On August 12, 2021, the Seventh Circuit joined a growing chorus of circuits to cabin expansive False Claims Act liability by holding that the Act requires an objective scienter standard. Under this standard, a defendant who acted under an incorrect interpretation of the relevant statute or regulation did not act with the requisite knowledge under the FCA if (1) the interpretation was objectively reasonable and (2) no authoritative guidance warned the defendant away from that interpretation.
In United States ex rel. Schutte v. SuperValu, Inc., No. 20-2241 (7th Cir. Aug. 12, 2021), the relators alleged that, from 2006 to 2016, SuperValu knowingly submitted to Medicare and Medicaid false reports of its pharmacies' "usual and customary" drug prices. On these reports, SuperValu listed its retail cash prices as its usual and customary price, rather than lower amounts that it charged qualifying customers under a price-matching discount program. The district court concluded that, under Seventh Circuit precedent, SuperValu's reports were false—its price-matched prices were actually its usual and customary prices—but dismissed the relators' claim because they failed to establish objective scienter.
Relators appealed that scienter holding but did not persuade the Seventh Circuit to reach a different conclusion. The court reasoned that the False Claims Act incorporates the common law understanding of what it means to act "knowingly." Once it reached that conclusion, its job got a bit easier: the Supreme Court had already decided years earlier in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), in construing the Fair Credit Reporting Act, that a "knowing" violation at common law requires objective scienter. Under an objective scienter standard, a defendant who acts in accordance with an objectively reasonable interpretation of a statute or regulation does not "knowingly" violate the False Claims Act if there was no authoritative guidance that should have warned it away from that interpretation.
The Seventh Circuit further held that a person's subjective intent has no bearing on this analysis, and that a relator's failure to meet Safeco's objective scienter standard dooms their FCA claim under any of the Act's three knowledge components—actual knowledge, deliberate indifference, or reckless disregard. The court did not "see how it would be possible for defendants to actually know that they submitted a false claim if relators cannot establish the Safeco scienter standard." Op. at 20. "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." Id.
The court then went on to find that SuperValu's interpretation of the "usual and customary" price under Medicare and Medicaid regulations was objectively reasonable at the time that it submitted its reports, and that whatever subjective intent the company had was "irrelevant." Moreover, though the Seventh Circuit declined to weigh in on the precise contours of the term "authoritative guidance," it concluded that there was no such guidance that warned SuperValu away from its interpretation. Authoritative guidance must "come from a governmental source" and "have a high level of specificity to control an issue." Relators pointed to no such guidance and thus could not establish objective scienter.
With its adoption of the objective scienter standard, the Seventh Circuit joined the only four other circuit courts that have weighed in the issue and imposed a notable limitation on otherwise expansive False Claims Act liability. It's no surprise that we agree with this outcome: we filed an amicus brief on behalf of firm clients arguing that this was the correct interpretation. Only time will tell if the other circuit courts agree. In the meantime, we will be keeping an eye out for clarification from the courts about whether agency guidance must be binding to be sufficiently authoritative to warn a defendant away from an otherwise objectively reasonable interpretation of a statute or regulation. The Seventh Circuit passed on that question (about which there appears to be some disagreement among the courts of appeals), because the court thought the agency guidance to be insufficiently clear in any event.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.