In what could be the most significant development for False Claims Act (FCA) jurisprudence since Universal Health Services v. United States ex rel. Escobar, on January 13, 2023, the US Supreme Court agreed to consider whether a defendant that relied on an objectively reasonable interpretation of an ambiguous law acts “knowingly” in violation of the False Claims Act.

FCA’S SCIENTER STANDARD

The FCA is a federal statute that was enacted in 1863 to redress defense contractor fraud during the Civil War. It has become an expansive and powerful tool that the government relies on to seek substantial damages and penalties (treble damages and per-claim penalties) and that whistleblowers use to recover substantial bounties. The FCA can be applied to virtually any entity that directly or indirectly receives government funds.

To be liable under the FCA, a defendant must act “knowingly,” which the FCA defines as acting with actual knowledge, deliberate ignorance, or reckless disregard. Specific intent to defraud is not required. Because FCA liability is frequently premised on the alleged violation of complex statutes, regulations, and contracts, defendants often argue that their interpretation of these requirements is reasonable, in an effort to negate the essential element of scienter.

RESOLVING CIRCUIT SPLIT

The Supreme Court granted certiorari to resolve what petitioners contend is a circuit split about whether a defendant can knowingly violate the FCA if its conduct is “objectively reasonable” in light of prevailing law. Specifically, the Court has agreed to hear United States ex rel. Schutte v. SuperValu Inc., and United States ex rel. Proctor v. Safeway, Inc.

Objective Reasonableness Standard

In those two cases, the US Court of Appeals for the Seventh Circuit held that defendants did not knowingly violate the FCA because their pricing practices reflected an “objectively reasonable” interpretation of underlying requirements. Relying on the Supreme Court’s ruling in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), a case interpreting knowledge requirements under the Fair Credit Reporting Act (FCRA), the Seventh Circuit held that a defendant’s subjective intent is irrelevant so long as the defendant’s position is supported by an objectively reasonable interpretation of the law, and the defendant was not “warned away” from its position by authoritative guidance. This ruling obviated the need for defendants to demonstrate that they actually and contemporaneously held these beliefs when they engaged in the challenged conduct.

The US Courts of Appeals for the Eighth and D.C. Circuits have taken approaches similar to the Seventh Circuit, holding that a defendant can rely upon a reasonable—but wrong—interpretation to negate scienter, unless there is authoritative guidance that warned the defendant away from its interpretation. United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, 833 F.3d 874 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281 (D.C. Cir. 2015). However, it is not clear whether these circuits require that a defendant must have contemporaneously held their reasonable interpretation at the time of the challenged conduct.

Subjective Intent Standard

In what petitioners claim is a direct circuit split with SuperValu, the US Court of Appeals for the Eleventh Circuit held in United States ex rel. Phalp v. Lincare Holdings, Inc. that courts must determine whether the defendant “actually knew or should have known that its conduct violated a regulation in light of any ambiguity at the time of the alleged violation.” 857 F.3d 1148 (11th Cir. 2017). The US Courts of Appeals for the Sixth, Ninth, and Tenth Circuits have adopted approaches similar to the Eleventh Circuit. See United States ex rel. Prather v. Brookedale Senior Living Communities, 892 F.3d 822, 838 (6th Cir. 2018); United States ex rel. Oliver v. Parsons Co., 195 F.3d 457, 461 (9th Cir. 1999); United States ex rel. Smith v. Boeing Co., 825 F.3d 1138, 1145 (10th Cir. 2016).

After a three-judge panel of the Fourth Circuit applied the Safeco standard, concluding that a defendant cannot act knowingly if it relies on an objectively reasonable interpretation of the law, an evenly divided en banc panel deadlocked on the question in United States ex rel. Sheldon v. Allergan Sales, LLC, vacating the panel’s decision and letting the district court’s dismissal stand. 49 F.4th 873 (4th Cir. 2022) (cert. petition filed Dec. 27, 2022).

Duty to Inquire

There is also a split between the Sixth and Eighth Circuits on whether a defendant has a duty to inquire about whether its interpretation is correct to avoid an application of the “reckless disregard” standard. Compare United States ex rel. Prather, 893 F.3d at 838 (6th Cir. 2018) (holding that a defendant had an obligation to inquire whether it was in compliance with all appropriate obligations), with Donegan, 833 F.3d at 880 (rejecting argument that defendant had a duty to obtain input from the Centers for Medicare and Medicaid Services as to whether its interpretation of the law was proper).

In an amicus brief filed at the invitation of the Court, the solicitor general and the US Department of Justice argued in favor of certiorari, pointing to the large number of ambiguities in federal law and claiming that “[w]hen a defendant has submitted false claims with [a] culpable [state] of mind, it cannot escape liability merely by showing that its claims were consistent with an objectively reasonable (but wrong) understanding of the law.” SuperValu Amicus Br. at 9.

The US Supreme Court will now decide whether and when a defendant's contemporaneous subjective understanding or belief about the lawfulness of its conduct is relevant to whether it “knowingly” violated the False Claims Act. SuperValu and Safeway Petitions for Cert. at Questions Presented.

IMPLICATIONS OF DECISION

The importance of this development for FCA and other federal statutory-based litigation cannot be overstated, particularly given the frequently arcane, complex, and often obtuse requirements that the government and whistleblowers rely upon as the bases for their claims.

If the Supreme Court accepts the SuperValu standard, it will provide much-needed clarity for litigants that ambiguous statutory and regulatory schemes cannot form the basis for application of the draconian penalties of the FCA. If the Supreme Court rejects the SuperValu standard, it will be more challenging, but still possible, for a defendant to argue that it lacked scienter at the motion to dismiss stage, even if its conduct was objectively reasonable.

Regardless of whether the Court adopts the SuperValu standard or follows the approach of one of the other circuits, the ruling will significantly affect FCA cases and potentially other federal litigation going forward.

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