For False Claims Act Cases, SCOTUS Says Courts Should Look at What Defendants Subjectively Knew at Time of Offense

Jackson Walker

Jackson Walker

The U.S. Supreme Court recently announced its ruling in United States Ex Rel Schutte v. SuperValu Inc., a case that will impact how corporations will defend themselves in False Claims Act (“FCA”) litigation. In a win for the government, the Court held that the knowledge element of the FCA concerns what a defendant knew at the time it submitted a claim, not what someone could have objectively known after-the-fact.

The FCA permits private parties to bring lawsuits in the name of the United States against those who they believe have defrauded the federal government. It imposes liability on anyone who “knowingly” submits a “false” claim to the government. For businesses facing draconian FCA liability, it is common to challenge that “knowledge” element of an FCA claim. Specifically, defendants often argue that—due to the sheer complexity of federal statutes and regulations—their interpretation of the law that is being advanced in litigation is objectively reasonable and, thus, their actions do not meet the knowledge requirement in the statute. Defendants have argued that their “objectively reasonable” conduct defeats the knowledge requirement, regardless of their subjective intent. The government, for its part, has long contended that a defendant’s subjective knowledge should be controlling.

Before the Supreme Court’s latest decision, the circuits were split on how to interpret the knowledge requirement. In SuperValu, the Seventh Circuit had held that subjective intent was irrelevant if the defendant’s conduct was objectively reasonable—even if the defendant’s interpretation of the law was wrong—and there was no “authoritative guidance” from a circuit court or agency that would have put the defendant on notice that his interpretation was incorrect. Essentially, the Seventh Circuit ruling allowed defendants to avoid FCA liability as long as they could articulate an objectively reasonable interpretation of the law—regardless of whether they actually believed that interpretation at the time of the alleged misconduct. The Eighth and D.C. circuits had previously adopted similar positions. By contrast, the Sixth, Ninth, Tenth, and Eleventh Circuits had held that a court must inquire whether a defendant subjectively knew or should have known that its conduct violated a law or regulation.

In a unanimous decision written by Justice Thomas, the Court vacated the Seventh Circuit’s decision below, rejecting the “objectively reasonable” standard. The Court held that the False Claims Act’s scienter element refers to a defendant’s knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed. The Court explained that that focus of the “knowledge” analysis should be on what a defendant thought when submitting a claim—not what a defendant could have thought after submitting it.

More litigation will likely occur in the lower courts to flesh out the details of the Supreme Court’s ruling, as defendants test issues the Court chose not to address in its opinion. In particular, defendants will continue to push back on what precisely constitutes subjective knowledge—who had to know, what did they need to know, whether they were aware of several plausible interpretations of the law, and so forth. While the Court did settle one circuit split, FCA practitioners and litigants will still see a great deal of litigation on the “knowledge” element.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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