One hundred sixty years ago, Congress passed the False Claims Act (FCA) in response to widespread fraud committed against the United States government during the Civil War. Known as the "Lincoln Law," the FCA was originally designed to aid the government's efforts to recoup funds it had paid to defense contractors that knowingly sold sick horses, defective munitions, and other useless supplies or services to the Union Army.

Through successive reforms, the law continues to be a powerful tool in the government's anti-fraud arsenal, "obtain[ing] more than $5.6 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, 2021,"^[1] and more than $72 billion since its most significant amendments in 1986.^[2]

Though the FCA may appear straightforward—i.e., one should not "knowingly present[] . . . a false or fraudulent claim for payment or approval" (31 U.S.C. 3729(a)(1)(A))—those who have conducted business with the government (since 1863) also know that details matter. For example, in FCA cases where the alleged falsity rests on a defendant's supposed error of legal "interpretation," the Act's knowledge requirement is closely related to whether the claim is itself false. The very definition of an ambiguity is that more than one objectively reasonable interpretation exists. Thus, if—before an authoritative decision is issued on which interpretation is "correct"—a contractor adopts a reasonable (yet not prevailing) interpretation of contract or regulatory language, should that reasonable-yet-incorrect interpretation result in FCA exposure? Similarly, should the contractor's knowledge of an ambiguity (even absent knowledge of the correct interpretation) render it liable under the FCA if its interpretation is not adopted by the courts?

This year, perhaps more than any other in recent memory, appears to be one in which the FCA's intricacies may be further ironed out by the courts and Congress. Accordingly, government contractors would be wise to closely track the following developments and consider actively participating in the policymaking process during this apparent "year" of the FCA.

The FCA at SCOTUS

Case law, treatises, compliance guides, and other commentaries on the FCA could alone fill entire libraries. And we have previously written at length about its intricacies, risks, and application to otherwise well-meaning government contractors. In its simplest form, however, the FCA serves to deter and penalize—up to three times the damages sustained—those who knowingly and improperly charge (or overcharge) the U.S. government for goods or services. But what does it mean to know that a request for payment or reimbursement is fraudulent, especially if the terms required for payment or reimbursement are themselves ambiguous?

The FCA defines the terms "knowing" and "knowingly" to "mean that a person, with respect to information--(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information[.]"^[3] Even now, the courts continue to grapple with the FCA's scienter (or state of mind) requirement.

In January, the U.S. Supreme Court agreed to consider two cases from the Seventh Circuit Court of Appeals^[4] that raise the issue of whether (and when) a defendant's contemporaneous subjective understanding or belief about the lawfulness of its conduct is relevant to whether the defendant "knowingly" violated the FCA. In other words, even if an FCA defendant's interpretation of an ambiguous regulation is found to be incorrect—thus rendering certain claims for payment "false"—would its mere knowledge of the ambiguity meet the FCA's scienter requirement where its conduct was supported by an objectively reasonable (but nonetheless wrong) interpretation of the law or relevant contract provisions? The Court's ultimate decision on this question will have a substantial impact on the FCA's scienter requirement, one of the two primary elements in any FCA civil liability determination.

In United States ex rel. Schutte v. SuperValu Inc., whistleblowers ("relators") filed a qui tam action—i.e., stepped into the shoes of the government—under the FCA, alleging that SuperValu, for approximately ten years, knowingly filed false reports of its pharmacies' "usual and customary" (U&C) drug prices when seeking reimbursements from the government under the Medicare and Medicaid programs. Since the 1970s, the Department of Health and Human Services has authorized pharmacies to seek reimbursement from the government for the "usual and customary charge to the general public."^[5] In that time, neither Congress nor federal agencies have defined what the term "U&C" means. States have adopted various interpretations of U&C but have not addressed discounts to cash-paying customers.^[6] The defendants interpreted U&C to mean undiscounted commercial pricing and failed to disclose to Government Healthcare Programs (GHPs) that they offered discounts to cash-paying customers through price matching and membership programs.^[7]

Relators contend, however, that defendants' actual knowledge that some pharmacy benefit managers that administer Medicare Part D would interpret defendants' U&C practices as overbilling the government is "actual knowledge" of falsity.^[8]

Relying on the Supreme Court's interpretation of the Fair Credit Reporting Act's scienter requirement in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007)—and citing multiple other circuits that had since done the same—the Seventh Circuit in Schutte held that an FCA defendant does not act with "reckless disregard" in overbilling the government as long as its interpretation of the relevant statute or regulation was "objectively reasonable" and no "authoritative guidance" from the government warned it away from that interpretation. In both Schutte and a subsequent similar case in April 2022, United States ex rel. Proctor v. Safeway, Inc., the Seventh Circuit determined that the defendant pharmacies held an objectively reasonable interpretation of relevant law and had received no authoritative guidance to the contrary from the government. Accordingly, FCA liability did not attach.

Just as we previously wrote with regard to the same issue considered in the Fourth Circuit in early 2022, these cases

highlight[] the importance for government contractors that are faced with ambiguous contract provisions or regulations to proactively seek guidance from the agencies with which they contract or by which they are regulated. Even if the agency fails to respond, such inquiry protects against a subsequent FCA finding, because proactively seeking administrative guidance and failing to receive any would further demonstrate the reasonableness of a course of action . . . .

The cases have been consolidated and are slated for oral argument on April 18, 2023. And while the outcome remains to be determined, there is an indisputable and growing interest in the Supreme Court's perspective on the FCA's scienter requirement.

Last month, the U.S. Solicitor General (on behalf of the United States), 33 states, the National Whistleblower Center, and Senator Chuck Grassley (R-IA)—the author and driving force behind the FCA's 1986 amendments and subsequent anti-fraud measures—filed amicus briefs supporting the relators. According to the U.S. Solicitor General, the decisions below, if upheld, "would allow defendants who intentionally submit false claims for payment to the government to escape FCA liability based on concededly incorrect post hoc justifications[.]"^[9]

Whichever direction the Court ultimately chooses, it will necessarily and directly affect government contractors' conduct and engagement with the government. Contractors perform pursuant to contracts and other vehicles that often have lengthy terms, conditions, and requirements—many of which are reasonably susceptible to more than one interpretation and are thus ambiguous as a matter of law.

Of course, construction of the FCA requires that the statute work broadly, across the marketplace to motivate federal contractors to operate ethically, all without creating a punitive regime that risks the commercial marketplace refusing to sell to the federal government because the potential liability outweighs the benefit. Venable will be closely tracking the Court's consideration of these important questions and will provide additional guidance once the Court issues its decision.

The FCA in Congress

As the Supreme Court weighs the issues, policymakers are considering legislative reforms to the FCA.

In February, Sen. Grassley announced his intention^[10] to reintroduce in this Congress the bipartisan False Claims Amendments Act, which responds in part to the Supreme Court's landmark FCA ruling in 2016, Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016). In Escobar, the Court detailed numerous considerations for determining whether an FCA defendant's misrepresentation about compliance with a statutory, regulatory, or contractual requirement was actually material to the government's decision to pay the defendant—a core requirement of the FCA.

Previously introduced in 2021, and successfully reported out of the Senate Judiciary Committee, Sen. Grassley's legislation would amend the FCA to provide that

In determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.^[11]

While the legislation was never considered by the full Senate, it is possible that the pending Supreme Court cases will further ignite interest on Capitol Hill in taking up this measure. Furthermore, if the bipartisan bill sponsors disagree with the Court's ultimate decision, it is reasonable to suspect that a re-introduced and revised False Claims Amendments Act may address the scienter issue head-on.

Notably, Sen. Grassley is seeking input from stakeholders on all sides of the issues. According to a quote obtained by Law360, the Senator will "seek advice from differing viewpoints . . . no stakeholder group who sought an audience with [my office] was turned down, or will be turned down."^[12] Venable will continue to closely monitor developments on this and any related legislation.

The Takeaway

One way or another, 2023 will shed further light on the contours of the FCA and its effect on how contractors conduct business with the government. In the meantime, and unless and until the Supreme Court counsels otherwise, government contractors grappling with ambiguous laws or contract provisions in determining costs for which they can (and cannot) request reimbursement should proactively engage in a dialogue with federal agencies with which they contract or by which they are regulated.

With potentially landmark FCA cases pending at the Supreme Court, and FCA reforms being discussed in Congress, contractors may be forgiven for perceiving 2023 as a year of risk and uncertainty. We suggest, however, that astute contractors view this as a year of opportunity—be it to proactively prepare for the FCA's evolving ecosystem or to get directly engaged with lawmakers in the policymaking process. If you have questions about how these pending developments may impact your organization and its work with the federal government, or if you wish to take the next step in sharing your organization's unique perspective with Capitol Hill, please reach out to these Venable authors.

[1] See The False Claims Act, U.S. Dept. of Justice, available at https://www.justice.gov/civil/false-claims-act.

[2] False Claims Act Settlements and Judgments Exceed $2 Billion in Fiscal Year 2022, U.S. Dept. of Justice (Feb. 7, 2023), available at https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-2-billion-fiscal-year-2022.

[3] 31 U.S.C. § 3729(b)(1)(A).

[4] See United States 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) and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), cert. granted, 143 S. Ct. 643 (2023) (hereafter "Schutte").

[5] See Schutte, Br. of Respondents at 1 (Mar. 21, 2023), available at https://www.law360.com/articles/1588262/attachments/0.

[6] Id. at 7-8.

[7] Id. at 2.

[8] See Schutte, Br. of Petitioners at 9 (Feb. 17, 2023), available at https://www.supremecourt.gov/DocketPDF/21/21-1326/255049/20230217125159663_21-1326%20and%2022-111%20ts.pdf.

[9] See Schutte, Br. of the United States as Amicus Curiae Supporting Petitioners at 13 (Feb. 24, 2023), available at https://www.supremecourt.gov/DocketPDF/21/21-1326/255556/20230224151138222_21-1326tsacUnitedStates.pdf.

[10] Daniel Wilson, "Sen. Grassley Plans FCA Amendments Amid 'Absurd' Rulings," Law360 (Feb. 16, 2023), available at https://www.law360.com/governmentcontracts/articles/1577261/sen-grassley-plans-fca-amendments-amid-absurd-rulings.

[11] S. 2428, 117th Cong., False Claims Amendments Act of 2021 (as reported by S. Comm. on the Judiciary), available at https://www.congress.gov/bill/117th-congress/senate-bill/2428/text.

[12] Daniel Wilson, "Sen. Grassley Plans FCA Amendments Amid 'Absurd' Rulings," Law360 (Feb. 16, 2023), available at https://www.law360.com/governmentcontracts/articles/1577261/sen-grassley-plans-fca-amendments-amid-absurd-rulings.