Background on FCA
The FCA applies to those who knowingly submit false or fraudulent claims for payment to the federal government.[1] To this end, the FCA creates liability for any person who, inter alia, “(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”[2] Thus, the party alleging an FCA violation must prove: (1) defendant made false statements or engaged in a fraudulent course of conduct; (2) with the requisite knowledge; (3) the statements or conduct were material; and (4) caused the government to pay out money or to forfeit monies due on a “claim.”[3] The FCA defines several of its terms — “claim,”[4] “knowingly,”[5] and “material”[6] — however, it does not define what is “false” or “fraudulent.”
Safeco scienter standard and its application to the False Claims Act
The scienter element of the FCA is established in three ways—actual knowledge, “acting in deliberate ignorance,” or “acting in reckless disregard.” Actual knowledge is “subjective knowledge,” while deliberate ignorance is “the kind of willful blindness from which subjective intent can be inferred” and reckless disregard is “an extension of gross negligence, or gross-negligence-plus.”[7] The Supreme Court noted in Universal Health Servs., Inc. v. United States, 579 U.S. 176, 136 S. Ct. 1989, 2001, 195 L. Ed. 2d 348 (2016) (“Escobar”) that the scienter element of the FCA is a “rigorous” requirement. Noting that, although the FCA defines “knowingly” to include actual knowledge, deliberate ignorance, and reckless disregard, the FCA does not provide guidance as to how these terms apply in situations where a defendant has the subjective belief that it complied with a statute or regulation.
To compensate for this gap in the statute, many circuit courts confronted with this issue have turned to the Supreme Court’s scienter analysis in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (“Safeco”), which, in interpreting the scienter requirement under the Fair Credit Reporting Act (“FCRA”), requires a finding that a defendant acted “willfully” to support a violation of the statute. The Supreme Court then determined that “willfully” under the FCRA includes both (1) knowing and (2) reckless violations of the statute.[8] The Supreme Court defined “recklessness” as “conduct violating an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known,’” and notably determined that a defendant’s subjective intent was irrelevant—in essence, subjective bad faith could not defeat a defendant’s objectively reasonable reading of a statute.[9]
Thus, Safeco established a two-step analysis to determine reckless disregard. The first step examines whether defendant’s interpretation of the relevant statute was objectively reasonable. The second step examines whether authoritative guidance, i.e. guidance issued by the government to clarify a law, might have warned defendant away from that reading.[10] Thus, a defendant can defeat FCA liability by demonstrating the same—an objectively reasonable interpretation of a statute and no guidance suggesting its interpretation is incorrect.
Several circuit courts of appeals have considered whether Safeco’s holding, under which a defendant cannot be deemed a knowing or reckless violator of a legal obligation if the obligation allows for more than one reasonable interpretation and the defendant acted consistent with one such reasonable interpretation, applies to the FCA’s scienter provision in cases of legal falsity.[11] To date, no circuit has declined to apply Safeco’s objective standard to the FCA where the alleged falsity rested on unclear legal obligations as established by statute or regulation.
However, within these holdings, one outstanding issuewhich forms the basis of the Supreme Court’s agreement to resolve the issue—is that several of these decisions have indicated, with varying degrees, that a defendant’s subjective intent is not relevant to the question of whether a defendant can act “knowingly” so long as it bases its actions on an objectively reasonable interpretation of the relevant statute when it has not been warned away from that interpretation by authoritative guidance. The consideration of a defendant’s subjective intent in this analysis is what is at issue in SuperValu and Safeway, infra.
SuperValu
In United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) (“SuperValu”) the Relator brought qui tam action under FCA alleging corporate parent knowingly filed false reports of its pharmacies’ “usual and customary” (U&C) drug prices when it sought reimbursements under Medicare and Medicaid. The district court granted summary judgment for the parent corporation. The Seventh Circuit affirmed, finding that there is no scienter under the FCA where the defendant had an objectively reasonable reading of the statute or regulation and there was no authoritative guidance warning against its view. In reaching this holding, the court found that Safeco’s scienter standard applied with equal force to the FCA’s scienter requirement. Applying Safeco, the Seventh Circuit also held that it was objectively reasonable for defendants, a group of retail pharmacies, to charge the Medicare Part D and Medicaid programs their retail cash prices as their “usual and customary” prices for drugs rather than prices offered through competitor price-match discount programs. The Seventh Circuit found that defendant’s subjective intent is irrelevant to the scienter inquiry because “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.” The dissent argued that Safeco only defines the “reckless disregard” prong of the FCA’s scienter standard and does not preclude a finding of liability under the “deliberate ignorance” or “actual knowledge” prongs, which it thought Relators had presented sufficient evidence on to avoid summary judgment. The dissent also argued that the court was creating a “safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test,” contending that a defendant’s subjective bad faith must be considered.
Safeway
In United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022) (“Safeway”), the Seventh Circuit followed up on SuperValu and re-affirmed its holding that a defendant does not act with reckless disregard as long as its interpretation of the relevant statute or regulation was objectively reasonable and no authoritative guidance warned the defendant away from that interpretation. In order to constitute “authoritative guidance,” the court held that the guidance must be come from a source with authority to interpret the relevant text (e.g., a governmental source reflecting the opinion of the relevant agency). Such guidance must also be sufficiently specific to put a defendant on notice that its conduct is unlawful. In Safeway, the court held that a single footnote in a lengthy CMS manual that was “in and out of the Manual during the relevant period,” was not authoritative guidance, nor were other sources proposed by the relator because they did not come from any government agency. Allowing for such a footnote to decide liability in this case (which included the risk of treble damages), the court declared, would raise serious due process concerns because defendants may not receive adequate notice of the agency’s shifting interpretation. Once again, however, the same judge as in SuperValu dissented, this time arguing that the majority’s opinion in both cases created “a deep and basic anomaly in the law” by eliminating subjective intent from the intentional element of fraud in the FCA. The dissent further noted that failing to consider the defendant’s state of mind might allow “[t]he ‘most culpable offenders’ … to craft their own get-out-of-jail-free cards whenever they like.”[12]
Key takeaways
The issue of a defendant’s subjective intent in contrast to its objective reading of law or regulation and its application to the FCA illustrates the ever evolving jurisprudence around interpretation of the various FCA elements, particularly in their application to legal falsity cases. For instance, the Supreme Court’s Escobar decision—the last high profile FCA case to be decided by the Supreme Court—has sparked much debate over the “materiality” provision of the FCA. Meanwhile, the notion that an “objective falsehood” be established to prove the “falsity” element of the FCA (an undefined term in the statute) has been called into question in the context of “medical necessity” cases, which involve examination of whether and when a physician’s medical opinions regarding the condition of a patient can be established as false.[13] When it comes to the scienter element of the FCA, evidence of subjective intent is still highly relevant where the claim turns upon defendant’s actual or constructive knowledge of facts that would make its claim false. However, when it comes to questions of ambiguous laws or regulations, whether an objective standard will govern defendant’s culpability is still up in the air. As it stands, every appellate court to consider the issue seems to agree that it does.
A common thread across these legal falsity cases, i.e. a claim premised on failure to comply with an applicable statute or regulation, is a defendant’s interpretation of a statute or regulation. This becomes increasingly difficult given the recent issuance of what is known as the Garland Memorandum, which grants permission to agencies to use “sub-regulatory guidance”—guidance that typically is not published through the notice and comment rulemaking process—in FCA prosecution for pursing false certification violations. Such permission naturally affords those agencies deference to their interpretation of their own self-promulgated guidance. Thus, in the context of SuperValu, Safeway and its predecessors, it will be interesting to see how courts continue to measure a defendant’s interpretation of a statute, regulation, or even sub-regulatory guidance for purposes of compliance in determining FCA liability. If the Court follows the majorities in SuperValu and Safeway, such guidance will need to be clear, specific, potentially authoritative, and more than mere footnotes in vast tomes of government publications that can be changed at any time. Clarity in laws, regulations, and other government-issued guidance should always be the goal—and if the government wishes to continue to invoke the FCA in perusing violations of law and regulation, hopefully this current debate will move the needle towards greater clarity.
[1] 31 U.S.C. §§ 3729 – 3733.
[2] 31 U.S.C. § 3729(a)(1)
[3] United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 700 (4th Cir. 2014).
[4] “Claim” means any request or demand for money or property (regardless of whether or not the United States has title to the money or property) that: (i) “is presented to an officer, employee, or agent of the United States”; (ii) or “is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest,” and if the United States government either “provides or has provided any portion of the money or property requested or demanded”; (iii) or “will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.” § 3729(b)(2)(A)
[5] “Knowingly” means that person: (i) has actual knowledge about the falsity of a claim, (ii) “acts in deliberate ignorance of the truth or falsity” of the claim, or (iii) acts with “reckless disregard of the truth or falsity” of the claim. The FCA does not require proof that the person specifically intended to defraud the government. 31 U.S.C. § 3729(b)(1).
[6] “Material” is defined as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” § 3729(b)(4).
[7] United States v. Speqtrum, Inc., 113 F. Supp. 3d 238, 249 (D.D.C. 2015).
[8] Id.
[9] Id.
[10] Id.
[11] See, e.g., United States ex rel. Olhausen v. Arriva Med. LLC, 2022 WL 1203023 (11th Cir. Apr. 22, 2022) (per curiam); United States ex rel. Streck v. Allergan, Inc., 746 F.App’x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F.App’x 551, 552 (9th Cir. 2017), cert. denied, 138 S.Ct. 407 (2017); United States ex rel. Donegan v. Anesthesia Assocs. of K.C., 833 F.3d 874, 879-80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 290-91 (D.C. Cir. 2015), cert. denied, 137 S.Ct. 625 (2017). But see United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340 (4th Cir.), reh’g en banc granted, No. 20-2330, 2022 WL 1467710 (4th Cir. May 10, 2022), and opinion vacated on reh’g en banc, 49 F.4th 873 (4th Cir. 2022) (affirming, by an equally divided court, the district court’s grant of dismissal with prejudice).
[12] Allergan Sales, 24 F.4th at 369 (Wynn, J., dissenting) (internal citation omitted), quoting Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93, 104–05, 136 S.Ct. 1923, 195 L.Ed.2d 278 (2016);
[13] See United States v. Care Alternatives, 952 F.3d 89, 96 (3d Cir. 2020), cert. denied, 141 S. Ct. 1371, 209 L. Ed. 2d 119 (2021); United States v. AseraCare, Inc., 938 F.3d 1278, 1282 (11th Cir. 2019); United States ex rel. Winter v. Gardens Regional Hospital & Medical Center, Inc., 953 F.3d 1108, 1113 (9th Cir. 2020), cert. denied sub nom. RollinsNelson LTC Corp. v. United States ex rel. Winter, 141 S. Ct. 1380, 209 L. Ed. 2d 124 (2021).
