The False Claims Act (FCA) is seeing quite a bit of action at the Supreme Court this term, with multiple cases under consideration. This is the second installment in PilieroMazza’s blog series on “The FCA at the Supreme Court,” where we will examine active cases, comment on decisions once they are issued, and discuss ways defendants can protect themselves in FCA litigation. Part 1 of the series is available here.
On January 13, 2023, the Supreme Court agreed to consider two consolidated cases: United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc. These cases raise an issue that has fostered serious debate over the last decade: whether a defendant is protected from FCA liability where they acted based on an objectively reasonable (but incorrect) interpretation of an ambiguous law or regulation. The forthcoming decision could be one of the most impactful FCA rulings in recent history.
For a defendant to be liable under the FCA, they must act with scienter, i.e., they must “knowingly” submit a false claim or false statement about a claim. The FCA defines a knowing violation of the statute as one made with actual knowledge that a submitted claim or statement was false or the defendant acted with reckless disregard or deliberate ignorance of the truth or falsity of the submitted claim. Often over the last decade, FCA defendants have invoked the Supreme Court’s decision in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), to argue that, where a defendant acted in reliance on an objectively reasonable interpretation of a law or regulation, they cannot have acted “knowingly” and therefore cannot be liable under the FCA. Although Safeco is not an FCA case (it dealt instead with the Fair Credit Reporting Act), various circuit courts of appeal have applied its framework to FCA cases. Now, the Supreme Court will decide whether these circuit courts are correct.
In Schutte, a whistleblower (or “relator”) brought a qui tam action under the FCA alleging that a pharmacy charged customers a discounted price for prescription drugs, while fraudulently reporting to the government that the non-discounted price was the “usual and customary” price. The relator alleged that these reports were knowing submissions of false information to the government, sufficient for FCA liability. The district court granted summary judgment in favor of the pharmacy. On appeal, the United States Court of Appeals for the Seventh Circuit affirmed in a split decision, finding that a defendant who acts under an objectively reasonable, albeit incorrect, interpretation of a relevant statute or regulation does not act with the requisite level of scienter to support FCA liability, so long as authoritative guidance does not warn the defendant away from its interpretation. The Seventh Circuit went a step further and explained that a defendant’s subjective intent is irrelevant to the question. In other words, even if the defendant intended to submit false claims to the government, so long as the defendant can identify an objectively reasonable basis for their conduct, no FCA liability can attach.
In Proctor, the Seventh Circuit considered a similar set of facts as it did in Schutte—the defendant was again accused of misrepresenting its “usual and customary” price for pharmaceutical products. The Seventh Circuit reaffirmed its holding that a defendant does not act knowingly under the FCA so long as the defendant can offer an objectively reasonable interpretation of the relevant statute or regulation and no authoritative guidance warned the defendant away from that interpretation. The Seventh Circuit also explained that “authoritative guidance” in this context means guidance that comes from a source with authority to interpret the relevant text. Such guidance also must be sufficiently specific to put a defendant on notice that their conduct is unlawful. For example, in Proctor, the Seventh Circuit determined that a single footnote in a lengthy manual is not authoritative guidance, nor are sources that do not come from any government agency.
The Supreme Court will hear oral arguments in these cases on April 18, 2023.
The Supreme Court’s ultimate decision is likely to resolve three related issues: whether Safeco applies to the FCA; if so, what standard will be applied (including whether subjective intent is relevant); and what constitutes sufficient “authoritative guidance” to warn a defendant away from improper conduct.
If the Supreme Court adopts the Safeco standard for FCA cases, it will be more difficult for relators and the Department of Justice (DOJ) to establish the scienter requirement for FCA violations based on failure to comply with a published law or regulation. It also will bolster defendants, who will be more likely to advance Safeco arguments at the motion to dismiss stage, potentially ending FCA cases before the costly discovery process.
Assuming the Supreme Court applies an objective reasonableness test to the FCA, the question remains: how far will the Supreme Court go? If the Court adopts the Seventh Circuit’s analysis, even defendants who subjectively intend to submit false claims would avoid liability. However, the Sixth, Ninth, Tenth, and Eleventh Circuits have opted for somewhat varied approaches that consider the defendant’s subjective intent.
Finally, if the Court adopts Safeco, it is likely to weigh in on the quality of authoritative guidance necessary to warn defendants away from wrongdoing. The Seventh Circuit required authoritative guidance to be sufficiently specific and come from a federal circuit court or the relevant agency. However, there is a wide variety of information that could constitute authoritative guidance from which the Supreme Court may choose, or it may punt so the issue is decided on a case-by-case basis.
Regardless of the outcomes of these questions, the Supreme Court’s decision is likely to offer much-needed clarity for litigants in FCA cases.
We offer the following key takeaways from where Schutte and Proctor seem to be heading:
- Confirming the adoption of Safeco in FCA cases would be a boon for defendants, particularly small business government contractors. It would be a surprise for the Supreme Court to reject the applicability of Safeco to the FCA outright. To date, every circuit court of appeals that has considered the issue has applied Safeco to FCA cases in at least some form, although questions remain about its actual applicability. A decision from the Supreme Court would have national implications in FCA litigation. It would offer defendants additional defenses to avoid FCA liability, reduce the risk of an adverse outcomes, and force relators and DOJ to consider reasonable reductions in settlement negotiations.
- Defining the scope of the Safeco test will assist litigants and courts to resolve FCA matters. Perhaps most discussed among the questions raised by Schutte and Proctor is whether the Supreme Court will rule that a defendant’s subjective intent is relevant to deciding whether they operated under an objectively reasonable interpretation of a statute or regulation. In this regard, the Supreme Court’s decision is likely to offer critical parameters for defendants, relators, and the government to evaluate the strength (or weakness) of a given FCA case and clarity for the parties about whether and how to resolve disputed cases. While a decision that deems subjective intent irrelevant would strengthen defense opportunities in FCA cases, the Supreme Court’s decision may help facilitate settlements and reduce attorneys’ fees and costs for litigants no matter how it comes out.
- Regardless of the Supreme Court’s decision, government contractors should implement internal protocols to ensure statutory and regulatory compliance. Small business government contractors are subject to complex and often-changing regulations, particularly related to eligibility for contracts issued under the Small Business Administration’s 8(a) Business Development and set-aside programs. The government has trained its focus on small business contracting of late, heavily scrutinizing small businesses that are not in compliance. Accordingly, regardless of how the Supreme Court rules, government contractors should implement internal audit and evaluation protocols to ensure statutory and regulatory compliance. Identifying appropriate agency guidance in advance of bidding, award, or performance will help government contractors avoid costly investigations and litigation in the event of an unwitting or unintended FCA violation. In addition, companies may seek specific written guidance from the agency about its interpretation of regulations. A well-documented, good faith effort to reasonably interpret and comply with legal and contractual obligations is essential. Doing so may afford greater degrees of protection in the event of a future enforcement action.
- The decision may result in legislative and regulatory activity. If the Supreme Court adopts Safeco and issues a defendant-friendly opinion, it could prompt substantial legislative and regulatory action. FCA advocates, such as Senator Chuck Grassley, could seek amendment of the FCA to legislate around the Supreme Court’s decision. In addition, agencies could modify or expand the way they issue guidance to warn contractors away from wrongdoing. Given the hotly contested issues currently under Supreme Court consideration, it is reasonable to assume that FCA activity will increase as a final decision is issued.
If you have questions about the FCA or are the subject of an FCA investigation or lawsuit, please reach out to Matt Feinberg and Annie Hudgins, the authors of this blog series, or another member of PilieroMazza’s False Claims Act or Audits & Investigations teams.