As we previously wrote on the blog, the Department of Justice has recently expanded its enforcement of the False Claims Act, 31 U.S.C. § 3730, into the arena of data security requirements in contracts with the federal government. The Act permits both the government and whistleblowers (called relators) to bring suit against companies that knowingly defraud the government by making false claims in connection with the contract. Because a company must know that it has made false claims to be liable under the Act (a standard known as scienter), ambiguous data security requirements may be less likely to result in liability under the Act. That is, how can a government contractor know, for example, that it has falsely affirmed compliance with a government cybersecurity contractual provision or regulation if it is vague or ambiguous?
On June 1, 2023, the U.S. Supreme Court issued its much-anticipated decision in United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391, 1393 (2023), a case addressing the meaning of scienter under the Act in the context of ambiguous regulations. In short, the Supreme Court unanimously concluded that a company that subjectively believes that it is defrauding the government can be liable under the Act, even if the regulation upon which the fraud is premised is objectively ambiguous. See id. at 1404. In other words, an after-the-fact claim that a regulation is ambiguous cannot convert claims believed to be false (and therefore actionable) into true ones (and therefore not actionable).
Schutte makes the tips from our prior blog post all the more important. In Schutte, the defendant raised the ambiguity of the regulation at issue only in court, long after making what it allegedly believed at the time were false claims. See id. at 1398. Outside counsel’s involvement in understanding that regulation and applying it when communicating with the government at the time the statements were made—and not just afterwards when facing a False Claims Act suit—might have made the difference. When faced with a data security requirement in a federal contract, early consultation with outside counsel is crucial to identify and document any vagueness or ambiguity about the meaning of the requirement. This is particularly true in the context of data security regulations and provisions in federal contracts, which require the government contractor to certify compliance with cybersecurity standards that are often broad and open-ended.
Another issue that was recently resolved by the U.S. Supreme Court relates to the government’s authority to dismiss whistleblower suits brought under the Act. As mentioned above, it is not just the Department of Justice that can bring suit under the Act. Relators may also bring suit in the name of the government and obtain a bounty from any recovery. In United States ex rel. Polansky v. Executive Health Resources, Inc., No. 21-1052, 2023 WL 4034314 (U.S. June 16, 2023), the Court held that the government may intervene to voluntarily dismiss a relator’s suit despite a relator’s objections. The Court explained that voluntary motions to dismiss normally should be granted, even in the context of suits under the False Claims Act brought by relators, and found that the government’s argument that the burden of litigation outweighed the likelihood of any potential recovery sufficed under the liberal dismissal standard that applied. See id. at *8–*9. Whether Polansky will be a boon to defendants facing intransigent relators and their counsel remains to be seen.
Further developments, however, may be on the horizon. In separate opinions in Polansky, Justices Thomas, Kavanaugh, and Barrett questioned whether relator suits are consistent with Article II of the Constitution, which entrusts enforcement of federal laws to the Executive Branch (including the Justice Department) rather than private parties (such as relators). See id. at *11–*12. At least four justices must vote in favor of reviewing a case for a petition for a writ of certiorari to be granted, and it is unclear whether any cases raising this Article II argument are waiting in the wings. In any event, defendants facing relator suits should consider raising the Article II argument—at the very least to preserve it—given the three justices’ statements in Polansky.
While Schutte and Polansky resolved two issues under the Act, others have been working their way up to the U.S. Supreme Court. We will continue to monitor and report on new developments under the Act.
