The U.S. Supreme Court recently agreed to hear two cases on the key question of when a defendant can be found to have “knowingly” violated the False Claims Act (FCA). This sets the stage for a potential landmark FCA decision that may change how courts handle FCA cases where complex regulatory provisions are at issue.
The question before the Court is whether a defendant’s subjective understanding or belief in the lawfulness of conduct is relevant to whether it knowingly violated the FCA. In the two cases at issue, the Seventh Circuit found defendants not liable under the FCA for allegedly fraudulent billing because each acted consistent with an “objectively reasonable” view of an ambiguous regulation and there was no authoritative guidance on the issue. The Seventh Circuit found that subjective intent is irrelevant to whether a defendant acted with knowledge.
The False Claims Act imposes liability where a defendant “knowingly” presents false claims or makes false statements to the government. The FCA defines “knowingly” to include (1) actual knowledge; (2) deliberate ignorance; or (3) reckless disregard of the truth or falsity of information. Proving scienter is an essential element of an FCA claim. Circuits are split on the application of this requirement in cases involving a violation of an ambiguous legal requirement. Four circuits have held that the question is whether a defendant subjectively knew or believed (or had reason to know or believe) that its conduct was unlawful. Four others, including the Seventh Circuit, have held that a defendant does not, as a matter of law, act with scienter if the conduct was consistent with an objectively reasonable interpretation of an ambiguous legal requirement, regardless of subjective intent.
At issue in U.S. ex rel. Schutte et al. v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021), was SuperValu’s prescription drug price-match program, under which stores could match lower prices offered by local pharmacies if customers requested it. But SuperValu didn’t include these prices when reporting its usual and customary prices, as required by certain government programs (including Medicare Part D and Medicaid). Supervalu argued that it did not have any intent to submit false claims, as its pricing submissions were supported by a reasonable interpretation of an ambiguous legal obligation. The Seventh Circuit agreed, finding SuperValu could not be liable under the FCA as its view was “objectively reasonable” and there was no authoritative interpretation on the issue. The decision was 2-1, with a spirited dissent by Judge David F. Hamilton. Judge Hamilton recited evidence that he believed demonstrated that SuperValu executives actually knew that they were submitting false pricing information, and he remarked that the majority’s decision “creates a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test. The majority's new safe harbor even makes subjective bad faith ‘irrelevant’ in fraud cases.” To be fair, the majority’s decision did not make it clear whether a defendant would have to harbor an objectively reasonable belief before or at the time of the alleged false claims.
United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), involved a similar issue involving allegations that the pharmacy chain fraudulently overstated its prices by failing to report certain discounts. The Seventh Circuit held that Safeway’s conduct was not paired with the intent required to be liable under the FCA because Safeway’s conduct was one of “multiple reasonable interpretations” of the law.
A ruling in favor of defendants SuperValu and Safeway may strengthen defense positions in FCA cases involving alleged violations of complex regulatory schemes, a common circumstance in cases arising in the health care and government contracting sectors. On the other hand, a ruling in favor of the relator could create additional minefields for corporations trying to navigate the regulatory shoals, and increase the likelihood that cases will proceed past the pleading stages through discovery, summary judgment, and trial. Although prudent in any event, a ruling in favor of relators may also place renewed emphasis on the need for company personnel to obtain detailed regulatory advice in matters involving any doubt or ambiguity to avoid being deemed to have acted “recklessly,” which is a form of actionable knowledge in FCA litigation.