/>iIn 2024, federal courts issued a number of important decisions in False Claims Act (FCA) cases that are particularly noteworthy for the health care and life sciences industries. We focus here on decisions that further develop the FCA scienter standard addressed in 2023 by the Supreme Court in its important SuperValu decision. We also look at decisions that have accepted the invitation of three Supreme Court justices to reexamine the constitutionality of the FCA’s qui tam provisions. Finally, a circuit split on the interpretation of “causation” for FCA suits based on alleged violations of the Anti-Kickback Statute (AKS) remains unresolved, pending a decision from the First Circuit.
Post-SuperValu Developments Concerning the FCA’s Scienter Standard
An essential element of any FCA claim is “knowledge” that the submission of claims was “false or fraudulent.” By statute, the FCA defines “knowledge” to mean that a person acted with (i) actual knowledge, (ii) deliberate ignorance, or (iii) reckless disregard with respect to the truth or falsity of the information at issue. This is the FCA’s intent or scienter standard. Last year, in SuperValu, the Supreme Court held that the FCA’s “knowledge” element is based on subjective intent and not, as a number of circuits had previously held, on a defendant’s “objectively reasonable” interpretation of an ambiguous legal or regulatory issue.1 We previously discussed the SuperValu case (here and here) and analyzed the decision’s implications in last year’s issue of EnforceMintz.
The Supreme Court explained that the FCA’s scienter requirement could be met by showing (i) “deliberate ignorance,” meaning that a defendant had knowledge of a “substantial risk” that its statements were false but “intentionally avoid[ed]” a relevant legal or regulatory requirement; or (ii) “reckless disregard,” meaning that a defendant understood that there was a “substantial and unjustifiable risk” that its claims were false but submitted the claims anyway. While the Supreme Court did not define how lower courts might determine which risks are “substantial” or “unjustifiable,” these two new glosses on “deliberate ignorance” and “reckless disregard” offer some guidance to providers and companies seeking to avoid exposure to FCA liability through well-designed compliance programs.
SuperValu may have been initially understood as a clear-cut victory for the United States and private whistleblowers who bring actions under the qui tam provisions of the FCA. Generally speaking, in litigation, a defendant’s subjective knowledge is often a question of fact, which makes it difficult for defendants to win a motion to dismiss on the basis of whether a complaint adequately alleges knowledge. But as decisions from the past year demonstrate, that is not the full story, for two reasons.
First, even after SuperValu, courts have been willing to grant motions to dismiss on scienter grounds. For example, in August 2024, a federal district court granted a pharmaceutical manufacturer’s motion to dismiss an FCA complaint for failure to adequately allege scienter.2 In US ex rel. Sheldon v. Forest Laboratories, LLC, the relator alleged that Forest Laboratories overcharged the government in violation of the FCA because it did not include certain price concessions in calculating “best price,” as that term was defined by statute. The court found the “best price” definition “no more informative than the hypothetical instruction in [SuperValu] to drive at a ‘reasonable’ speed.”3 As such, the court found that the defendant’s alleged familiarity with such vague instructions did not provide a basis to attribute a culpable mental state to the drug manufacturer.
Second, in June 2024, the Supreme Court decided Loper Bright Enterprises v. Raimondo, ending the era of “Chevron deference” in which courts deferred to an agency’s interpretation of an ambiguous statute.4 This decision may lend support to FCA defendants in cases where the conduct at issue allegedly violated an ambiguous statutory or regulatory requirement. Often in FCA cases, the United States or a private relator attempts to establish scienter by showing an FCA defendant’s knowledge of statutory or regulatory requirements or agency guidance. After Loper Bright, a provider or company facing ambiguous or complex statutory or regulatory requirements can now demonstrate that it subjectively believed it was not taking “substantial and unjustifiable risk” that its claims were false based on the controlling statutory text, without undue deference to an agency’s interpretation. For example, analyzing Stark Law compliance often requires a review of layers of exceptions to complex statutory or regulatory prohibitions. Loper Bright may help provide a defense as to both scienter and falsity where theories of liability are premised on noncompliance with a web of statutory requirements, regulations, and complex agency guidance.
As we previously discussed (here), these case law developments highlight three implications for health care and life sciences companies seeking to minimize FCA exposure or to defend against an FCA investigation or litigation:
- Providers and companies should seek to minimize potential FCA exposure by documenting interpretations of ambiguous legal requirements or regulations based on all available advice, communications with agencies or payors, and any other information when making business decisions that involve claims to federal programs or federal funds.
- In the event of an FCA investigation, strong compliance functions and a clear record showing the entity’s lack of a subjective belief that it was submitting false or fraudulent claims, or taking an unjustified risk of doing so, may help persuade the government to decline to intervene in an FCA lawsuit.
- As Sheldon demonstrates, once in litigation, a scienter-based motion to dismiss argument as well as summary judgment opportunities may still be available, despite SuperValu’s subjective intent holding.
While scienter issues often raise disputed factual questions, that is not always the case, as demonstrated by developments in FCA case law since SuperValu.
Successful Constitutional Challenges in FCA Cases Under Article II and the Eighth Amendment
For the first time in two decades, the issue of the constitutionality of the FCA’s qui tam provisions is squarely before the federal courts. In 2024, defendants raised successful constitutional challenges in cases involving large FCA penalties. Given these results, constitutional questions will likely remain a hot-button issue in 2025, particularly in cases where the government declines to intervene.
Zafirov and the Constitutionality of the FCA’s Qui Tam Provisions
In September 2024, a federal district court held in US ex rel. Zafirov v. Fla. Med. Assocs., LLC that the FCA’s qui tam provisions violate the Appointments Clause of Article II of the Constitution.5
Public officials who exercise “significant authority” under federal law and “occupy a continuing position established by law” are “Officers” who must be appointed consistent with the requirements of Article II, Section 2. In considering whether FCA relators are “Officers”, the court observed that “[a]n FCA relator’s authority markedly deviates from the constitutional norm.” The court explained that the qui tam provisions permit anyone “wherever situated, however motivated, and however financed” to perform a “traditional, exclusive [state] function by appointing themselves as the federal government’s avatar in litigation.”6 The court thus concluded that arrangement violates the Appointments Clause because it permits unaccountable, unsworn private actors to exercise core executive power with substantial consequences for the public. Finding the relator in Zafirov was unconstitutionally appointed, the court granted the defendants’ motion for judgment on the pleadings and dismissed the case with prejudice.
In our prior discussion (here), we explained how Zafirov followed from Justice Thomas’s dissent in US ex rel. Polansky v. Executive Health Resources, which noted the “substantial arguments” that the FCA’s qui tam provisions may be “inconsistent with Article II.” Two other justices agreed with Justice Thomas’s suggestion that the Court should consider the constitutional question in an appropriate case.
The United States and the relator appealed the Zafirov decision to the Eleventh Circuit. As of the date of this publication, briefing is in progress. The government made four particularly noteworthy arguments in its opening brief. First, the government argued that qui tam relators pursue “private interests” assigned by the FCA but do not exercise executive power. Second, the government argued that the qui tam provisions are not subject to the Appointments Clause because relators are not a part of the federal government. Third, even if the Appointments Clause applies, the government argued that relators (i) do not exercise “significant authority” because they are not part of the government workforce and the government retains supervisory authority over declined FCA cases; and (ii) do not “occupy a continuing position established by law” because the role of a qui tam relator is time-limited, case-specific, and involves interests that are personal in nature. Finally, the government argued that, even if the district court’s ruling in Zafirov is affirmed, the decision should be limited only to declined cases and should not extend to matters where the government has intervened or is considering whether to intervene. The defendants’ brief will be filed in the first quarter of 2025 and a decision is expected by the end of 2025.
If Zafirov is affirmed, that would create a circuit split on the constitutionality of the qui tam provisions, which would greatly increase the odds of Supreme Court review. In cases decided between 1993 and 2002, the Second, Fifth, Sixth, Ninth, and Tenth Circuits rejected Article II constitutional challenges to the FCA’s qui tam provisions, so Zafirov’s impact may be limited in those jurisdictions. But in circuits where the issue has not been decided, and to preserve the argument in circuits that previously rejected Article II challenges, defendants are raising the constitutional arguments via motions to dismiss, motions for judgment on the pleadings, and in affirmative or general defenses.
For example, in one recent declined FCA lawsuit pending in a federal district court within the Eleventh Circuit, a defendant Medicare Advantage Organization moved to dismiss, leading its brief with the argument that such relator-driven qui tam suits violate Article II of the Constitution.7 Defendants have made similar arguments in other jurisdictions as well.8
The success of these arguments remains to be seen. FCA defendants raising the constitutional argument should be aware of the notice requirements of Federal Rule of Civil Procedure 5.1, which requires that a party filing a pleading or motion drawing into question the constitutionality of a federal statute promptly file a “notice of constitutional question” with the court and serve that notice on Attorney General of the United States.
In response to FCA defendants’ emerging reliance on Zafirov, the United States has not hesitated to step in to defend the constitutionality of the FCA’s qui tam provisions in previously declined cases. For example, in US ex rel. Gill v. CVS Health Corp., DOJ initially declined to intervene in an FCA lawsuit involving over $200 million in alleged damages from overpayments and over-billing federal programs and commercial payors.9 After Zafirov was decided, the CVS defendants filed a Rule 5.1 notice of constitutional challenge, arguing that the FCA qui tam provisions violated separation of powers principles and Article II of the US Constitution. The CVS defendants also asserted those defenses in their answer to the complaint. The CVS defendants’ Rule 5.1 notice prompted the government to reverse course and intervene “for the limited purpose of defending the constitutionality of the qui tam provisions” of the FCA.
These Article II challenges to the qui tam provisions could significantly impact FCA cases, especially qui tam litigation where the United States previously declined to intervene. We will continue to monitor this issue as it develops in 2025.
Eighth Amendment Challenges to Excessive FCA Penalties
In July, the Eighth Circuit vacated a roughly $6.5 million FCA award, holding that the amount violated the Eighth Amendment’s Excessive Fines Clause.10 In Grant ex rel. US v. Zorn, a medical practitioner filed a qui tam action against the co-owner of a sleep disorders center, alleging that the defendant overbilled federal and state programs for patient visits and engaged in a kickback scheme. After trial, the district court determined that the 1,050 false claims the defendant had submitted to the government resulted in roughly $86,000 in actual damages, which was then trebled to about $259,000. Then, the court imposed a per-claim civil penalty, which added almost $7.7 million to the total award.
Citing the Eighth Amendment’s Excessive Fines Clause and the Supreme Court’s prior invalidation of punitive damages awards that far outpace actual damages, the district court reduced the penalties to $6.47 million. The district court thus endorsed a ratio in which the penalty amounts were 25 times greater than actual damages.
On appeal, however, the Eighth Circuit in Grant vacated the punitive damages award, holding that the application of both treble damages and per-claim civil penalties violated the Eighth Amendment’s Excessive Fine Clause. The court reasoned that the punitive sanction was “grossly disproportional” to the conduct at issue and that the Eight Circuit had previously rejected double-digit multipliers where there was a small economic loss and no evidence of danger to health and safety.
The Grant decision bolsters defendants’ arguments for lower penalty awards in FCA cases where the penalties imposed far exceed actual damages. These arguments are more likely to succeed in cases where the only harm alleged is purely economic.
The Unresolved Circuit Split on the Causation Standard for AKS-Based FCA Claims
As we discussed in last year’s edition of EnforceMintz, a significant circuit split is developing on the causation standard applicable to FCA claims based on violations of the AKS. Specifically, section (g) of the AKS states that “a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].”11 The issue in this circuit split is whether the submission of a claim to the government “result[s] from” a kickback only if it would not have been submitted “but for” the kickback.
In July 2024, the First Circuit heard oral argument on the FCA-AKS causation issue in United States v. Regeneron Pharmaceuticals, Inc.12 As of the date of publication of this article, the First Circuit’s decision is pending.
In Regeneron, the government appealed the district court’s holding that a standard of “but for” causation applied to FCA lawsuits premised on AKS violations. The district court’s holding was consistent with recent decisions from the Sixth and Eighth Circuits (which we previously discussed here) applying the plain language of section (g) of the AKS to require a showing of “but for” causation. On appeal, the government argued that a broader proximate cause standard applies, requiring only “some sort of causal connection.” That view, which has been endorsed by the Third Circuit, is based on the legislative history of the 2010 amendment that added the “resulting from” language in section (g) of the AKS.
At oral argument in Regeneron, Judge Kayatta challenged the government’s expansive view of the causation standard based on legislative intent. Judge Kayatta asked whether causation would be met in a situation where a hospital sent a vendor 10,000 claims in one year, then received a kickback, and then sent fewer claims in the following year. In response, the government argued that each and every claim in year two would be tainted by a kickback, even though the volume of claims decreased post-kickback. Perhaps tellingly, Judge Kayatta found that to be an “odd” outcome.
However the First Circuit rules, the circuit split will deepen, thereby increasing the likelihood that the causation standard question will rise to the Supreme Court. In the meantime, health care and life science entities facing FCA scrutiny based on AKS theories should closely monitor this emerging area. The applicable causation standard can have major implications on FCA exposure and potential damages.
