United States: U.S. Supreme Court To Determine Scienter Standard For False Claims Act Cases

As previewed in a prior Jones Day Commentary, the U.S. Supreme Court has now granted certiorari to address the standard for scienter in False Claims Act ("FCA") cases. The Court consolidated and will review two Seventh Circuit cases, U.S. ex rel. Schutte v. SuperValu, Inc., and U.S. ex rel. Proctor v. Safeway, Inc., to consider whether a defendant whose conduct comported with an "objectively reasonable" interpretation of the law can nonetheless be found to have "knowingly" broken the law and thus submitted false claims. The question is critical to all who do business with the government, and particularly health care providers subject to regulations that are often ambiguous. Private FCA plaintiffs (called "relators") frequently have leveraged such ambiguities to threaten treble damages and massive civil penalties for, at most, good faith practices.

This case is a follow-up to the Supreme Court's 2007 decision in Safeco Insurance Co. v. Burr, which held that a defendant could not have scienter to violate the Fair Credit Reporting Act ("FCRA") if the law has "more than one reasonable interpretation," the defendant acted consistently with one of those interpretations, and no authoritative guidance warned the defendant away from that interpretation. Importantly, this standard is objective; a defendant's subjective intent is irrelevant.

The Courts of Appeals have largely applied Safeco in FCA cases. This aligns with Supreme Court precedent, which has emphasized that the FCA imposes a "rigorous" scienter requirement and is not meant to punish run-of-the-mill regulatory violations.

In contrast to this growing body of law, relators have argued that extending Safeco to the FCA improperly allows defendants to use after-the-fact legal arguments to avoid liability for fraud. The relators in Schutte and Proctor thus have asked the Supreme Court to hold that a defendant's "subjective understanding" can show scienter even for ambiguous statutes or regulations.

This may be the Supreme Court's most significant FCA case since the landmark Escobar decision in 2016. This scienter issue often impacts whether defendants can defeat a case asserting violations of vague regulatory requirements on a dispositive motion, or if they must instead face discovery and the potential for the FCA's enormous damages and penalties.

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