The Supreme Court today issued its ruling on one of the most significant False Claims Act (FCA) cases it has considered in the last several years. In the consolidated cases of United States ex rel. Schutte et al. v. SuperValu Inc., et al. and United States ex rel. Proctor v. Safeway, Inc., both from the Seventh Circuit, the Supreme Court analyzed the FCA’s scienter (knowledge) requirement, specifically examining the relevance of a defendant’s subjective understanding of an otherwise objectively reasonable interpretation of an ambiguous rule or regulation. The Court overturned both cases, holding, “The FCA’s scienter element refers to a defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.”
In reaching its decision, the Court disagreed with the Seventh Circuit and other courts’ holdings that a defendant could not submit a false claim if: (a) there was an objectively reasonable interpretation (even if incorrect) of applicable statutory requirements, and under the interpretation the claim would not be considered false; and if (b) there was no sufficiently authoritative guidance that warned a claimant away from that interpretation. In Schutte, the Seventh Circuit allowed the defendant’s reasonable interpretation to defeat scienter without requiring proof the defendant had indeed believed its interpretation was correct at the time of the alleged improper conduct. Five other circuit courts of appeal agreed. Schutte supporters pointed out that healthcare regulations often are murky and complex and, without an “objective reasonableness” approach, defendants may unfairly face the FCA’s hefty treble damages and penalties even where they reasonably (albeit erroneously) interpreted an ambiguous law.
During oral argument, Defendants’ counsel further argued that reversing Schutte could potentially require defendants to waive attorney-client privilege to prove their contemporaneous, subjective understanding of the rule or regulation in question. In considering the practicalities of reversing the decision, Chief Justice Roberts and Justices Alito and Kavanaugh seemed to share concerns about requiring a defendant to believe it has selected the “best” interpretation of a law to avoid FCA liability, even where there may be multiple objectively reasonable interpretations.
Four other justices — Jackson, Kagan, Gorsuch, and Sotomayor — appeared to see the case as more straightforward, instead presenting only the issue of whether evidence of subjective intent is ever relevant to assessing scienter under the FCA, rather than addressing any circumstances where a defendant considered and selected from multiple interpretations.
In ruling 9–0 in Relator’s favor, the Court focused solely on the individual claimant’s state of mind when it submits claims, ruling that a defendant can knowingly violate the FCA regardless of how complex, confusing, or vague the underlying legal standard (here, “usual and customary prices”). Importantly, under the Court’s view, when a claimant knew of a substantial and unjustifiable risk that its claims could be false (based on the agency’s ambiguity) and still submitted a claim, requisite scienter is present regardless of the statutory ambiguity and also any other reasonable person’s interpretation of the same language. In sum, the Court held that a defendant’s interpretation and belief at the time of claims transmittal is the most relevant factor to scienter.
Following this critical ruling, the best practice is for companies — particularly those navigating the complex healthcare regulatory landscape — to create contemporaneous, non-privileged records regarding the basis for their interpretation of any potentially ambiguous rules and regulations. In addition, given the potential for conflicting or competing approaches at different levels of a company, and the perils of knowledge being imputed to an entity collectively, companies should make efforts to issue and document companywide directives to ensure uniformity in approach. Routine compliance audits are an additional best practice.