The latest updates and analysis from Morrison Foerster
January 17, 2023 - False Claims Act

Supreme Court to Consider the False Claims Act’s Intent Standard

MoForecast Podcast: Predictions on the False Claims Act (FCA)

On Friday, January 13, the Supreme Court agreed to consider whether the False Claims Act (“FCA”) covers compliance lapses tied to regulatory interpretations that are incorrect but “objectively reasonable.” The Supreme Court granted petitions for writs of certiorari in two cases, United States ex rel. Schutte v. SuperValu, Inc. and United States ex rel. Proctor v. Safeway, Inc., which will be consolidated and set for oral argument. The Supreme Court’s decision in the cases should resolve a circuit split over the role of a defendant’s subjective intent in determining scienter.

The FCA imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment” to the government, or who “knowingly makes, uses, or causes to be made or used” a “false statement” material to such a claim.31 U.S.C. § 3729(a)(1)(A) and (B). The Act defines “knowingly” to mean that a person (i) “has actual knowledge of the information”; (ii) “acts in deliberate ignorance of the truth or falsity of the information”; or (iii) “acts in reckless disregard of the truth or falsity of the information.”31 U.S.C. § 3729(b)(1)(A).

In applying the statute’s knowledge requirements, several circuits follow the Supreme Court’s standard in Safeco Insurance Co. v. Burr,551 U.S. 47 (2007), a Fair Credit Reporting Act case holding that a defendant does not have the necessary scienter, and has not acted with “reckless disregard,” if its conduct is consistent with an “objectively reasonable” interpretation of an unclear law or regulation and there is no “authoritative guidance” to the contrary. This has become known as the “clever lawyer” defense because the defendant’s subjective beliefs are irrelevant if the defendant’s lawyers can later show that its conduct was consistent with an objectively reasonable—albeit erroneous—interpretation of the law.

In United States ex rel. Schutte v. SuperValu Inc., two pharmacists alleged that SuperValu knowingly misrepresented its pricing for generic drugs in order to overbill Medicare and Medicaid. SuperValu successfully argued before the Seventh Circuit that, even if it overbilled, it did not have the intent to violate the FCA because its pricing was based on an “objectively reasonable” determination of “usual and customary” pricing. The dissent argued that this standard creates a “safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.” Pointing to a four-to-four circuit split, the pharmacists sought certiorari, asserting that other circuits apply a subjective standard to determine whether a defendant actually knew or should have known that it was committing an FCA violation.

In response to a request by the Supreme Court, the Solicitor General filed a brief in December 2022, supporting the pharmacists and urging the Court to grant certiorari and reverse the Seventh Circuit’s “objectively reasonable” standard. The government stated that it is impossible to preemptively address every potential ambiguity in government programs, and that government contractors must approach ambiguities in good faith, follow what they understand to be the best interpretation, and seek clarification when necessary.

This will be the second FCA case before the Court this term.As we previously discussed, in United States ex rel. Polansky v. Executive Health Resources Inc.,the Supreme Court is hearing a case that should resolve a circuit split over whether and under what circumstances the government can invoke its authority to dismiss qui tam cases pursuant to 31 U.S.C. § 3730(c)(2)(A) when it initially declined intervention. The Court’s decision in SuperValu is likely to have even broader significance, perhaps doing for the FCA’s scienter standard what the Court’s landmark decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), did for the statute’s materiality standard.

Decisions in both SuperValu and Polansky are expected by July.