On June 1, 2023, the Supreme Court unanimously ruled in favor of whistleblower plaintiffs (referred to as “relators”) in consolidated False Claims Act (“FCA”) cases in a decision that clarified the application of the FCA’s knowledge requirement.  In United States ex rel. Schutte v. SuperValu Inc., the Court held that the FCA reaches defendants who knew that the claims they submitted were fraudulent, even if they subsequently offered an “objectively reasonable” interpretation of an ambiguous legal or contractual requirement material to the government’s payment decision.  McGuireWoods previously reported that the Supreme Court’s resolution of the case and the underlying circuit split was set to be significant.

In a concise ruling (with no concurring or dissenting opinions), Justice Thomas’s opinion interpreted the FCA’s knowledge requirement in a manner that is more favorable to relators and prosecutors, while foreclosing a line of defense for FCA defendants that several courts had previously allowed.

The FCA provides for liability for a defendant that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”[1]  “Knowingly” is defined in the statute as acting with (1) “actual knowledge” of the falsity, (2) “deliberate ignorance of the truth,” or (3) “reckless disregard of the truth.”[2]  In the consolidated cases before the Court, the Seventh Circuit held that the defendants, which own and operate retail pharmacies, had not “knowingly” presented false claims for reimbursement because they had offered in litigation “objectively reasonable” (if not accurate) interpretations of the complex Medicare and Medicaid prescription drug pricing schemes at issue (involving accurate reporting of “Usual and Customary” pricing to government payors) that would have rendered their claims true.  The Seventh Circuit reasoned, consistent with several other circuits, that even if a defendant’s statements are false under the best interpretation of an ambiguous provision, the defendant does not “knowingly” present false statements if there exists “an objectively reasonable reading of the statute or regulation” under which the statement was true.[3]  In making that determination, the Seventh Circuit concluded, “a defendant’s subjective intent does not matter for [the FCA’s] scienter analysis—the inquiry is an objective one.”[4]

The Supreme Court unanimously rejected the Seventh Circuit’s interpretation of the FCA, emphasizing that “[w]hat matters for an FCA case is whether the defendant knew the claim was false,” because “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”[5]  In other words, the inquiry into the knowledge element of the FCA should “focus primarily on what the respondents thought and believed” when they submitted “the false claim[s]—not what the defendant[s] may have thought after submitting” them or “post hoc interpretations that might have rendered the claims accurate.”[6]

In so ruling, the Court rejected the Seventh Circuit’s reliance on the Supreme Court’s 2007 interpretation of the Fair Credit Reporting Act’s knowledge standard in Safeco Insurance Co. v. Burr.[7]  The Supreme Court first explained that the Safeco Court interpreted “a different statute, the [Fair Credit Reporting Act], which had a different mens rea standard, ‘willfully.’”[8]  While that interpretation referenced the “knowing” and “reckless” standards that also apply in the FCA, the decision was not meant to “establish[] categorical rules for those terms.”[9]  The Court also explained that its Safeco decision itself “did not purport to set forth the purely objective safe harbor that respondents invoke.”[10]  Instead, Safeco held that recklessness “encompassed actions involving ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’”[11]  “By a similar token here,” the Schutte Court refused to consider “legal interpretations that respondents did not believe or have reason to believe at the time they submitted their claims.”[12]

The Court’s rejection of the “objectively reasonable” standard under the FCA is a clear win for prosecutors and relators.  The Court’s holding will bolster FCA enforcement by removing an argument previously available to FCA defendants in several jurisdictions.  Moreover, while the existence of an “objectively reasonable interpretation” of an ambiguous regulatory provision or contract term in an FCA case may be ripe for resolution as a matter of law in a motion to dismiss or an early summary judgment motion, determining a defendant’s subjective intent is a fact-intensive inquiry that is generally unsuitable for early resolution.  Meaning, defendants are less likely to win early dismissals of complaints and will be forced to bear the costs and burdens of discovery and protracted litigation to resolve questions regarding what the defendant “thought and believed” when they submitted the claim.  And even beyond the FCA, the Court’s narrow description of the Safeco standard may also strengthen the federal government’s fraud enforcement efforts more broadly.

All is not lost for government contractors and healthcare providers, though.  There is some helpful language in Justice Thomas’s opinion that future defendants will cite to in arguing they had a good faith, if mistaken, interpretation of the vague terms at issue.  Furthermore, the Court suggested that even some objectively unreasonable interpretations may escape liability if the defendant believed they were accurate:  “The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”[13]  Putting the focus primarily on what the defendant thought or knew at the time, as opposed to an arguably more reasonable interpretation, will aid some defendants in future cases.

Companies that transact with the government can take prophylactic steps to protect against future FCA suits by making (and documenting) good faith efforts to reasonably interpret and comply with legal and contractual provisions.  The Court’s focus on subjective intent will aid those defendants who document their efforts to fairly interpret and comply with relevant provisions at the time they submit their claims.

Please contact the authors if you have any questions regarding the FCA and other government-contractor or healthcare-related enforcement or compliance concerns.

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[1] 31 USC § 3729 (a)(1).

[2] 31 USC § 3729 (b)(1).

[3] United States v. SuperValu Inc., 9 F.4th 455, 468 (7th Cir. 2021), cert. granted sub nom. United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 644 (2023), and vacated and remanded sub nom. United States ex rel. Schutte v. SuperValu Inc., No. 21-111, 2023 WL 3742577 (U.S. June 1, 2023).

[4] Id. at 470.

[5] United States ex rel. Schutte v. SuperValu Inc., No. 21-111, slip op. at 2, 8 (June 1, 2023).

[6] Id. at 10–11.

[7] Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007).

[8] SuperValu, slip op. at 13 (quoting Safeco, 551 U.S. at 52).

[9] Id.

[10] Id. at 14.

[11] Id. (quoting Safeco, 551 U.S. at 68).

[12] Id.

[13] Id. at 8.