A recent Eleventh Circuit decision joins the chorus of FCA cases struggling to interpret the scienter requirements in situations where there is more than one objectively reasonable interpretation of a statute, regulation, etc. See United States ex rel. Gerry Phalp et al. v. Lincare Holdings, Inc. et al., No. 16-10532, 2017 WL 2296878 (11th Cir. May 26, 2017). The Eleventh Circuit held that the mere existence of a reasonable interpretation of an ambiguous Medicare provision was not sufficient to show lack of scienter in an FCA case. It affirmed the district court decision granting summary judgment to the defendant, but amended the reasoning to clarify that scienter requires a determination that the defendant actually knew or should have known that its conduct violated the regulation in light of any ambiguity present.
The question of whether a defendant’s violation of an ambiguous contract provision or regulation can support FCA liability is a live one, with recent circuit courts weighing in on the extent to which a defendant’s subjective scienter ought to be considered. In the past, courts have relied on the Supreme Court’s holding in Safeco Insurance Company of America v. Burr, 551 U.S. 47, 68-71 (2007), for the proposition that where a defendant’s interpretation was objectively reasonable, the court need not consider the defendant’s subjective knowledge. This civil scienter standard was questionably undermined when the Supreme Court unanimously abrogated the Federal Circuit’s “objectively reckless” two-part test for scienter, as we discussed in an earlier blog. Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016).
An Eighth Circuit FCA decision provided a reading that harmonized the apparent tension between Safeco’s adoption of the “objectively reasonable” test and Halo’s rejection of the “objectively reckless” test. See United States ex rel. Donegan v. Anesthesia Assoc. of Kansas City, PC, 833 F.3d 874 (8th Cir. 2016). In Donegan, the Eighth Circuit held that the objectively reasonable test would insulate defendants from liability when a defendant had an objectively reasonable interpretation of an ambiguous regulation and the relator did not produce evidence that there was government guidance warning a defendant that the interpretation was otherwise unreasonable. The Lincare district court decision mirrored Safeco’s reasoning, allowing for essentially any post hoc rationalization of an ambiguous provision to negate a finding of liability. On appeal, however, the Eleventh Circuit aligned itself more closely with the Eight Circuit’s suggestion: that evidence that the defendant was on notice that an otherwise reasonable interpretation was incorrect could sustain scienter.
Curiously, the Eleventh Circuit did not cite to Safeco, Halo, or Donegan when it rejected the district court’s scienter standard, even though the defendant and the government as amicus each made arguments about Safeco’s applicability. This omission distinguishes the opinion from those of other circuit courts to have touched the issue, such as United States ex rel. Purcell v. MWI Corp. out of the D.C. Circuit. 807 F.3d 281 (D.C. Cir. 2015). In that case, a relator alleged that the defendant had falsely certified that it had paid only “regular commissions” to be paid to its sales agents. The defendant argued that the commissions at issue in that case qualified as “regular” under an objectively reasonable interpretation of the term, and the Court cited heavily to Safeco in its discussion – ultimately holding that an ambiguous term could defeat scienter only if the defendant’s interpretation was objectively reasonable and the defendant had not previously been “warned away” from that interpretation. Id. at 288.
Despite the lack of direct discussion of Safeco, the Eleventh Circuit in Lincare rejected the district court’s Safeco-esque knowledge standard, reasoning that it would insulate “ostrich” defendants who “buried [their] head[s] in the sand” to ignore or avoid knowing that their otherwise objectively reasonable interpretation of the ambiguous provision was actually unacceptable. The Eleventh Circuit went on to say that the district court’s interpretation would permit post hoc reasonable interpretations that shielded defendants from liability, even when they had “actual knowledge of a different authoritative interpretation” at the time. This reasoning is consistent with that in Halo.
The question of how to treat ambiguous provisions with respect to FCA liability is one of the utmost importance to prospective defendants, particularly in light of the Escobar decision last summer. Implied certification opens the door for defendants to be especially vulnerable to allegations of failure to comply with ambiguous terms of their programs or contracts. It remains to be seen whether the circuits will ultimately stray far enough from Safeco to require Supreme Court intervention to create consistency, but in the meantime we will continue monitoring and bring you any new developments as we spot them.