What Happened

Last week, the Supreme Court granted certiorari and consolidated two False Claims Act (“FCA”) cases that ask the Court to determine “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.” The grant follows disagreements in the courts of appeals over the scope of the FCA’s knowledge requirement.

U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway, Inc.

To prove scienter under the FCA, the government or relator plaintiff must prove the defendant acted “knowingly,” or with “reckless disregard” or “deliberate ignorance” of the truth. The question the Justices will consider in the consolidated FCA cases is whether that standard can be met where a defendant had an objectively reasonable interpretation of the law or regulation.

The relator whistleblowers in Safeway and SuperValu are former employees who alleged that the supermarkets overcharged Medicare and Medicaid for generic drugs because they intentionally failed to include all available discounts they offered to retail customers in the “usual and customary” (“U&C”) pricing they offered to the government. The government declined to intervene in both cases.

The Seventh Circuit, in 2-1 decisions, held that Safeway and SuperValu were not liable under the FCA because their interpretations of U&C pricing under an ambiguous regulation were “objectively reasonable,” even if their determinations were ultimately wrong. In reaching this conclusion, the Seventh Circuit applied the “Safeco standard” for scienter from the Supreme Court’s 2007 Safeco Insurance Co. of America v. Burr decision under the Fair Credit Reporting Act.1 In Safeco, the Court found that someone acting under an incorrect interpretation of a statute or regulation cannot have acted with “knowledge” or “reckless disregard” if their interpretation of an unclear statute or rule was objectively reasonable and there was no “authoritative guidance” cautioning against that interpretation.

The relators who filed petitions with the Supreme Court and the government–which urged the Court to grant certiorari–disagree. They argue that the Safeco standard ignores subjective intent in deciding scienter and caution that applying the Safeco standard to FCA cases will open the door for defendants to rely on after-the-fact “objectively reasonable” explanations for their behavior.

Why This Matters

The FCA imposes steep penalties for those who knowingly present false claims or make false statements to the federal government, and the statute’s scienter requirement is critical to determining FCA liability.2 If the Supreme Court applies the Safeco standard to FCA claims, courts cannot find the requisite scienter if defendants acted on an objectively reasonable interpretation of an ambiguous statute or regulation.

On the other hand, if the Court declines to apply the Safeco standard to FCA cases, the decision could dramatically expand the scope of FCA liability in circuits that currently apply Safeco in the FCA context. Further, it could increase the burden on companies who receive government funds to clarify any legal ambiguities before submitting claims for payment.