The Supreme Court recently heard oral argument in the appeal of two False Claims Act (FCA) cases from the Seventh Circuit that called into question the level of intent, or scienter, required to establish corporate liability under the FCA for “knowingly” overbilling the government for goods or services.  The Court’s eventual decision may have widespread implications in healthcare, government contracting, and other industries because it may impact how a company can defend against an FCA claim by arguing that its conduct was objectively reasonable, even if, subjectively, the company or its employees may have intended to violate the FCA or did not otherwise take adequate steps to ensure that their conduct was consistent with the statute.  

Both cases, United States ex. rel. Schutte v. SuperValu, Inc., 9 F.4th 455 (7th Cir. 2021) (“SuperValu”), and United States ex. Rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022) (“Safeway”), held that the Supreme Court’s decision in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), governs the interpretation of the FCA’s scienter requirement.  Specifically, citing Safeco, 551 U.S. at 70, the Seventh Circuit found in SuperValu that an FCA defendant does not act with reckless disregard as long as the defendant’s interpretation of the relevant statute or regulation was objectively reasonable and no authoritative guidance warned the defendant away from that interpretation.  SuperValu, 9 F.4th at 468.  The appellate court found that when FCA “relators cannot establish the standard articulated in Safeco, there is no liability under the FCA.”  Id.  In other words, the Seventh Circuit determined that a defendant’s beliefs are “irrelevant” if the defendant can later show that its conduct was consistent with an “erroneous” but “objectively reasonable” interpretation of the law.  This has potentially far-reaching implications, as we explain below.

Alleged Conduct “Objectively Reasonable” And Thus Not “Knowingly False”

The SuperValu case involved discount prescription pricing at approximately 800 of respondent’s pharmacies and the “usual and customary price” for prescriptions they reported to state Medicaid agencies, Medicare Part D, and other payors for reimbursements.  9 F.4th at 461.  SuperValu purportedly had a price match program in which it provided discount pricing to match competitors’ prices when customers requested a price match.  SuperValu purportedly did not provide these discount prices when reporting its “usual and customary” prices for various prescriptions and, allegedly, reported a higher price than the actual or average prices it charged customers.  Id.  SuperValue was alleged to have violated the FCA by knowingly submitting false claims for reimbursement above the “usual and customary price” actually charged.  Internal discussions and other evidence suggested that personnel at the company were concerned that the reported prices were higher than the actual prices, and the reported prices could not be adequately explained if CMS investigated the charging practices.  Id.  However, because there was no specific agency guidance or caselaw on point, the court reasoned, the term “usual and customary price” was open to interpretation and thus the company’s reporting practices were deemed objectively reasonable. 

The FCA Contains Three “Knowledge” Prongs

The FCA, 31 U.S.C. § 3729 et seq., imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment” to a government spending program, or who “knowingly makes, uses, or causes to be made or used” a “false statement” material to such a claim.  31 U.S.C. § 3729(a)(1)(A) and (B).  The FCA defines “knowingly” to “mean that a person, with respect to information,” (i) “has actual knowledge of the information”; (ii) “acts in deliberate ignorance of the truth or falsity of the information”; or (iii) “acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1)(A).  FCA claims thus require proof of two primary elements, falsity and scienter (intent), as well as materiality.[1]  Either the Justice Department or a private party, known as a relator or whistleblower, may sue under the FCA.  When a relator files a “qui tam” suit, the government may “elect to intervene” and essentially proceed with litigating the matter.  If the government declines, the private party may proceed with the litigation and share in any judgment.  31 U.S.C. § 3730.  A substantial amount of FCA litigation involves claims of overbilling or improper billing under the Medicare Act and regulations promulgated by the Centers for Medicare and Medicaid Services related to healthcare billing, reimbursement requirements, and various allowances.  Other FCA litigation involves fraudulent claims for reimbursement for a variety of goods and services provided to the U.S. government, including defense, technology, services, and education-related contracting.

Three Avenues of Knowledge Potentially Foreclosed by Safeco

Courts have explained that liability under the FCA can be established by showing knowledge under any of the three prongs in 31 U.S.C. § 3729.  “Actual knowledge” under the FCA traditionally means the defendant was subjectively “aware of” a violation.  See Intel Corp. Investment Policy Committee v. Sulyma, 140 S. Ct. 768, 776 (2020).  “[D]eliberate ignorance” has been interpreted to mean a defendant is “subjective[ly] aware” of a substantial risk that his statement may be false and avoids taking steps to confirm whether the statement is true or false.  See United States v. Ricard, 922 F.3d 639, 656 (5th Cir. 2019).   And, “reckless disregard” has been explained as an aggravated form of gross negligence, in which a defendant disregards a “high risk” of falsity “that is either known or so obvious that it should be known.”  See Farmer v. Brennan, 511 U.S. 825, 836 (1994).  Courts have also explained that defendants who disregard warnings about likely falsity from sources such as attorneys, internal compliance officers, or others with requisite knowledge may act with “reckless disregard” of the truthfulness of their claims.  See United States ex rel. Polukoff v. St. Mark’s Hospital, 895 F.3d 730, 744 (10th Cir. 2018).

By contrast, the Seventh Circuit’s recent SuperValu decision explains that “Safeco covers all three of the scienter standards listed in § 3729,” 9 F.4th at 469, holding that “while the FCA’s scienter provision is defined via three distinct definitions, a failure to establish the Safeco standard as a threshold matter precludes liability under any of these definitions.” Id. at 459.  Safeco involved an alleged violation of the Fair Credit Reporting Act (“FCRA”), and whether the plaintiffs met the FCRA’s common law scienter (intent) requirement of acting “willfully,” 15 U.S.C. § 1681n(a).  The court found that term meant both “knowing” and “reckless disregard,” and a two-step process should be used to determine whether the standard is met.  The court explained that a defendant who acted under an incorrect interpretation of the relevant statute or regulation did not act with reckless disregard if (1) the interpretation was objectively reasonable and (2) no authoritative guidance cautioned defendants against it.  Safeco, 551 U.S. at 70.  The court further explained that a defendant’s subjective intent is irrelevant for purposes of liability and suggested in a footnote that a failure to meet this standard would preclude a finding of a knowing violation.  Id. at 70 n.20.  The Seventh Circuit has thus applied the Safeco Court’s rationale interpreting the FCRA’s “willfully” scienter requirement to exclude “objectively reasonable” conduct from liability, to the FCA’s “knowingly” requirement and its three-pronged definition to determine liability for the submission of false claims.  Businesses and individuals who may be impacted by application of the False Claims Act will need to pay careful attention to whether the Supreme Court agrees.

Takeaways

Companies and individuals who may face potential liability under the False Claims Act should carefully watch the Supreme Court’s decision in SuperValu and Safeway.  Those in the healthcare industry, and anyone who provides goods or services to the Federal Government will want to know whether “objectively reasonable” will become the new standard for scienter, or knowledge, for determining FCA liability.  Even if a particular practice or action may be deemed “objectively reasonable,” the knowledge standard will be informed by agency practice, prior decisions of courts or administrative bodies, and guidance provided by government entities with authority in the subject area.  If it does, companies may be more secure against FCA challenges when their conduct is consistent with objectively reasonable interpretations of law and regulation. This would be an important protection for companies striving to comply in increasingly complex and shifting regulatory environments.

Where knowledge of falsity may be imputed to the company because of external factors such as agency guidance or prior decisions, companies should proceed with caution and consider compliance enhancements.  Regardless of whether a company can assert a strong “objectively reasonable” defense to a future FCA claim, companies will need to ensure that their existing compliance programs are sufficiently robust to detect and prevent conduct that could form the basis of an alleged false claim. They will also need to ensure that they implement any authoritative guidance from government agencies because a failure to do so will expose them to FCA liability. With this in mind, companies should consider taking the following steps:

1. Compliance Programs: Review and assess their existing compliance programs to determine whether the existing programs, policies, and procedures constitute a robust compliance framework that can effectively detect and prevent conduct that may be considered a false and misleading practice. A compliance program needs to reflect a company’s current business portfolio. If company’s business lines have changed, its compliance program must be updated to robustly cover those new areas.

• Training: Provide regular training on the components of their compliance program. All employees need to have at least annual training. Additionally, any of these employees who hold management positions should also have specialized familiarize themselves on the compliance program so they can be compliance advocates to their employees of the requirements.

• Internal Testing: Conduct internal testing of the company’s compliance program based on objective and articulated metrics to ensure such testing is robust and will uncover areas of potential non-compliance. For example, the company’s Chief Compliance Officer is involved on any significant payments matters/high-level acquisitions over a certain amount.

Companies should consider engaging outside counsel to assist on any review of, training regarding or internal testing of any compliance program in order to protect such work under attorney client privilege.   

A ruling from the Supreme Court in the two cases is expected later this year.

[1] In Univ. Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 1996 (2016), the Court interpreted § 3729(a)(1)(A) to require that knowingly false claims be material to the government’s payment decision.