Next Tuesday, April 18, 2023, the highest court in the land will hear arguments in what is poised to be the most influential False Claims Act (FCA) case since the landmark decision in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). On January 13, 2023, the U.S. Supreme Court granted certiorari to hear two consolidated appeals from the U.S. Court of Appeals for the Seventh Circuit in United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022). The Court's decision will likely have far-reaching ramifications for FCA cases involving ambiguous contractual or regulatory requirements and may also provide benchmarks for assessing the key element of scienter across all FCA cases.
In Supervalu and Safeway, the Seventh Circuit joined several of its sister circuits in applying the scienter standard articulated by the Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007) to the FCA, finding that a defendant's conduct is not reckless when (1) acting under an objectively reasonable, albeit erroneous, interpretation of an ambiguous regulation or contract provision; and (2) no authoritative guidance existed to warn the defendant away from that interpretation.
The petition to the Supreme Court urged the Justices to resolve an alleged circuit split on the proper scienter standard under the FCA, including whether a defendant should be entitled in litigation to rely upon an interpretation that it may not have actually relied upon when it submitted the claims. The Supreme Court's forthcoming ruling will undoubtedly have significant implications for all manner of FCA cases, from health care to procurement fraud and more, and as a result is one to watch closely.
In the cases before the Court, relators filed qui tam suits alleging that the defendants knowingly caused false claims to be submitted to government healthcare programs. The Government declined to intervene in either case. Applying Safeco, the district court in each action held that the defendants' interpretation of underlying legal requirements, while incorrect, was objectively reasonable and that no authoritative guidance had warned against this interpretation. On appeal, the Seventh Circuit agreed with the district court's application of the Safeco standard to the FCA, concluding that Safeco's rule with respect to ambiguous provisions is narrow enough so as not to "shield bad faith defendants that turn a blind eye" to wrongful practices. At the same time, the Seventh Circuit found that scienter in cases like these can be determined without a separate inquiry into the defendant's subjective intent because the test is an objective one. Applying the Safeco standard, the Seventh Circuit affirmed the district court rulings that the defendants did not act "knowingly" under the FCA.
Judge Hamilton sat on each panel and dissented in both cases. He argued that the majority improperly disregarded the defendants' subjective intent as irrelevant to the question of whether their interpretation was objectively reasonable. In Judge Hamilton's view, where a defendant "knew at the time that it was carrying out a fraud and needed to conceal it," the defendant should not be able to escape liability by later offering an objectively reasonable interpretation of the law to justify its conduct. In the face of evidence of nefarious and deceptive intent, Judge Hamilton posited that the FCA's scienter requirement is fulfilled, regardless of any subsequently-claimed reasonable interpretation of the law.
The relators in both cases filed petitions for certiorari in April 2022. In their respective Briefs in Opposition to the relators' petitions, the respondent defendants contended that Safeco does not lower the bar for compliance; rather, it recognizes that it is impossible to have knowledge of the correct interpretation of an ambiguous legal obligation before the government has authoritatively announced its interpretation or a court has made such a determination. In contrast, a defendant that engages in objectively unreasonable conduct even in the face of an uncertain legal obligation, or acts contrary to an authoritative interpretation of an ambiguous regulation or rule, will still be subject to liability under the FCA, and nothing about Safeco changes that. In short, respondents argued that "Safeco does not give a free pass to cheats and fraudsters, nor make ignorance of the law a defense. It merely protects those that 'cannot know that [their] claim is false' because 'the requirements for that claim are unknown.'"
Senator Chuck Grassley (R-IA)—the principal author of the 1986 amendments that gave rise to the modern FCA—filed an amicus curiae brief in support of the relators urging the Supreme Court to grant certiorari and vacate the decision of the Seventh Circuit. Senator Grassley argued that the Safeco standard "makes a hash of the law of fraud," noting that it "places the burden on the Government to anticipate every possible fraud" and endlessly issue "definitive guidance" to proscribe that fraud. What results, according to Senator Grassley, is a scenario in which a defendant who "correctly knows an act is unlawful is immunized from FCA liability if its lawyer, years later, can cook up an interpretation of the law under which the act was arguably permissible—even if that interpretation is wrong and the defendant did not have that interpretation at the time." This amicus brief is another example of Senator Grassley's full-throated objection to what he deems the gradual judicial curbing of the power of the FCA, resulting in what he terms a "free pass to fleece the public fisc." Senator Grassley's amicus brief kicked off a string of other amicus briefs on both sides ranging from private organizations and healthcare businesses to states and federal agencies.
The Solicitor General also filed an amicus brief, urging the Supreme Court to grant certiorari and arguing that the FCA's scienter standard is fulfilled where a defendant: (i) subjectively believes that a claim is false; (ii) recognizes a substantial risk that the claim is false but deliberately avoids taking readily available steps to obtain clarification; or (iii) knows or should know that the claim is probably false but acts with reckless disregard of that danger.
Briefing is now complete and nearly twenty amicus briefs have been submitted between the competing sides. Going into next Tuesday's argument, the Supreme Court has scheduled a total of one hour for the argument, with 20 minutes allotted to relator-petitioners, 10 minutes for the Solicitor General, and 30 minutes for defendant-respondents.
We think it probable that the Supreme Court will not waiver from the circuit courts' endorsement of the Safeco standard to FCA cases generally, but how the Court will resolve questions regarding evidence of subjective versus objective interpretations of ambiguous requirements is much more difficult to predict. What is "objectively" certain, though, is that the Supreme Court's ruling will have an enormous impact as to the critical element of scienter in all manner of FCA investigations and litigation. We continue to monitor these cases closely and will report our reactions following next week's oral arguments.
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