By: Jules Levenson and Mark Casciari

Seyfarth Synopsis: A district court in New York has held that a plaintiff cannot assert claims against a plan in which she did not participate and cannot assert claims of fiduciary breach without plausible allegations of wrongdoing.

A federal district judge in the Southern District of New York has dismissed claims that a stable value fund was depressing returns and pocketing the difference between the amount credited to the investments and the actual return on the investments. The decision is reported as Dezelan v. Voya Retirement Ins. & Annuity Co., No. 16-cv-1251 (S.D.N.Y. July 6, 2017).

The plaintiff participated in a separate-account stable value fund (with money segregated from Voya’s general accounts).  She sued on behalf of a class of participants in all of Voya’s ERISA-covered stable value funds in a multitude of employer-sponsored plans, including participants in non-segregated funds. The suit alleged that Voya violated its fiduciary duties and engaged in prohibited transactions by skimming money from the investments rather than allowing it to accrue to the plans.

Voya filed a motion to dismiss, which the Court granted without prejudice. On the general account claims, the court found that the plaintiff did not have standing to attack alleged violations in the general account funds because the she did not participate in the funds, and thus  had no redressable injury.  It also rejected plaintiff’s claims as to separate account plans because the claims turned on a showing that Voya improperly transferred assets between its segregated and general accounts. The Court lastly rejected holdings from other circuits that an ERISA participant may represent participants in other plans if the “gravamen” of the suit involves the same general practices across all plans.

On the merits of the separate account claims, the Court found that the complaint did not state a claim for breach of fiduciary duty because the complaint did not plausibly allege that Voya kept plan money, so there was no inference of misconduct. As to the prohibited transaction claims, the complaint did not allege, the Court said, that any improper transfers occurred,  and one could not be presumed because of opportunity.

The Court’s decision is important because it shows that, at least for some district judges, the Supreme Court’s Twombly plausibility standard continues to limit the ability of plaintiffs to sue for, and seek discovery on, alleged wrongdoing in plans in which they did not participate.  It is also important because it requires plaintiffs to carefully allege self-dealing facts.  That said, the decision has the potential to lead to piecemeal litigation, with a multiplicity of suits asserting similar claims. And note that the Dezelan case is far from over. On August 3, 2017, the plaintiff filed her amended complaint; an answer or new motion to dismiss is due September 18.

By Sam Schwartz-Fenwick and Michael W. Stevens

Seyfarth Synopsis: The Texas Supreme Court held that the U.S. Supreme Court’s landmark marriage equality decision, Obergefell v. Hodges, did not dispositively address how far government employers must go in providing benefits to same-sex married couples.

In a provocative opinion, in Pidgeon v. Turner, No. 15-0688, the Texas Supreme Court held that Obergefell v. Hodges, 135 S. Ct. 2584 (2015), does not necessarily require state governments to extend marital benefits to same-sex married couples.

Procedural Background

In 2013, the city of Houston began extending benefits to same-sex spouses of city employees who were lawfully married. Shortly thereafter, Pidgeon was filed. It alleged that the city’s actions violated Texas and Houston law. The law was enjoined by a state court. In July 2015, the Texas court of appeals reversed the injunction, holding that Obergefell represented a “substantial change in the law regarding same-sex marriage since the temporary injunction was signed,” and that Obergefell forbade states from refusing to recognize lawful same-sex marriages.  The appeals court also remanded to the trial court to issue opinions “consistent with” Obergefell . Plaintiffs then appealed to the Texas Supreme Court.

The Court’s Opinion

The Texas Supreme Court reversed. The Court wrote “The [U.S.] Supreme Court held in Obergefell that the Constitution requires states to license and recognize same-sex marriages to the same extent that they license and recognize opposite-sex marriages, but it did not hold that states must provide the same publicly funded benefits to all married persons.”  Slip op. at 19 (emphasis added). The Texas Supreme Court remanded the case, so the trial court could decide if the Constitution or Obergefell “requires citizens to support same-sex marriages with their tax dollars.” Id. at 20.

The decision rested on the proposition that Obergefell is “not the end” of the inquiry as to the “reach and ramifications” of the constitutional status of same-sex marriage. Id. at 23.  Notably, the Texas Supreme Court acknowledged that the U.S. Supreme Court had, in the same week, decided Pavan v. Smith, No. 16-992, which rejected the state of Arkansas’ efforts to limit recognition of same-sex parents on birth certificates.  In Pavan, in a per curiam opinion, the Court held that same-sex couples are entitled to the same “constellation of benefits that the Stat[e] ha[s] linked to marriage.”  2017 WL 2722472, at *2 (citations omitted).

Despite the apparent inconsistency with Pavan, the Texas Supreme Court emphasized the purported uncertainty over the reach of same-sex marital benefits by noting that the U.S. Supreme Court has also granted certiorari in Masterpiece Cakeshop, Ltd. v. Colo. Civil Rights Comm’n, No. 16-111, a case involving a baker who was sued after he refused to make a wedding cake for a same-sex wedding.

Next Steps

The trial court may now proceed to the merits of the case, and a ruling that is inconsistent with Obergefell and Pavan is a distinct possibility.  Should the case ultimately proceed to the U.S. Supreme Court, in light of Pavan, and assuming the current membership of the Court remains the same, it seems unlikely that a narrow reading of Obergefell, at least as to governmental actors, would be upheld.  Unlike Masterpiece Cakeshop, Ltd., Pidgeon does not raise any questions of freedom of speech or religious liberty.  Rather, as with Pavan and Obergefell, it addresses whether state actors can treat same-sex marriages differently than opposite sex marriage.

While the decision in Pidgeon may ultimately be vacated, that this decision was issued 2-years after a ruling by the Supreme Court legalizing same-sex marriage, underscores that opponents of marriage equality continue to use courts as a vehicle to limit or reverse marriage equality.

As Pidgeon and other challenges to marriage equality make their way through the courts, employers and benefit plans considering modifying their benefit offerings to exclude same-sex spouses should tread very carefully, especially given the EEOC’s position that differential benefit offerings to same-sex spouses violates Title VII of the Civil Rights Act.

By: Samuel Schwartz-Fenwick and Thomas Horan

Seyfarth Synopsis: Adding to the body of conflicting authority on the scope of the attorney-client privilege in ERISA lawsuits, a district court has found that the fiduciary exception to attorney-client privilege applies to an insurance company that acts as a claim administrator, thus requiring disclosure of  communications between the insurer and its lawyers regarding a claim for benefits during the claims process.

When an insurance company asks its attorneys for advice regarding decisions on benefits claims and appeals, it may be doing so without the protection of attorney-client privilege, according to a recent decision from the Southern District of New York. In McFarlane v. First UNUM Life Insurance Company, the court granted Plaintiff’s motion to compel production of  documents determined by the court to be within the fiduciary exception to the attorney-client privilege. No. 16-cv-07806, 2017 WL 480500 (S.D.N.Y. Feb. 6, 2017). In doing so, the court rejected the argument that the fiduciary exception to attorney-client privilege—which makes a fiduciary’s communications with counsel discoverable in certain situations— does not apply to insurers acting as benefit claims administrators.

Plaintiff sought benefits under an LTD plan offered by her employer. Authority to make decisions on benefit claims and appeals had been delegated to Defendant, the insurer who issued the policy. After benefits were terminated, Plaintiff filed suit and sought production of the administrative record. Along with its production, Defendant produced a privilege log containing three entries related to communications between the Lead Appeals Specialist and Defendant’s in-house attorneys. Those three entries were the subject of Plaintiff’s motion.

Defendant argued these documents were privileged based on the rationale of Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007). In Wachtel, the Third Circuit found the fiduciary exception did not apply to insurers. It reasoned, that in contrast to an internal claims-administrator, when an insurer acts as the claim administrator the legal advice it seeks during the claim process is paid for by the insurer, not by the beneficiary or benefit plan. As such, the insurer—as opposed to a traditional administrator—owns the funds that will ultimately be paid out and has an interest in the management of those assets.

Rejecting the Third Circuit reasoning, the court found that the dispositive factor under Second Circuit law is the purpose of the communication in question. Thus, if the purpose of the communication concerns the exercise of fiduciary functions, the requirement that the fiduciary act in the beneficiary’s best interests makes the beneficiary the “true client” of the advice. This is a “fact-specific inquiry” and requires the court to examine both the content and context of the communication.

The court’s rejection of Wachtel highlights the fact that courts differ in their application of the fiduciary exception. It also, however, demonstrates that fiduciaries need to be aware of the risk that a court may find their communications with counsel discoverable should a dispute arise regarding an administrator’s decision during the administrative review process.

By Andrew Scroggins and Mark Casciari

The Seventh Circuit has stymied an EEOC attempt to declare that employer wellness plans violate the Americans with Disabilities Act (“ADA”). The court decided that the issues raised by the suit are moot, and deferred to another day tackling weightier questions of statutory interpretation and the EEOC’s rulemaking authority.

The decision arises out of EEOC v. Flambeau, Inc.  As we previously wrote, Flambeau offered an employer-subsidized self-funded health plan, but conditioned participation on completion of a “health risk assessment” and “biometric screening test.”  The health risk assessment “required each participant to complete a questionnaire about his or her medical history, diet, mental and social health and job satisfaction.” The biometric test “involved height and weight measurements, a blood pressure test and a blood draw.”  The EEOC argued that this violated the ADA’s ban on involuntary medical examinations, citing its then proposed (now final) regulations on employer-sponsored wellness plans.  (See also our prior blogs here and here.)

The district court rejected the EEOC’s position, finding that the EEOC’s regulations were not binding on the court.  Working through the statutory language, the court concluded that the ADA’s safe harbor protections, which exempt activities related to the administration of a bona fide employee benefit plan, enable employers to design benefit plans that require otherwise prohibited medical examinations as a condition of enrollment.

In EEOC v. Flambeau, Inc., No. 16-1402 (7th Cir. Jan. 25, 2017), the Seventh Circuit affirmed “but without reaching the merits of the parties’ statutory debate.”  The court held that neither party to the case continued to have a serious stake in its outcome, and the relief sought by the EEOC is either unavailable or moot.  Before the EEOC commenced litigation, Flambeau had already made its wellness program non-mandatory, having concluded that the costs of the health risk assessment and biometric screening test outweighed their benefits.  The employee who had challenged the policy had no claim for damages, including EEOC-requested punitive damages, and had long since left the employer.  The court also observed that the case was a poor candidate for evaluating the statutory questions because the events at issue had occurred before the EEOC issued its wellness plan regulations.

A decision on the merits of the EEOC’s regulations will have to wait for another day.  But the Seventh Circuit’s discussion did provide defense lawyers a memorable line to be cited in future cases where the EEOC stakes out a new or untested position:

An employer’s or its attorney’s disagreement with EEOC guidance does not by itself support a punitive damages award, at least where the guidance addresses an area of law as unsettled as this one.

Stay tuned for more court decisions and, perhaps, revocation or non-enforcement of the regulations, as the Trump administration makes leadership changes at the EEOC.  Note as well that, President Trump has named Vicki Lipnic as EEOC Acting Chair.

 

By Kathleen Cahill Slaught and Shireen Yvette Wetmore

Seyfarth Synopsis: Insurer gets to pick its remedy when hospital engages in dishonest billing and illegal kickbacks…to the tune of $41 million.

Judge Lynn Hughes of the U.S. District Court for the Southern District of Texas closed out the year with a bang in Aetna Life Insurance Company v. Humble Surgical Hospital, LLC, No. Civil Action H-12-1206 (S.D. Tex. Dec. 31, 2016). The not-so-appropriately-named Humble Surgical Hospital, LLC (“Humble”) was sued by insurer Aetna for allegedly waiving patient fees and paying kickbacks to referring physicians through an elaborate, but ultimately not-so-clever, shell game in which the providers created shell LLCs and paid $3,500 annually in “administrative fees” to participate in the 300-bed hospital’s scheme.

In a scathing opinion, the court explained the scheme as follows, “Because no economically rational patient would choose [Humble] over an in-network provider, Humble paid referral fees to doctors, waived patient costs, and submitted inflated bills to Aetna.”

In a three-year period from 2010 to 2013, Humble managed to bill $41 million in fees paid by Aetna. The Court found that Humble had enticed patients with promises that their out-of-pocket costs would be equal to or less than the cost of using in-network services. Yet Humble was not part of the Aetna network, nor did it charge Aetna for services at the in-network negotiated rates. Humble also enticed the doctors with a 30% kickback–representing nearly $12 million in fees.

Clearly illegal, right? Comically, Humble attempted to argue that Aetna was not entitled to recovery because it knowingly paid Humble the amounts it charged without challenging the charges. Because Aetna did not know of the scheme, the Court said that the voluntary payment rule did not apply.

Humble also attempted to argue defenses based on preemption. The Court found that ERISA is silent regarding overpayment by providers and that recovery actions for fraud are not attempts to enforce the applicable plans. As such, the Court found that Aetna’s claims were not preempted.

Humble even attempted to argue the defense of unclean hands. The Court made short work of that: “Humble has no defense . . . [it] is filthy up to the elbows from lies and corrupt bargains.”

In the end, the Court gave Aetna a choice between three remedies:

  • $12 million – to recover the kickbacks Humble unlawfully gave to providers
  • $20 million – to recover the difference between the out-of-network fees paid and the in-network equivalents, OR
  • $41 million – to recover the total amount paid by Aetna to Humble during the three year period from 2010 to 2013.

Which would you choose?

 

 

By Ron Kramer

Seyfarth Synopsis: Seventh Circuit  finds employer still obligated to contribute to benefit funds for the life of the CBA even though the employees decertified the union.

Employers often assume that when their employees decertify a union, that any obligations an employer had under the operative collective bargaining agreement would disappear. No union, no contract.  Right?

Wrong! In Midwest Operating Engineers Welfare Fund v. Cleveland Quarry, Case Nos. 15-2628, -3221, -3861, 16-1870 (7th Cir. Dec. 20, 2016), employees in three separate IUOE bargaining units of the Company voted to decertify in 2013.  At the time, the Union and the Company were party to five year collective bargaining agreements expiring in 2015.  The Company assumed the decertification of the Union, which allowed it to set its own terms and conditions of employment, ended any contractual obligation to contribute to the multiemployer welfare and pension funds (“Funds”).

The Funds sued, and after they were successful in district court the Company appealed. The Seventh Circuit recognized that the collective bargaining agreements were unenforceable as to the Union, but found nevertheless that the Funds had the right under ERISA to bring a suit for delinquent contributions under 29 U.S.C. § 1145.  The Court based its decision on the idea that when the Funds promised to provide a level of benefits to the employees (presumably by allowing the employer to participate in the Funds under the terms of the CBAs), that created a binding contractual promise.  The Court also recognized that the Funds were third-party beneficiaries to the CBAs and thus entitled to enforce them even if the Union could no longer do so.  “[S]o far as benefit law is concerned the employees were still working ‘under the terms of’ the collective bargaining agreement.”

The Seventh Circuit is not alone in finding that an employer’s contractual obligations to participate in multiemployer funds can survive decertification, withdrawals of recognition, and disclaimers of interest. But there is a competing view.  The Ninth Circuit has recognized that when a bargaining unit ceases to exist, be it by decertification or contract repudiation given the existence of a one person bargaining unit, any existing contract becomes void, not voidable, ending the employer’s obligation to contribute to employee benefit plans. Laborers Health & Welfare Trust Fund v. Westlake Development, 53 F.3d 979 (9th Cir. 1995) (contract repudiation); Sheet Metal Workers’ Int’l Ass’n v. West Coast Sheet Metal Co., 954 F.2d 1506 (9th Cir. 1992) (decertification case were the court held “that the renewal contract became void prospectively as of the decertification of the Union”).  Notably, the Seventh Circuit did not address the Circuit split.

Employers lucky enough to have employees decertify prior to contract expiration cannot assume their obligations to the funds necessarily end. Consult counsel before making any rash moves you may live to regret.

By Mark Casciari and Chris Busey

Seyfarth Synopsis: The Supreme Court’s grant of certiorari in three Church Plan cases presents the possibility that many Church Plans thought for years to be exempt from ERISA rules, including its funding rules, will now have to comply with the statute. It also presents a possible issue of Article III standing — even though not part of the issue on which the Court granted certiorari — whether some of the plaintiffs are unable to sue in federal court because they allege the risk of an injury in the future, but not a concrete injury at present.

It has been widely reported that the Supreme Court soon could require over $1 billion in new defined benefit plan funding with the stroke of a pen when it decides whether Church Plans thought for years to be exempt from ERISA funding rules are really not exempt.  The three Courts of Appeal opinions now being reviewed by the Court are: Rollins v. Dignity Health, 830 F.3d 900 (9th Cir. July 26, 2016); Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir. Mar. 17, 2016); and Kaplan v. St. Peters Healthcare System, 810 F.3d 175 (3d Cir. Dec. 29, 2015). In each of these cases, employees of the hospital systems alleged that the pension plans maintained by their employers were misclassified as ERISA-exempt.

We have been monitoring developments in these cases (see our previous blog posts here and here), and now the Supreme Court’s decision to review the Rollins, Stapleton, and Kaplan opinions presents the possibility of a nationwide reclassification of many Church Plans, with enormous consequences, especially in the funding context. The funding consequences arise because ERISA funding rules are more exacting than the funding standards under which the plans at issue have been governed.

The Supreme Court will consider a question of statutory interpretation. ERISA Section 3(33)(A) defines an exempt Church Plan as one established and maintained “by a church or by a convention or association of churches which is exempt from tax.” The issue becomes whether ERISA’s church-plan exemption applies if a plan is maintained by a tax-qualifying church-affiliated organization, or if the exemption applies only where a church established the plan. Each of the Courts of Appeal under review declined to defer to the IRS’s opinion–expressed in a 1983 memorandum from the IRS General Counsel–that Church Plans include those maintained by a church-affiliated organization regardless of the identity of the entity that established the plan. The Supreme Court’s question presented explicitly references, as well, the 30-plus-year history of Church Plan classifications by the federal Department of Labor and Pension Benefit Guaranty Corporation that correspond to that of the IRS.

One sleeping issue in these cases may have implications for ERISA litigation generally. The Court’s Church Plan decision may intersect with its recent decision in Spokeo Inc. v. Robbins, 136 S.Ct. 1540 (2016). Spokeo dealt with the U.S. Constitution’s Article III standing precondition to any federal lawsuit, and said that a plaintiff must allege a “concrete injury” to bring suit (see here and here for additional background). The plaintiffs in the Church Plan cases under review allege a number of ERISA violations that have occurred as a result of a possible misclassification of their pension plans. These include that the plans failed to meet ERISA’s funding, fiduciary and reporting and disclosure requirements. To be sure, some plaintiffs also allege a clearly concrete injury — for example, an actual loss of benefits due to the plan’s vesting schedule that fails to meet ERISA minimums. But under Spokeo, it is unclear if alleged funding, fiduciary and reporting and disclosure “injuries,” in the absence of a specific, personal harm, or non-speculative risk of harm, would pass muster as sufficiently concrete. Although the Supreme Court did not request briefing on the Article III issue, it may address a lack of Article III standing, as a question of subject matter jurisdiction may arise at any point in federal litigation. ERISA litigators should read the coming Church Plan decision to see if it contains an Article III analysis that has implications beyond the Church Plan context. If it does not, litigators nonetheless should be aware that the last word on the intersection of Spokeo and ERISA will not yet be written.

By: Danielle Vera and Sam Schwartz-Fenwick

Seyfarth Synopsis: Currently before the  Supreme Court are two petitions regarding the thorny legal question of which organizations can qualify for ERISA’s Church-plan exemption. If the Supreme Court grants certiorari and follows the recent Third and Seventh Circuit Court decisions, then all Church-affiliated organizations (e.g. church affiliated hospitals, daycares, and adoption agencies) will have to bring their existing plans into compliance with ERISA, likely at a substantial cost both to their bottom line and to their religious mandate.    

In the fall term, the Supreme Court may address an ERISA question with broad ranging impact on the First Amendment. Specifically, currently before the Court are petitions in two cases (Saint Peter’s Healthcare System v. Kaplan and Advocate Health Care Network v. Stapleton) where the appellate court found that benefit plans established by religious hospitals (Church-affiliated organizations) are not eligible for ERISA’s Church-plan exemption and therefore are subject to ERISA..

Both the Third and Seventh Circuits found that the defendant healthcare organizations did not qualify for the ERISA Church-plan exemption, as they were Church affiliated organizations not Churches. They reasoned the Church-plan exemption was very limited and only applied to plans established by a church, or by a convention or association of churches. The courts found that the exemption does not apply to plans established and maintained by a Church-affiliated organization. In reaching this holding, the courts rejected the arguments that both the legislative history and text of ERISA support a broad Church-plan exemption that extends to Church affiliated organizations.

While a Circuit split has not yet emerged on this issue, there is still a significant chance that the Supreme Court will grant certiorari, given that these cases touch on the limits of the Federal government to regulate religion.

As a practical matter, if the Supreme Court affirms the rulings of the Circuit Court it will be difficult financially for many of these plans to comply with ERISA. Subjecting formerly exempt plans to the strictures of ERISA places high monetary demands on Church-affiliated organizations that maintain pension plans. For instance, the plan will be subjected to ERISA disclosure requirements and compliance with the funding requirements of the Pension Protection Act of 2006. In addition, an affirmance of the Circuit Courts’ holdings will cause many plans to make amendments that contradict the religious tenets of the Church with which they affiliate. For instance, retirement and welfare plans, suddenly subject to ERISA, will likely be very limited in their ability to limit health and survivor benefits to opposite-sex spouses (a core tenet of many religious entities that maintain Church plans). Even if the Supreme Court were to affirm the Circuit Courts’ holdings, it is certain that the plans, relying on the decision in Hobby Lobby, would argue that their religious right to provide benefits in accord with their religious tenets should control. How the Supreme Court will ultimately decide that issue has broad implications for employers and plan sponsors as it will help clarify the line between an employer’s freedom of religion, and an employee’s entitlement to certain benefits under anti-discrimination laws.

By:  Jim Goodfellow and Mark Casciari

Seyfarth Synopsis: The U.S. Department of Labor has recently issued its new regulation expanding the definition of fiduciary under ERISA, but there are a number of lawsuits challenging the authority of the DOL to issue the regulation — stay tuned to see how the DOL fares in the courts.  

In April, the Department of Labor issued new regulations under ERISA related to individuals who offer investment advice to ERISA plans, their fiduciaries, or participants for a fee.

The DOL now says that a fiduciary is someone who provides recommendations or advice for a fee to a plan, a plan fiduciary, a plan participant, or an IRA owner for a fee regarding: (1) the advisability of acquiring, holding, disposing, or exchanging plan or IRA assets; (2) the investment of assets after those assets are rolled over, transferred, or distributed from a plan or IRA; and (3) the management of those assets. The new regulation became effective on June 7, 2016.

Investment advisers and other groups are not taking this new rule lying down, and the DOL now faces a number of separate lawsuits, which allege that the DOL overstepped its rule making authority when it issued its new regulation.  Five of those lawsuits have been consolidated into one action in the United States District Court for the Northern District of Texas, and a hearing in that consolidated action has been set for November 17, 2016. Another lawsuit has been filed in the United States District Court for the District of Kansas.

In yet another suit, National Association for Fixed Annuities v. Perez, 16-cv-01035 (D.D.C.), the parties are briefing a motion for a preliminary injunction filed by the plaintiff association. The plaintiff association has argued, among other things, that implementing the new rule will have irreparable harm on the fixed annuity industry because the new fiduciary definition will cause jobs to hemorrhage. In addition, the plaintiff argues that the DOL has expanded fiduciary liability far beyond Congress’ intent when it passed ERISA–according to the plaintiff, ERISA fiduciary status is meant to cover only those who provide ongoing management of the plan or its assets.

The DOL has responded with a cross motion for summary judgment and a memorandum in opposition, arguing that its regulation comports with ERISA, and that the plaintiff is playing Chicken Little as to the harm to its membership.

Stay tuned. This surely will wind up before one or more Courts of Appeal and perhaps the Supreme Court.

An Expanding Universe of Healthcare Provider Liability:  The United States Supreme Court Endorses “Implied False Certification” under the False Claims Act

By Jonathan Braunstein and Nabeel Ahmad

http://www.seyfarth.com/JonathanBraunstein

http://www.seyfarth.com/NabeelAhmad

 

Seyfarth Synopsis:

In Universal Health Services Inc. v. U.S. et al. ex rel. Escobar et al., the United States Supreme Court found a healthcare provider liable under the False Claims Act (“FCA”) for material omissions on its claim for payment because the claim made specific representations, and the provider’s failure to disclose its noncompliance with regulatory requirements made those representations misleading.

The Holding

On June 16, 2016, the Supreme Court considered and endorsed the “implied false certification” theory of liability under the False Claims Act. Specifically, the Supreme Court held a defendant may be liable for a material omission on a claim for payment if the claim makes specific representations, and the defendant’s failure to disclose its noncompliance with a statutory, regulatory, or contractual requirement renders those representations misleading. Going even further, the Supreme Court held that a defendant may be liable even if the requirement that the defendant did not comply with was not an express condition of payment.

The Underlying Facts

A beneficiary of a state Medicaid program received counseling services at a mental health facility owned and operated by Universal Health. The beneficiary died after suffering an adverse reaction to medication prescribed by the facility. After the beneficiary’s death, her guardians learned that the vast majority of the facility’s employees were not licensed or authorized to prescribe medication or offer counseling without supervision. The guardians filed a qui tam action against Universal Health alleging that it had violated the FCA under the “implied false certification theory” of liability.

The Supreme Court’s Analysis

In a unanimous decision written by Justice Thomas, the Supreme Court agreed with plaintiffs. First, the Supreme Court considered whether submitting a claim without disclosing violations of statutory, regulatory, or contractual requirements constituted an actionable misrepresentation under the FCA. Finding that it did, the Court wrote that by submitting claims for payment using payment codes corresponding to specific services, Universal Health represented that specific types of treatment were provided. The facility’s staff members made further representations by using National Provider Identification numbers corresponding to specific job titles. By conveying this information without disclosing the facility’s many violations, Universal Health’s claims constituted actionable misrepresentations.

Second, the Supreme Court considered Universal Health’s argument that FCA liability should be limited to undisclosed violations of express conditions of payment. The Court disagreed, and held that this argument was not supported by the text of the statute or the statute’s scienter requirement. According to the Court, a defendant can have actual knowledge that a condition is material even if not expressly designated as a condition of payment.

Third, the Supreme Court clarified the FCA’s materiality requirement and held that the Government’s decision to specify a provision as a condition of payment is relevant, but not dispositive. The Supreme Court noted that it is not sufficient for a finding of materiality that the Government would have declined to pay a claim if it knew of the defendant’s noncompliance.  Materiality also cannot be found if the defendant’s noncompliance with statutory, contractual, or regulatory requirements is minor or insubstantial. Moreover, payment of a claim despite actual knowledge that certain requirements were violated is strong evidence that those requirements are not material. The Supreme Court vacated the First Circuit Court of Appeal’s ruling because its materiality standard was too broad.

Takeaway for ERISA plans: The Supreme Court’s Endorsement of Implied False Certification Liability Will Help ERISA Plans Defend Provider Collection Actions, Prosecute Overpayment Recovery Actions, and Deter Future Fraud

Although this case involved claims for payment under the FCA, the ruling is of great relevance and aid to ERISA plans. Claim submissions by providers to ERISA benefit plans often contain actionable material omissions and concealments akin to “implied false certifications” under the FCA.

If providers concealed material information on their claim submissions to ERISA benefit plans, they should not be able to recover allegedly owed but unpaid claims. The “implied certification” theory under the FCA can be cited by ERISA plans in support of affirmative defenses (such as unclean hands) to collection actions brought by providers.

Similarly, ERISA plans should be able to claw back overpayments induced by the providers’ material omissions and concealments. Fraudulent omissions, concealments and “implied false certifications” support claims by ERISA Plans under state law (see e.g., Cal. Civil Code 1710, sub. 3) to recover overpayments and offset future amounts owed.

Health care fraud, waste and abuse have a significant impact on our economy. Public agencies and private companies are focused on controlling costs and are increasing anti-fraud efforts.  Hopefully, the Supreme Court’s decision will serve as a fraud deterrent going forward. We fully expect to see many more civil and criminal healthcare fraud and provider billing disputes involving “implied false certification” in the near future.