In what may lead to the biggest FCA opinion in recent history, the U.S. Supreme Court earlier this month agreed to consider two cases addressing the necessary state of mind (i.e., “scienter”) to violate the FCA.
The FCA prohibits defendants from knowingly submitting false claims. That scienter standard is broader than just actual knowledge. The statute defines “knowing” and “knowingly” with three alternative standards:
- Acting with actual knowledge the information submitted is false;
- Acting in deliberate ignorance of the truth or falsity of the information submitted; or
- Acting in reckless disregard of the truth or falsity of the information submitted.
Whether a defendant has acted with the necessary scienter is often a hotly litigated issue. And that is particularly true when the alleged FCA violation stems from a violation of another statute or regulation that is subject to different interpretations.
Scienter and Safeco
Since the Supreme Court’s landmark 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), the most consequential development in FCA jurisprudence has been a series of decisions from circuit courts holding that a defendant acting under an objectively reasonable interpretation of a law or regulation did not act with the scienter necessary to violate the FCA. These decisions rely on a Supreme Court case, Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007), that did not involve the FCA. Rather, Safeco interpreted the Fair Credit Reporting Act to establish an objective scienter standard. In applying that objective standard in the FCA context, courts have (1) limited the viability of claims based on noncompliance with regulatory or sub-regulatory guidance, particularly in the context of government programs such as Medicare, and (2) provided an avenue to dismiss those claims at the pleading stage, by hinging scienter on an objective legal inquiry.
To date, there is no true circuit split on the application of Safeco’s objective standard to the FCA’s knowledge requirement, because no circuit court to have considered the issue has expressly held that Safeco does not apply in the FCA context. But recent decisions from the Seventh and Fourth Circuits adopting the Safeco standard came from panels split 2-1 and drew vigorous dissents: from Judge Hamilton in United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 472 (7th Cir. 2021), and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649, 663 (7th Cir. 2022), and from Judge Wynn in United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 357 (4th Cir. 2022). The Fourth Circuit thereafter agreed to rehear Sheldon en banc, and in a 4-4 split, vacated the panel opinions while affirming the district court’s decision (thus reaching the same outcome the panel had). United States ex rel. Sheldon v. Allergan Sales, LLC, 49 F.4th 873 (4th Cir. 2022).
The Looming Supreme Court Review
Commentators, including our colleague Elisha Kobre, predicted after the Fourth Circuit’s en banc decision that the Supreme Court would soon weigh in, and they were correct. On January 13, 2023, the Supreme Court granted certiorari in Schutte and Proctor, the two recent Seventh Circuit decisions that adopted Safeco in the FCA context.
The FCA bar, Medicare and Medicaid providers, government contractors, Congress, and others will be closely watching the Supreme Court’s consideration of this issue. Why?
- Establishing FCA violations amid complex regulatory requirements. The Safeco standard makes it more difficult to establish an FCA violation based on a defendant’s noncompliance with a regulatory or statutory requirement, even if the noncompliance itself (and thus the falsity of the claim) is not in question. This has major implications for entities and individuals that receive money from the government but are subject to voluminous and complex regulatory and sub-regulatory requirements. The clear trend starting with Escobar, and continuing with the courts applying Safeco to the FCA, has been to limit the ability of relators and the government to use the FCA to police regulatory and contractual compliance. In insisting that the FCA’s materiality requirement was a “demanding” one, the Supreme Court in Escobar observed that the FCA is “not a vehicle for punishing garden-variety breaches of contract or regulatory violations.” 579 U.S. at 194. Adopting an objective scienter standard focused on “reasonable interpretation” of applicable requirements would entrench this concept. And it would likely have an even greater practical effect, given that the objective scienter standard can be applied at the pleading stage while the Escobar materiality analysis is more dependent on weighing factual circumstances.
- No subjective intent? Under the Seventh Circuit’s strict application of Safeco’s standard, a defendant’s subjective intent, no matter how nefarious, is irrelevant. Even if a defendant believed he or she was violating a legal requirement, and even if the defendant was in fact violating that requirement, the defendant did not act with actual knowledge, deliberate ignorance, or reckless disregard (as required by the FCA) as a matter of law, if there was (1) a contrary “permissible interpretation” of the relevant requirement, and (2) no “authoritative guidance” warning the defendant away from that interpretation. 9 F.4th at 470–71. Appellants and amici curiae, including Sen. Chuck Grassley, argue that this interpretation undercuts the purpose and plain language of the FCA by allowing defendants who acted with fraudulent intent to escape liability by coming up with post hoc “reasonable interpretations” of rules they did not at the time believe to be ambiguous. The Sixth, Ninth, Tenth, and Eleventh Circuits have taken approaches that appear to allow for some consideration of subjective intent, albeit not in opinions that directly consider and reject the Safeco standard. See United States ex rel. Prather v. Brookdale Senior Living Communities, 892 F.3d 822 (6th Cir. 2018); United States ex rel. Oliver v. Parsons Co., 195 F.3d 457 (9th Cir. 1999); United States ex rel. Smith v. The Boeing Co., 825 F.3d 1138 (10th Cir. 2016); United States ex rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148 (11th Cir. 2017). How the Supreme Court will respond to these arguments, and whether it will devise a middle ground that allows for consideration of subjective intent in some circumstances, remains to be seen.
- What constitutes “authoritative guidance”? The Seventh Circuit held that in order to be “authoritative,” guidance must issue from “either circuit court precedent or guidance from the relevant agency.” Schutte, 9 F.4th at 471. The court also stated that the guidance must be “specific enough to put a defendant on notice that its conduct is unlawful.” Proctor, 30 F.4th at 661. But in both cases the Seventh Circuit stopped short of deciding whether, in order to be “authoritative,” agency guidance must be “binding” (e.g., in the form of either a notice-and-comment rulemaking or a binding administrative adjudication), and instead looked at the “totality of the circumstances” to find that a footnote in the Medicare Prescription Drug Benefit Manual was not authoritative. Id. at 662–63. If the Supreme Court does extend the Safeco standard to the FCA, it will be interesting – given the many forms that agency guidance can take, including manuals, policy memoranda, and opinion letters – to see whether the Court provides further clarity on what guidance counts as “authoritative.”
Conclusion: Big Case, Big Effect
The Supreme Court’s decision in the consolidated Schutte and Proctor cases could have even greater effects than Escobar. Depending on the outcome, the decision may prompt changes to the way agencies issue guidance and the manner in which government contractors consult and assess guidance. The outcome may even prompt amendments to the FCA itself. Government contractors and other FCA stakeholders will be watching.