2023 is shaping up to be a major year in False Claims Act (“FCA”) practice, with the Supreme Court weighing in on both FCA scienter (in SuperValu) and the reach of the government’s dismissal authority (in Polansky), and the government focusing its enforcement efforts around antitrust, cyber, and national security. We focus today on the United States ex rel. Schutte v. SuperValu, Inc. decision, in which the Supreme Court held that a contractor’s subjective belief about its compliance at the time it submitted claims for payment is relevant to whether it had the requisite scienter for FCA liability. Much has been written on this case, with most articles exploring esoteric concepts like “scienter,” “falsity,” and the “objectively reasonable person.” But assuming—as we do—that the decision will reduce the prospect of successful early dispositive motions, what practical steps can contractors take to reduce their False Claims Act exposure and avoid litigation in the first place? We offer three suggestions.
We begin with a basic refresher on the issue presented in SuperValu. A defendant is not liable under the False Claims Act unless it “knowingly” (including acting with “reckless disregard”) submits a false claim to the government. The “knowing” scienter element—particularly around reckless disregard—can be difficult to prove in the world of complex and often ambiguous laws and regulations that govern contractors’ compliance. The federal circuits had split on the issue of whether a defendant’s subjective interpretation at the time it submitted claims for payment to the government was relevant to determining FCA “knowledge” if the defendant could later show that the underlying rule was ambiguous and its conduct (regardless of its contemporaneous understanding or belief) was consistent with an objective, reasonable interpretation of the unsettled requirement. SuperValu resolved the debate by holding that whether a defendant knowingly violated the FCA—and satisfied the scienter element—must consider the defendant’s real-time “knowledge and subjective beliefs.” United States ex rel. Schutte v. SuperValu, Inc., 143 S. Ct. 1391 (2023).
Insights and Recommendations
We forecast that the SuperValu holding will reduce contractors’ opportunities to obtain early dismissals of FCA cases through dispositive motions, as they will be less able to craft post-hoc arguments that, regardless of their contemporaneous understanding of an ambiguous law or regulation, they acted consistent with an objectively reasonable interpretation of the rules. The problem is that companies often either will not have had explicit discussions about how an ambiguity should be resolved, or—perhaps more dangerously—will engage in internal debate about how to interpret its obligations. To gird against a government (or whistleblower) after-the-fact examination of the company’s “knowledge,” we suggest:
- Remember That E-mails Matter. And so do internal memos, notes, Teams chat records, and more! Reinforce to your employees the importance of keeping written business communications professional. Employees should avoid speculating about topics for which they may not have the whole story.
- Document Good-Faith Interpretations of Ambiguous Requirements. A great prophylactic against the occasional “bad e-mail” is to have strong contemporaneous documentation showing how and why the company decided upon a particular course of action. For example, a written memo to the contract file about the rationale for concluding that “usual and customary” means the catalog price, not the discount price. This is particularly important for regulations or guidance containing ambiguous language or susceptible to different interpretations.
- Seek to Resolve Ambiguities Early. Consult with counsel regarding apparent ambiguities; this will make it much more difficult for a relator or the government to show that the contractor operated in a “knowingly” false manner.