Publications & Presentations
May 20, 2016
Second Circuit’s Narrow Application of Implied Certification Liability Not Limited to Health Care Cases

By Emma R. Cecil and Brian F. McEvoy

As the Supreme Court mulls the validity and scope of the implied false certification doctrine in Universal Health Services v. United States ex rel. Escobar, the Second Circuit not only has reaffirmed its insistence that implied certification liability attaches only where compliance with the particular regulation is expressly identified as a condition of payment, but has explicitly extended that check on FCA liability beyond the healthcare context to the financial industry.

Earlier this month, the Second Circuit affirmed the dismissal of an FCA suit against a large multinational bank in which whistleblowers had alleged that the bank falsely certified compliance with various banking laws and regulations every time it borrowed money at favorable rates from the Federal Reserve’s discount window. The relators contended that the Fed would not have permitted the bank to borrow at those favorable rates had it known that it was undercapitalized as a result of alleged massive control fraud. The government declined to intervene and the relators pursued the litigation.

Relying on its decision in Mikes v. Strauss – a health care FCA case in which the court rejected the qui tam relator’s attempt to ground liability in the defendants’ failure to comply with certain calibration guidelines when performing spirometry procedures – the Second Circuit held that while the Fed could not have made decisions about the bank’s eligibility to borrow without examining its financial statements, the tangential relationship between the bank’s submission to regulators of financial information in connection with borrowing from the discount window and the Fed using that information to determine eligibility at some later point was not sufficient to support liability under an implied certification theory.

In siding with the bank, the Court explicitly refused to limit Mikes to cases alleging health care fraud, noting that, as in the case of Medicare fraud, the federal government has many tools other than the FCA at its disposal to discipline banks and to ensure compliance with banking laws and regulations. The Court also rejected the notion that its holding would give banks a “free pass” to defraud the government, finding instead that imposing liability for noncompliance with “any law or regulation” would cause greater harm to the financial system by discouraging banks from accessing the discount window. Such a result would be wholly at odds with the Fed’s intentions in changing discount window operations in this first place.

Although the decision spells good news for financial institutions faced with implied false certification claims, all bets may be off if the Supreme Court rules next month in favor of a broad application of the FCA that would expand liability for virtually any breach of industry regulations.

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