Background
In recent years, federal courts have been grappling with the scienter element of the False Claims Act (FCA), including how to assess scienter when a statutory, contractual, or regulatory obligation could be interpreted in multiple reasonable ways. The FCA imposes civil liability on persons who knowingly submit false claims for payment to the government.1 The statute defines knowingly to mean “actual knowledge,” “deliberate ignorance of the truth or falsity of the information,” or “reckless disregard of the truth or falsity of the information,”2 and “requires no proof of specific intent to defraud.”3 In cases where the plaintiff (government or relator) argues that the defendant defrauded the government by relying on an interpretation of an ambiguous term of a statute, contract, regulation, or guidance document, courts struggle to apply the statutory definition of “knowingly” when the defendant points to an objectively reasonable alternative interpretation of that term under which its claim or statement would be true.
The Supreme Court granted certiorari to resolve this question after two Seventh Circuit decisions applied the Supreme Court’s analysis of the scienter standard governing another statute to FCA cases. In 2007, the Supreme Court held in Safeco Insurance Co. of America v. Burr that relying on an “objectively reasonable” interpretation of a statute does not constitute “reckless disregard.”4 Although Safeco involved an interpretation of “willful acts” under the Fair Credit Reporting Act and not the FCA, circuit courts have increasingly been applying the Supreme Court’s reasoning in Safeco to their analyses of the FCA’s knowledge requirement.5
In two hotly debated cases – U.S. ex rel. Proctor v. Safeway6 and U.S. ex rel. Schutte v. Supervalu7 – the Seventh Circuit applied the Supreme Court’s reasoning in Safeco to determine whether defendants acted with reckless disregard for the purpose of establishing FCA liability. The court held that a defendant faced with an ambiguous statute or regulation does not act with reckless disregard if: (1) the statutory interpretation was “objectively reasonable”; and (2) “authoritative guidance” does not caution against it. The SuperValu and Safeway cases both involved supermarket pharmacies’ interpretation of Medicare’s and Medicaid’s “usual and customary” price requirements. In both cases, the Seventh Circuit held that the pharmacies’ interpretations were objectively reasonable and therefore a finding of FCA scienter was precluded.8
The Fourth Circuit was the most recent court to continue the trend of applying Safeco to the FCA in Sheldon v. Allergan Sales, LLC, 49 F. 4th 873 (4th Cir. 2022). In Sheldon, the District Court held that the drug manufacturer relied on a reasonable interpretation of an ambiguous provision of the Medicaid Rebate Program statute and, therefore, did not have the requisite knowledge for an FCA violation.9 On rehearing en banc, the Fourth Circuit deadlocked, which resulted in the circuit decision being vacated but the district court’s decision in favor of the defendants being upheld.10
The issue of FCA scienter is clearly a government priority. Even in declined cases, the Department of Justice (DOJ) has expressed concern regarding cases dealing with this issue through statements of interest.11 In Sheldon, for example, the government declined to intervene in the qui tam action, but was quick to brief the issue and petition to argue against applying Safeco to the FCA at the en banc panel. DOJ also filed similar amicus briefs in support of the relator’s positions in the Seventh Circuit.12
These contentious decisions have led several qui tam relators to seek further review on petition for certiorari before the Supreme Court.13 On 13 January 2023, in light of the circuit split and the government’s interest in stopping the current trend, the Supreme Court granted certiorari for the Seventh Circuit opinions in SuperValu and Safeway.14 The consolidated cases are set for oral argument on 18 April 2023.
The eventual Supreme Court opinion will settle the contested issue of whether the court’s analysis in Safeco applies to the FCA. Specifically, can a defendant be liable under the FCA for knowingly submitting false claims if its conduct was consistent with an objectively reasonable (even if wrong) interpretation of a governing provision or standard regardless of whether it held that interpretation at the time it submitted the claim? Or must the defendant also prove that it actually relied on that interpretation at the time?
Parties’ positions
Both Seventh Circuit panels in Safeway and SuperValu decided in 2-1 split decisions that the relators could not satisfy the FCA’s scienter element because Safeway’s and SuperValu’s alleged misconduct was based on reasonable, good faith interpretations of the reimbursement requirements. The U.S. Solicitor General disagrees, arguing in its amicus brief to the Supreme Court that applying Safeco to the FCA would gut the statute, shielding violators from review of their subjective belief.15 Even a subjective belief that they are submitting false claims, the government contends, would not be enough for an FCA violation if the Supreme Court agrees with the Seventh Circuit. The Solicitor General argued that, if the new rule is adopted, a defendant would not be liable under the FCA even if they are aware of a risk that their interpretation is false but fail to clarify their position. The government (and the relators) argue that the Seventh Circuit standard would allow a defendant to submit false claims and then, after the fact, identify a “wrong-but-reasonable” justification to escape liability.16
Advocates for the various defendants in this line of cases urge that without the adoption of Safeco, the FCA will become a strict liability statute, since even a good faith effort to interpret sometimes ambiguous statutes could lead to liability if not done faultlessly. Standard regulatory non-compliance, therefore, becomes knowing fraud.
Middle-ground approach
The Supreme Court has historically ruled unanimously in its modern FCA decisions. The consolidated cases currently pending before the court are positioned to be an outlier in that trend. The Court’s current configuration may be beneficial for defendants because the conservative majority is often more deferential to business and tends to favor against over-regulation. Counsel for the whistleblowers and DOJ, therefore, may have a steep climb to victory. Interestingly, prior to joining the Supreme Court, Justice Kavanaugh joined an opinion in Purcell v. MWI Corp., 807 F.3d 281 (D.C. Cir. 2015), a D.C. Circuit case which applied Safeco to the FCA. Assuming he maintains the position he took as a circuit judge, he will likely vote to affirm the Seventh Circuit decisions.
It is possible that the Court opts for a middle-ground approach. Rather than rejecting or adopting Safeco’s jurisprudence outright, the Court may decide to recognize that an objectively reasonable interpretation does not equate to reckless disregard of the truth, but may put guardrails on the definition of objectively reasonable, potentially quelling the government’s concern that defendants could skirt liability with bad faith post hoc ambiguity arguments. At the same time, the Court may also recognize, as it did in Safeco, that enforcement of punitive statutes must be confined to contexts where the government has clearly stated its expectations through a governing statute, rule, regulation, or guidance and the defendant is shown to have knowledge of, or reckless disregard toward, its non-compliance when submitting claims to the government. Absent such guardrails, the Supreme Court’s admonition elsewhere that the FCA is not intended to punish “garden-variety breaches of contract or regulatory violations” would arguably be rendered meaningless.17
Looking ahead
If the FCA knowledge requirement is not met, FCA liability cannot follow. If the Supreme Court applies the Safeco standard to FCA scienter, then it will be clear that defendants cannot be held liable if they acted in accordance with an objectively reasonable interpretation of an ambiguous statute or regulation. On the other hand, if the Court departs from Safeco, the scope of FCA liability could expand in those circuits currently applying this approach.
The upcoming Supreme Court review of SuperValu and Safeway will provide clarity for defendants that must grapple with complex government regulations and programs in their everyday course of business. The forthcoming opinion from the Court will undoubtedly have significant implications on businesses, government enforcers, and the plaintiffs’ bar. Whatever the Court’s decision, parties can hope for clarity concerning how to operate in light of ambiguous regulations in order to best guard against FCA liability.
References
1 31 U.S.C. § 3729(a)(1)(A) and (B).
2 Id. § 3729(b)(1)(A).
3 Id. § 3729(b)(1)(B)
4 Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007).
5 See e.g., United States ex rel. Streck v. Allergan, Inc., 746 F. App’x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017); United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015).
6 United States ex rel. Proctor v. Safeway, Inc., 30 F. 4th 649 (7th Cir. 2022), cert. granted, 143 S. Ct. 643 (2023).
7 United States ex rel. Schutte v. Supervalu Inc., 9 F. 4th 455 (7th Cir. 2021) cert. granted sub nom. United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 644 (2023).
8 Importantly, a failure to satisfy the standard for reckless disregard precludes liability under the FCA’s actual knowledge and deliberate indifference provisions too, which concern higher degrees of culpability. Safeway, 30 F.4th at 653.
9 United States ex rel. Sheldon v. Forest, 499 F. Supp. 3d 184 (D. Md. 2020).
10 United States ex rel. Sheldon v. Allergan Sales, LLC, 49 F. 4th 873 (4th Cir. 2022).
11 In an earlier case, the government urged the court to consider “what steps the defendant took to ascertain the government’s construction of an ambiguous regulation,” such as verifying the interpretation with the agency, when evaluating the knowledge requirement. The district court, unpersuaded by that argument, granted summary judgment in favor of the defendant, holding that even a “somewhat opportunistic” interpretation that supports a defendant’s financial motive can be reasonable. See U.S. ex rel. Est. of Donegan v. Anesthesia Assocs. of Kansas City, PC, No. 4:12-CV-0876-DGK, 2015 WL 3616640, at *9 (W.D. Mo. June 9, 2015), aff’d sub nom. United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874 (8th Cir. 2016).
12 Brief for the United States as Amicus Curiae Supporting Appellants’ Petition for Rehearing En Banc,United States ex rel. Schutte v. Supervalu Inc., (7th Cir. Sep. 30, 2021) (No. 20-2241), ECF No. 68.
13 See U.S. ex rel. Tracy Schutte v. SuperValu Inc. (originating from the Seventh Circuit Court of Appeals, petition for certiorari filed April 1, 2022); U.S. ex rel. Thomas Proctor v. Safeway, Inc. (also from the Seventh Circuit, petition for certiorari filed August 3, 2022); Troy Olhausen v. Arriva Medical LLC (originating from the Eleventh Circuit, petition for certiorari filed October 18, 2022); and U.S. ex rel. Deborah Sheldon v. Allergan Sales, LLC (originating from the Fourth Circuit, petition for certiorari filed December 22, 2022).
14 United States ex rel. Schutte v. Supervalu Inc., (Jan. 13, 2023) (20-2241). The petitions for certiorari for Arriva and Sheldon remain pending at the time of publication.
15 Brief for the United States as Amicus Curiae at 9, United States ex rel. Schutte v. Supervalu Inc., (2022) (20‑2241).
16 Id. at 12.
17 Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176, 194 (2016).