On January 13, 2023, the Supreme Court granted certiorari in a pair of consolidated cases from the Seventh Circuit that could result in one of the most consequential False Claims Act (FCA) decisions since the FCA was amended in 1986. See U.S. ex rel. Schutte v. SuperValu Inc., No. 21-1326, and U.S. ex rel. Proctor v. Safeway, Inc., No. 22-111.
At issue is whether a defendant can act “knowingly” under the FCA when the relevant legal requirement for payment is ambiguous, and the defendant’s interpretation is objectively reasonable—and whether scienter can be determined without a separate inquiry into the defendant’s subjective intent at the time of the conduct in question. The question formally presented in the petitions is “whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”
The issue goes to the essence of FCA liability in cases involving so-called “legal falsity” in which a defendant is alleged to have misrepresented its compliance with a legal requirement in connection with a claim for payment from the government.
In the cases before the Supreme Court, split panels of the Seventh Circuit held that the FCA’s scienter standard is not met when: (i) the defendant acts consistent with an “objectively reasonable” interpretation of an ambiguous legal requirement, and (ii) there was no “authoritative guidance” from a circuit court or relevant federal agency at the time. E.g., U.S. ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 468 (2021). The majority explained that 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. Under this view, the defendant’s subjective intent is “irrelevant.” Id. at 471.
The Solicitor General urged the Court to grant the petition in SuperValu and reverse the Seventh Circuit’s decision to preserve the relevance of subjective intent. The government’s view is that the FCA’s scienter standard is met where a person: (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. See Br. of United States as Amicus Curiae, No. 21-1326, at 8 (Dec. 2022). According to the government, an FCA defendant cannot escape liability by identifying “an objectively reasonable (but wrong) exculpatory interpretation of the governing requirements after the fact” if the defendant “was unaware of that interpretation at the time it acted.” Id. at 21.
How the Supreme Court will resolve the issue is, of course, an open question. In practical terms, a decision affirming the Seventh Circuit would keep the focus in FCA cases involving legal falsity on questions of law or matters of judicial notice that often can be decided at the pleading stage without discovery—i.e., whether the relevant legal requirement is ambiguous, whether the defendant’s interpretation is objectively reasonable, and whether authoritative guidance from the responsible agency or circuit court foreclosed the defendant’s interpretation. A decision embracing the relevance of subjective intent would shift the focus to fact-intensive questions about what the defendant actually intended at the time the claims were submitted. Given the Court’s emphasis on the need to “strictly enforce” the FCA’s “rigorous” scienter standard in Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 579 U.S. 176, (2016), we would expect any decision reversing the Seventh Circuit to provide guidance to lower courts on how to strictly enforce that standard in cases where the underlying legal requirements are ambiguous so that disputed legal issues do not lead to burdensome FCA discovery absent particularly compelling allegations that the defendant acted with the relevant subjective intent.
Our team of highly experienced FCA practitioners is monitoring this case closely for its impact on pending and future cases.