Leaves Window Open for Defense Based on Subjective Belief
On June 1, 2023, the U.S. Supreme Court issued a decision in a consolidated appeal of two healthcare qui tam cases that removes a very powerful defense from defendants’ arsenal in False Claims Act (FCA) cases. In the healthcare space, defendants have often asserted that, where an applicable legal or regulatory standard—e.g., a reimbursement regulation or Local Coverage Determination—is ambiguous and open to more than one objectively reasonable interpretation, the required FCA element of scienter (a knowing state of mind) cannot be found as long as defendants’ actions were consistent with one reasonable interpretation of the standard. While the Supreme Court’s decision closes the door on this defense, now making it harder for defendants to assert that they did not knowingly violate the FCA, the decision still leaves the window open for defendants to assert a defense based on their sincerely held subjective belief at the time claims were made that their interpretation of the applicable standard was correct. This will have an immediate impact on healthcare FCA cases.
In its unanimous decision in United States ex rel. Schutte v. SuperValu, Inc., the Supreme Court ruled that scienter under the FCA hinges not on whether there existsan objectively reasonable alternative interpretation of an applicable ambiguous legal requirement, but instead, on whether the defendants actually believed the interpretation they adopted at the time claims were submitted. In doing so, the Supreme Court established that the post hoc objectively reasonable standard from Safeco Insurance Co. of America v. Burr does not apply to FCA cases. The Court’s opinion vacates and remands two healthcare Seventh Circuit decisions, United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway Inc, which were consolidated for the appeal.
Required Elements for an FCA Case
In order to assert an FCA case, a plaintiff must prove: 1) that a claim submitted to the government is false; 2) that the claim is material to payment; 3) that the claim caused the government to pay money; and 4) that the claim was made with the requisite scienter (or knowledge that it was false).
Reimbursement rules and coverage decisions are notoriously vague, leaving them open to multiple reasonable interpretations. Given that, scienter is often the critical element on which liability in FCA cases hinges. Whether the interpretation of the standard/rule is correct goes to the falsity element—but the belief that the interpretation was correct goes to scienter. If the defendants’ interpretation is found not to be correct, there may be a false claim, but there is still not an FCA violation if the defendant actually believed its interpretation was correct.
The two cases the Supreme Court considered, and which are discussed below, are examples of how vague reimbursement rules can lead to FCA litigation.
The Safeco Standard and the Seventh Circuit Opinions
In the 2007 Safeco decision, the Supreme Court interpreted the “willfully” standard in the Fair Credit Reporting Act to encompass both knowing and reckless mental states. The Court held that the defendant in that case did not act recklessly because its post hoc interpretation of the law, though incorrect, was objectively reasonable in light of the “less-than-pellucid” statutory text and the lack of “guidance” from federal appellate courts or regulators. In a footnote that became central to the SuperValu and Safeway cases, the Safeco Court declined to consider evidence of the defendant’s “subjective bad faith.” The Safeco Court opined that where “the statutory text and relevant court and agency guidance allow for more than one reasonable interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such interpretation as a knowing or reckless violator.”
In SuperValu and Safeway, whistleblowers alleged that the supermarket chains had failed to disclose their discounted pharmacy prices offered to customers, and instead, reported their higher retail prices when reporting to Medicare and Medicaid their “usual and customary” charges to the public for reimbursement purposes. The Seventh Circuit found that the supermarket chains had not acted with scienter (even though there was evidence they thought their usual and customary prices were their discounted prices) because, applying the Safeco standard, they could not have acted “knowingly” when their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary.”
Just Say No to “Post Hoc Brainstorming”
Vacating the Seventh Circuit’s decisions, Justice Clarence Thomas wrote that “the FCA’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 emphasizes that the FCA’s definition of “knowingly” for the scienter requirement centers on the defendant’s lack of an honest belief in the statement’s truth at the time the claim was made, with each form of scienter focusing on what the defendant thought and believed: 1) actual knowledge (a defendant’s awareness of the falsity of a statement ); 2) deliberate ignorance (a defendant’s awareness of a substantial risk that their statements are false, while intentionally avoiding taking steps to confirm the statement’s truth or falsity); and 3) reckless disregard (a defendant’s consciousness of a substantial and unjustifiable risk that their claims are false).
In both the SuperValu and Safeway cases, there was evidence that the defendants thought the claims they submitted were false at the time they submitted them—that they were put on notice of the correct interpretation of “customary and ordinary” as being their discounted prices and then tried to hide from regulators that they had these discounts. The Court stated that the focus of “knowingly” under the FCA “is not, as respondents would have it, on post hoc interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.”
Where Do We Go from Here?
While the FCA defense bar may be disappointed that the Safeco defense is not available, the Supreme Court’s decision is limited to the situation where a defendant had subjective knowledge of falsity at the time of the claim but tried to rely on the ambiguity of the applicable standard afterward as a defense. FCA defendants still can assert lack of scienter where they believed their interpretation of an ambiguous standard was correct at the time the claims were made, even if that interpretation is ultimately found not to hold. And the flip side of the Court’s holding that a defendant cannot rely on a post hoc interpretation of an ambiguous standard is that a whistleblower/the government similarly may not rely on a defendant’s subsequently attained knowledge to try to prove subjective intent at the time the claims were made. As the Supreme Court said, the focus is on “what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it.”
As a practical matter, it would be helpful for healthcare FCA defendants to have evidence that they thought their interpretation was the correct interpretation at the time the claims were made, in light of what they knew about any guidance bearing on the interpretation of the applicable standard, including regulatory guidance, industry understanding, and the like, if any.
In sum, the Supreme Court’s decision removed what has been a powerful defense for when there is an ambiguous applicable standard with alternative reasonable interpretations. However, defendants still have a defense for their sincerely held beliefs that they followed the correct interpretation.