OA Alert: Supreme Court to Address the FCA Scienter Standard

FCA Background

The False Claims Act, 31 U.S.C. § 3729 et seq. (“FCA”), prohibits persons from “knowingly” submitting false claims or making materially false statements to the government in support of claims. The FCA’s “scienter” requirement statutorily defines “knowing” conduct to refer to defendants who act with (1) actual knowledge, (2) deliberate ignorance, or (3) reckless disregard. The Government or the whistleblower plaintiff must prove only one to satisfy the FCA’s scienter requirement, and proof of specific intent to defraud is not required.

Supreme Court Review

On January 13, 2023, the Supreme Court granted writs of certiorari to hear the consolidated Seventh Circuit cases of U.S. ex rel. Schutte v. SuperValu Inc., No. 21-1326 and U.S. ex rel. Proctor v. Safeway, Inc., No. 22-111. The Supreme Court will address whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether the defendant knowingly violated the FCA. The Seventh Circuit determined that the misconduct reflected reasonable views of compliance obligations, without examination of whether such views were objectively held in good faith. The Supreme Court decision could clarify whether a defendant can knowingly submit a false claim so long as the conduct is consistent with an objectively reasonable interpretation of the statute.

The Cases

Objective vs. Subjective Scienter Standard

The majority of appeals courts, including the Seventh Circuit, follow the objective standard. This means that a defendant who acts pursuant to an incorrect interpretation of a relevant statute or regulation does not act knowingly under the FCA if their interpretation was objectively reasonable (an example of this would be relying on counsel’s advice) and there is not authoritative guidance suggesting their interpretation was wrong. Other appeals courts follow a subjective intent standard. Generally, a subjective intent standard is whether the defendant actually knew or should have known that its conduct failed violated the applicable law.

SuperValu/Safeway

In the SuperValu and Safeway cases, the Seventh Circuit applied the objective reasonable standard set forth in the Supreme Court decision of Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), a Fair Credit Reporting Act case. In Safeco, the Supreme Court held that a defendant’s subjective intent is irrelevant so long as the defendant’s position is supported by an objectively reasonable interpretation of the law, and the defendant was not “warned away” from its position by authoritative guidance. In SuperValu, it was alleged that Supervalu charged its customers a discounted price for prescription drugs but reported the non-discounted price as its usual and customary price to Medicare and Medicaid. The district court found that SuperValu’s interpretation of the usual and customary price was objectively reasonable when it submitted reports to governmental programs. The district court’s ruling was affirmed by the Seventh Circuit, which additionally held that subjective intent was not applicable to the FCA scienter analysis. Specifically, the Seventh Circuit reasoned that the FCA’s scienter standard in not met when: (i) the defendants act consistent with an objectively reasonable interpretation of an ambiguous legal requirements; (ii) and there was no authoritative guidance from a circuit court or relevant federal agency at the time.  Similarly, in Safeway, the Seventh Circuit held that without guidance from the courts or authoritative guidance from an applicable agency with respect to usual and customary prices, the scienter requirement could not be met. Therefore, the Seventh Circuit concluded that Safeway billing governmental programs at full rates did not violate the FCA.

Conclusion

From a defense perspective, the SuperValu objective standard is more procedurally efficient, cost effective, and advantageous. Procedurally, cases may be decided at the pleading stage since the objective standard involves questions of law and guidance. The subjective standard would include fact-intensive inquiries into the defendant’s then state of mind, for which discovery is often required, and includes additional costs and aggravations for the defendant. The FCA is broad in scope and carries severe penalties and multiple damage recoveries. Since subjective intent is often blurry at best, well-intentioned defendants may feel more pressured to settle the case due to uncertainty of the standard, as opposed to culpability. Proponents of the subjective standard may argue that the objective standard allows for objectively reasonable loopholes created years after the acts took place. Regardless of the manner in which the Supreme Court proceeds, stakeholders in the health care space deserve clarity.

OA’s team of health care practitioners is carefully tracking this matter and its effects on the health care industry.

For additional information or assistance in a False Claims Act matter, please contact Andrew Weissenberg at 518-462-5601 or Aweissenberg@oalaw.com.

Andrew is Of Counsel with OA’s Health and Business Law practices.  He advises and counsels clients on health care transactional matters and regulatory compliance, including health care fraud and abuse issues related to the False Claims Act, state and federal anti-kickback and physician self-referral laws, physician entity structuring, licensure matters and corporate practice of medicine prohibitions.