Narrow application of implied certification liability in the District Court of the Second District

As the Supreme Court considers the validity and scope of the alleged false certification doctrine in Universal Health Services v. United States ex rel. EscobarThe Second Circuit Court of Appeals not only reaffirmed its holding that implied certification liability only arises where compliance with a particular regulation is expressly stated as a condition for payment, but also expressly expanded the FCA’s liability review beyond the healthcare context to include the financial sector.

Earlier this month, the Second Circuit affirmed the dismissal of the FCA’s lawsuit against a large international bank in which whistleblowers alleged that the bank falsely certified itself as complying with various banking laws and regulations whenever it lent money at favorable rates from the Federal Reserve’s discount window. The whistleblowers argued that the Fed would not have allowed the bank to lend money at those favorable rates if it had known that the bank was undercapitalized as a result of alleged large-scale control fraud. The government declined to intervene, and the whistleblowers continued to litigate.

Based on your decision in Mikes vs Strauss – FCA health care case, in which the court rejected an attempt to support qui tam relator liability based on the defendants’ failure to follow certain calibration guidelines when performing spirometry procedures – the Second Circuit held that although the Fed could not make a decision about a bank’s eligibility for a loan without examining its financial statements, the indirect connection between the bank’s submission of financial information to regulators in connection with the discount window loan and the Fed’s use of that information to determine eligibility at some later point was not sufficient to support liability under an implied certification theory.

The court, taking the bank’s side, clearly refused to limit The Mikes to cases of alleged health care fraud, noting that, as in the case of Medicare fraud, the federal government has many other tools than the FCA to discipline banks and ensure compliance with banking laws and regulations. The court also rejected the notion that its ruling would give banks a “free pass” to defraud the government, finding instead that imposing liability for failure to comply with “any law or regulation” would cause greater harm to the financial system by discouraging banks from using the discount window. Such an outcome would be entirely contrary to the Fed’s intentions in changing the discount window operation in the first place.

While the decision is welcome news for financial institutions facing false certification claims, all odds could change if the Supreme Court rules next month in favour of a broad application of the FCA, which would widen liability for virtually any breach of industry regulations.