The United States Supreme Court recently granted certiorari in a pair of cases out of the Seventh Circuit that will finally resolve a longstanding circuit split on the question of “scienter” under the False Claims Act (FCA)—namely, whether a defendant can “knowingly” violate the FCA if the relevant legal requirement is ambiguous and the defendant’s conduct is otherwise “objectively reasonable.” How the Court answers that question in United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc. could significantly impact businesses and individuals potentially subject to FCA investigations or litigation.
A defendant can only violate the FCA if the defendant acted “knowingly.” The statute itself states that this knowledge requirement can be met with actual knowledge, deliberate ignorance, or reckless disregard; it is not necessary for the defendant to have the specific intent to defraud the government. However, due to the sheer complexity of federal statutes and regulations, it is common for defendants to argue that their interpretation of the governing law is reasonable and thus their actions cannot meet the statutory knowledge requirement. The question presenting courts, then, is whether defendants can knowingly violate the FCA if their conduct was “objectively reasonable” in light of prevailing law, regardless of their subjective intent.
In Supervalu and Safeway, divided panels of the Seventh Circuit adopted the objective reasonableness standard, holding that subjective intent is irrelevant so long as the defendant’s conduct was objectively reasonable—even if the defendant’s interpretation of the law is ultimately found to be incorrect—and there was no “authoritative guidance” from a circuit court or agency that would have put the defendant on notice that their interpretation was incorrect. Both the Eighth and D.C. Circuits have adopted positions similar to the Seventh Circuit.
By contrast, the Sixth, Ninth, Tenth, and Eleventh Circuits have held that a court must inquire whether a defendant subjectively knew or should have known that its conduct violated a law or regulation.
The government, for its part in these two cases, is arguing against the adoption of an objective reasonableness standard. Its position is that subjective intent should be relevant: a defendant should not be able to escape FCA liability by identifying an objectively reasonable (but incorrect) interpretation of governing rules if the defendant did not hold that interpretation at the time of the relevant conduct.
Whichever of these interpretations the Court accepts, it will have a significant impact on how defendants approach FCA cases—whether litigation focuses on objective arguments about how the law should be interpreted or on fact-intensive inquiries into the defendant’s subjective state of mind. Businesses and corporations defending themselves from FCA liability must be nimble in responding to the Court’s decision.
