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Cruel (FCA) Intentions? Supreme Court Set to Review FCA Scienter Standard

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On January 13, 2023, the Supreme Court granted certiorari in two consolidated cases from the Seventh Circuit to consider whether a defendant relying on an objectively reasonable interpretation of an ambiguous law acts “knowingly” in violation of the False Claims Act (“FCA”). In the two cases, United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc., the Seventh Circuit panel shielded the food-and-pharmacy chains SuperValu Inc. and Safeway, Inc. from FCA liability for fraudulent billing practices related to the usual and customary pricing of pharmaceutical drugs.1 The Court’s decision to hear these two FCA cases is a significant development for FCA jurisprudence and could result in one of the most consequential FCA decisions since the FCA was amended in 1986.

The FCA and Its Scienter Standard

The FCA was enacted in 1863 to redress defense contractor fraud during the Civil War. Today, the FCA has become a powerful tool for the government to seek substantial damages and penalties when the government does not get the benefit of its bargain or is somehow defrauded. The FCA’s current provisions also allow private persons (also known as whistleblowers) to bring qui tam lawsuits on the federal government’s behalf, with the promise of a potential reward of a portion of any monetary recovery. Under the FCA, entities that directly or indirectly receive federal government funds can be defendants in such qui tam lawsuits.

To be liable under the FCA, a defendant must make a false claim to the government “knowingly,” which is the FCA’s scienter standard. The FCA defines acting “knowingly” as acting with “actual knowledge,” “deliberate ignorance,” or “reckless disregard.”2 Specific intent to defraud is not required. Violations of legal requirements under complex statutes, regulations, and contracts can sometimes be the basis for an allegedly false claim, such as when a defendant misinterprets a requirement and then complies with that requirement as understood when making a claim to the government. As a result, defendants often argue that their interpretation of a legal requirement is reasonable, in an effort to negate an essential element of the FCA’s scienter standard.

The FCA Cases Before the Supreme Court

At issue in the consolidated cases before the Supreme Court is “[w]hether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”3 Specifically, the FCA defendants had filed reports to the government with prices based on their interpretation of “usual and customary” pricing under Medicare and Medicaid regulations. The district court proceedings found that the defendants’ interpretation of the regulations was wrong and resulted in a false claim to the government, and this aspect of the cases was not appealed. The cases instead hinged on the scienter requirement, and whether the defendants knowingly made the false claim.

The Seventh Circuit held that the defendants did not knowingly violate the FCA because defendants’ pricing practices were consistent with an “objectively reasonable” interpretation of an ambiguous legal requirement — i.e., the meaning of “usual and customary” pricing under Medicare and Medicaid regulations — and defendants were not “warned away” from their actions by any “authoritative guidance” from a circuit court or federal agency at the time.4 The Seventh Circuit explained that a defendant “might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.”5 Under this view, the defendant’s subjective intent is “irrelevant.”6 Thus, the Seventh Circuit rulings indicated that defendants would not be required to show that they actually and contemporaneously held these beliefs when they engaged in conduct challenged as a false claim.

The Solicitor General asked the Supreme Court to reverse the Seventh Circuit’s decision and proposed a standard that takes subjective intent into account. Under the government’s view, the FCA’s scienter standard is met when a person (a) subjectively believes that a claim is false; (b) recognizes a substantial risk that the claim is false but deliberately avoids taking readily available steps to obtain clarification; or (c) knows or should know that the claim is probably false but acts with reckless disregard of that danger.7 According to the government, a defendant should not escape liability simply by identifying “an objectively reasonable (but wrong) exculpatory interpretation of the governing requirements after the fact, even if the defendant was unaware of that interpretation at the time it acted.”8

Implications of Eventual Supreme Court Decision

Government contractors and other recipients of federal funding have a significant stake in the outcome of the Supreme Court’s decision on FCA scienter, having long expressed concerns with the broad scope of the FCA in light of being required to comply with complicated and voluminous statutes, regulations, and contract provisions. Implementing an objectively reasonable standard for FCA scienter would prevent excessive liability whenever defendants are faced with ambiguous legal requirements with little guidance from other sources on the proper interpretation. On the other hand, the government and whistleblowers worry that disregarding a defendant’s subjective intent could allow intentional fraudsters to escape liability so long as they can make up a reasonable legal rationale after undertaking fraudulent conduct.

Further, a decision affirming the Seventh Circuit would likely keep the focus in FCA cases on questions of law, such as whether the relevant legal requirement is ambiguous, whether the defendant’s interpretation is objectively reasonable, and whether authoritative guidance from the circuit court or relevant agency “warned away” the defendant’s interpretation. Litigating questions of law is typically more straightforward and less costly than litigating questions of fact, and if the defendant’s subjective interpretation of a legal requirement is not relevant to FCA liability, then an entire area of factual development should not be in dispute over the course of litigation. However, a decision embracing the defendant’s subjective intent would shift the focus to fact-heavy questions regarding the defendant’s subjective intent at the time the claims were submitted. Litigating these questions of fact is not only likely to be costly and time consuming, but it is also likely to implicate additional complicated disputes, such as disputes around attorney-client privilege in instances where a defendant relied on advice from counsel in determining its interpretation of a legal requirement.

Needless to say, this Supreme Court case will be one to watch. Oral argument will occur in April, and the Court’s ruling is expected by the end of June. Regardless of how the Court resolves the issue, the ruling will significantly impact the FCA’s scope and its impact on statutory, regulatory, and contractual compliance.

1 U.S. ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) and U.S. ex rel. Proctor v. Safeway, Inc., 340 F.4th 649 (7th Cir. 2022).

2 31 U.S.C. § 3729(b)(1)(A).

3 U.S. ex rel. Schutte v. SuperValu Inc., cert. granted (U.S. Jan 13 2023) (No. 21-1326), and U.S. ex rel. Proctor v. Safeway, Inc., cert. granted (U.S. Jan 13 2023) (No. 22-111),.

4 SuperValu, 9 F.4th at 468.

5 Id.

6 Id. at 470.

7 See Br. of United States as Amicus Curiae at 8, SuperValu Inc., No. 21-1326 (Dec. 6, 2022).

8 Id. at 21.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.