its most robust form (and oversimplifying a bit), the implied certification rule says that the mere act of submitting a claim for payment on a covered contract represents compliance with the contracts material terms, as well as with other governing laws and regulations. Or what is functionally equivalent: If the contract, a law or a regulation requires compliance, there is a duty to disclose any material noncompliance when requesting payment. Had this rule applied, Countrywide would have almost certainly been subject to the FCA’s treble damages and per-claim fines.

Thomas’s opinion for the unanimous court in Universal Health Services avoided considering the robust version of the implied certification doctrine by finding that the case at bar involved a type of half-truth that the common law of fraud has long recognized as fraudulent. “When, as here, a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.” I am not convinced that the Court correctly applied the half-truths rule to the facts in this case. Without wading too deep into the weeds, it is not obvious that the representation that the Court identified—that certain counseling services were provided—implied compliance with the regulations at issue—licensing requirements that the defendants apparently violated. I have argued elsewhere that common law half-truths cases can usually be analyzed in terms of Gricean conversational implicature. It’s not so clear that this one can be.

I think that the more robust implied certification doctrine adopted by many circuits is a pretty good rule. Although Thursday’s decision neither affirmed nor denied it, the Court’s reliance on the half-truth doctrine might end up doing more harm than good. Plaintiffs will now start looking for representations in claims for payment, and parties will end up arguing about what those representations did and did not imply about compliance with other contract terms, laws or regulations. Given the Court’s questionable application of the half-truth doctrine in Universal Health Services, the outcomes of those arguments will be uncertain at best. Better is the more categorical robust implied certification rule that most circuits are already applying, and which the Court might have taken this opportunity to ratify.

Those interested in the law of deception will find other pieces of Thomas’s opinion interesting, including his discussion of the FCA’s materiality requirement and the mention in footnote 6 that Rule 9(b) requires pleading materiality with particularity.

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