3 minute read | June.09.2023
On June 1, the Supreme Court ruled that entities that submit false claims to the government can be liable if they subjectively believed the claims were false at the time of submission. The decision overruled cases that permitted defendants to evade liability by arguing that their interpretation of an ambiguous law or regulation was “objectively reasonable” despite their subjective belief.
The Supreme Court case – U.S. v. SuperValu Inc. – involved allegations that retail pharmacies overcharged the government for prescription drugs. Specifically, a whistleblower alleged that pharmacies were submitting prescription costs that were higher than what their “usual and customary” charges were in violation of Medicaid and Medicare requirements.
Under the False Claims Act, a defendant is liable when “knowingly” presenting “a false or fraudulent claim for payment” to the government and does so with “knowledge of the claim’s falsity.” A defendant’s conduct is “knowing” if it was done with “actual knowledge, deliberate ignorance, or recklessness” regarding the claim’s truth or falsity.
The appeals court had said the pharmacies were not liable under the FCA because they had acted “consistent with any objectively reasonable interpretation that had not been ruled out by definitive legal authority or guidance,” because the phrase “usual and customary” was vague and the defendants were able to articulate an interpretation that supported the costs they submitted. This was in spite of the fact that there was evidence that the pharmacies believed that the charges they were submitting were improperly inflated.
The Supreme Court disagreed with the appellate court, holding that a defendant has the state of mind required for liability under the FCA “if they understood [the relevant] standard and submitted inaccurate claims anyway,” regardless of what “an objectively reasonable person” may have believed.
Now False Claims Act defendants can face liability if it is shown that they were aware of and subjectively understood the applicable standard and failed to follow it or were deliberately ignorant or reckless regarding the falsity of a claim, even if they could establish a post-hoc objectively reasonable interpretation (such as when a word or phrase in the standard could be interpreted multiple ways).
This decision comes as the Department of Justice appears to be shifting its focus from investigating fraudulent behavior by PPP borrowers to investigating lenders and related institutions.
As in the 2008 financial crisis, when the government investigated mortgage lenders, we expect the government to turn its sights on PPP lenders to determine if government-backed loans were improperly made, particularly in light of the broad participation in and cost of the PPP program. One study suggests that up to 15% of the $800 billion in PPP loans are suspicious.
The full implications of the decision are still coming into focus, but the case could affect FCA cases against PPP lenders by: