OBJECTIVELY REASONABLE FRAUD?: THE SUPREME COURT’S UPCOMING FCA DECISION WILL RESOLVE CIRCUIT SPLIT OVER SCIENTER ELEMENT

By: Carly Heying, Volume 107 Staff Member 

On January 13, 2023, after urging by the U.S. Solicitor General and Senator Chuck Grassley (R-Iowa),[1] the Supreme Court agreed to take up a pair of consolidated False Claims Act cases addressing “whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”[2] The Court’s decision will resolve a question that has split circuit courts and will potentially close a “gaping hole” allowing bad-faith defendants to escape liability for defrauding the government.[3]

The False Claims Act (FCA) was first enacted in 1863 and still operates as a key tool for the United States to combat fraud against the government. It imposes a civil penalty on anyone who “knowingly” submits false or fraudulent claims for payment or approval to the U.S. government.[4] Under the FCA, those who submit such claims are liable for three times the amount of damages that the government sustained because of the fraudulent claim, plus a penalty of between $5,000 and $10,000.[5]

Not only does the FCA allow the government to target fraudulent claims, but it also allows private whistleblowers, known as “relators,” to bring a civil action in the name of the government.[6] If successful, relators are entitled to a certain percentage of the government’s proceeds from the action or settlement.[7]

Today, FCA enforcements reclaim billions of dollars each year for the federal government.[8] FCA claims arise when a statute or regulation authorizes a person or entity to submit a claim to the government for money but the person or entity submits a fraudulent claim, for example by submitting a claim for services not actually rendered or by making a false statement to induce the government to pay a claim. But what happens when the statute or regulation empowering someone to submit a claim for reimbursement is ambiguous?

I. COURTS HAVE SPLIT OVER WHAT MAKES A CLAIM FALSE WHEN A STATUTE OR REGULATION IS AMBIGUOUS

The current circuit split revolves around the meaning of the word “knowingly.” A person is liable under the FCA for “knowingly” submitting a false claim if they had “actual knowledge” that the claim was false or if they acted in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information.[9] When a statute or regulation is ambiguous, however, courts have disagreed about whether a defendant is liable for making a false claim when relying on an incorrect but objectively reasonable interpretation of the statute or regulation.

The Ninth Circuit implicitly considered the issue in United States v. Chen and determined that a subjective standard applied.[10] In that case, the Ninth Circuit affirmed the district court’s judgment against defendant Dr. Chen for knowingly submitting false claims to Medicare.[11] Dr. Chen argued that he based his claims on a reasonable interpretation of Medicare requirements, so he did not and could not knowingly fail to comply.[12] Rejecting that argument, the Ninth Circuit held that while a good-faith interpretation does not subject a defendant to liability, sufficient evidence showed that Dr. Chen’s interpretation was neither correct nor made in good faith.[13] His subjective bad faith was therefore sufficient to meet the FCA’s knowledge element.[14]

The Eleventh Circuit explicitly reached the same conclusion in United States ex rel. Phalp v. Lincare Holdings, Inc. and determined that a subjective standard applied.[15] In that case, relators brought an FCA claim against their former employer for knowingly submitting Medicare reimbursement claims that were “false” because they failed to comply with Medicare regulations.[16] The district court found that the regulations themselves were ambiguous, and because the defendants’ interpretation was objectively reasonable, the defendant’s interpretation “belie[d] the scienter necessary to establish a claim of fraud.”[17] The Eleventh Circuit disagreed and held that “although ambiguity may be relevant to the scienter analysis, it does not foreclose a finding of scienter.”[18] Instead, the issue was whether the defendant “actually knew or should have known that its conduct violated a regulation in light of any ambiguity.”[19] In particular, the Eleventh Circuit cautioned that the opposite rule would allow defendants who deliberately submitted claims they believed to be false to avoid liability by coming up with a reasonable interpretation of an allegedly ambiguous regulation.[20]

The Seventh Circuit disagreed. In United States ex rel. Schutte v. SuperValu Inc., the court recently held that even if a defendant intends to file a false claim, the defendant “cannot know that its claim is false if the requirements for that claim are unknown.”[21] That case involved a claim that SuperValu knowingly filed false reports of its “usual and customary” drug prices (defined by regulation as the price charged to the general public) when it reported the retail cash price instead of the lower amounts charged to qualifying customers under a discount program.[22] But the Seventh Circuit held that the regulation was not clear, and SuperValu’s interpretation was objectively reasonable.[23] The Seventh Circuit set a standard absolving a defendant of liability where the defendant has an “objectively reasonable reading of a statute or regulation” and they do not have “authoritative guidance warning against [the defendant’s] erroneous view.”[24] The court concluded that the objective reasonableness standard would effectively guard against the threat that a bad-faith defendant could escape liability.

II. WHAT’S AT STAKE IN THE UPCOMING SUPREME COURT DECISION?

Before the Supreme Court granted the writ of certiorari in United States ex rel. Schutte v. SuperValu Inc., the Solicitor General raised a number of concerns with the Seventh Circuit’s approach in her amicus brief. She warned that the objective falsity standard would allow defendants acting in bad faith to submit false claims for payment and to escape liability by identifying “wrong but reasonable justifications after the fact.”[25] Additionally, the complexity of government regulatory programs prevents the government from proactively resolving every legal ambiguity, so the government relies on the good faith of government contractors and should therefore not absolve bad-faith actors of liability.[26] Legal scholars have also argued that adopting an objective falsity standard is inconsistent with the Supreme Court’s prior interpretation of the FCA.[27]

But for those who regularly submit claims to the government for payment, the “objective reasonableness” standard has greater appeal. When it is not clear how to comply with the law, it does not seem fair to subject people to treble damages and a steep penalty for objectively reasonable interpretations of the law.[28] Additionally, the “subjective falsity” standard is likely to impose substantial litigation costs on FCA defendants by requiring issues of subjective intent, even where a defendant’s decision was objectively reasonable, to be heard and determined by a jury.[29]

The Supreme Court is set to hear oral arguments on Tuesday, April 18, 2023.[30] Regardless of the outcome, the Court’s decision in this case will have wide-reaching compliance implications for those who regularly submit claims for payment to the U.S. government.

 

[1] See Brief for the United States as Amicus Curiae, United States ex rel. Schutte v. SuperValu, Inc., No. 21-1326 (petition for cert. granted Jan. 13, 2023); Brief for Senator Charles Grassley as Amicus Curiae Supporting Petitioners, United States ex rel. Schutte v. SuperValu, Inc., No. 21-1326 (petition for cert. granted Jan. 13, 2023).

[2] Question Presented Report, Supreme Court of the United States (Jan. 13, 2023), https://www.supremecourt.gov/qp/21-01326qp.pdf [https://perma.cc/6GZC-9MP5].

[3] See Brief for Senator Charles Grassley at 23, United States ex rel. Schutte v. SuperValu, Inc.

[4]See 31 U.S.C. §3729(a)(2)(A).

[5] Id. at (a)(1).

[6] 31 U.S.C. § 3730(b).

[7] 31 U.S.C. § 3730(d).

[8] See, e.g., Melissa D. Berry, U.S. False Claims Act Enforcements Exceed $5.6 Billion in 2021, Mostly on Health-Care Related Claims, Reuters (Feb. 23, 2022), https://www.reuters.com/legal/litigation/us-false-claims-act-enforcements-exceed-56-billion-2021-mostly-health-care-2022-02-23 [https://perma.cc/6TXQ-UQRW] (reporting that the government recovered its second-largest amount in history from FCA judgments and settlements).

[9] 31 U.S.C. § 3729(b)(1).

[10] See 402 Fed. App’x 185, 186 (9th Cir. 2010).

[11] Id. at 186.

[12] Id. at 187–88.

[13] Id. at 188.

[14] Id.

[15] 857 F.3d 1148 (11th Cir. 2017).

[16] Id. at 1152. This is known as the “false certification theory” of FCA liability, which alleges that a person has falsely certified that they correctly complied with a statute or regulation when compliance with such statute or regulation was a condition for payment by the government. See id. at 1155.

[17] Id. at 1152.

[18] Id. at 1155.

[19] Id.

[20] See id.

[21] 9 F.4th 455, 459 (7th Cir. 2021).

[22] Id. at 459.

[23] See id. at 468.

[24] Id. at 468.

[25] Brief for the United States as Amicus Curiae at 12, United States ex rel. Schutte v. SuperValu, Inc.

[26] Id. at 22–23.

[27] See, e.g., Joel D. Hesch, Proving a Violation of the False Claims Act Through Deliberate Ignorance, 17 Liberty U. L. Rev. 3, 14 (2022) (arguing that the Supreme Court has closely hewed to common law fraud, “which makes subjective bad faith central to fraudulent scienter,” in its interpretation of the FCA).

[28] See Jeff Overley and Daniel Wilson, Justices Ignite FCA Debate: Fairness Vs. ‘Invitation To Fraud’, Law360 (Jan. 17, 2023), https://plus.lexis.com/newsstand#/law360/article/1566332 [https://perma.cc/QD2S-LXM7] (reporting that attorneys who represent FCA defendants view steep damages as unfair when predicated on reasonable interpretations of unclear compliance requirements).

[29] See id. (raising the argument that a subjective falsity standard will prevent defendants from successfully moving to dismiss cases or for summary judgment).

[30] U.S. ex rel. Schutte v. SuperValu Inc., SCOTUSblog, https://www.scotusblog.com/case-files/cases/u-s-ex-rel-schutte-v-supervalu-inc [https://perma.cc/23YP-7F8D].