Last week, the Supreme Court granted review to clarify the scienter requirement in False Claim Act (31 U.S.C. §§ 3729 et seq.) (FCA) cases. This significant decision will affect the scope of FCA liability by addressing what is required to prove that a defendant acted “knowingly” for purposes of the FCA.
As background, FCA liability does not attach unless a plaintiff can establish the defendant “knowingly” submitted false claims for payment to the government. The term “knowingly” is statutorily defined to refer to defendants who act with “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” The plaintiff must prove only one of these to satisfy the FCA’s knowledge requirement.
Most U.S. Courts of Appeal have held that the FCA requires an objective scienter standard. This means that a defendant who acts pursuant to an incorrect interpretation of a relevant statute or regulation does not act “knowingly” under the FCA if their interpretation was objectively reasonable and there is not authoritative guidance suggesting their interpretation was wrong. A reasonable interpretation of an ambiguous law thus does not result in FCA liability.
In United States ex rel. Schutte v. SuperValu, Inc., the qui tam relators alleged that SuperValu charged customers a discounted price for prescription drugs, but fraudulently reported the non-discounted price as its “usual and customary” (U&C) price to Medicare Part D and Medicaid, thereby knowingly submitting false reports to the government. Extending the objective scienter standard adopted in the Fair Credit Reporting Act case Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007) to the FCA, the district court found that the relators failed to establish the requisite scienter because SuperValu’s interpretation of the U&C price was objectively reasonable at the time it submitted its reports.
On appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s ruling. The Seventh Circuit reasoned that Safeco reflects a common law principle that applies with equal force to each interpretation of “knowingly” under the FCA. In addition, the Seventh Circuit held that subjective intent has no bearing on the FCA’s scienter analysis.
The Seventh Circuit issued a similar ruling in United States, ex rel. Thomas Proctor v. Safeway, Inc., holding that Safeway’s practice of billing the government undiscounted rates as U&C prices did not violate the FCA because U&C pricing was not clearly defined. The Seventh Circuit determined that without guidance from the courts or binding authority from an applicable agency as to the meaning of U&C prices, the relator was unable to establish that Safeway acted “knowingly.”
The relators in both SuperValu and Safeway filed petitions for a writ of certiorari, which the Supreme Court granted on January 13, 2023. In each case, the Supreme Court has been asked to address “whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the [FCA].” The decision is likely to have a significant impact on the landscape of FCA litigation.
