Part 1 of 2: U.S. Supreme Court Hears Argument About Scienter Standard Under The False Claims Act

The U.S. Supreme Court heard oral argument yesterday in a pair of False Claims Act (“FCA”) cases that should provide clarification as to whether a defendant’s subjective intent in the face of ambiguous regulatory guidance is relevant to scienter. When whistleblowers or the federal government bring FCA claims, they must show that the defendants acted “knowingly” — i.e., actually knew, deliberately ignored, or recklessly disregarded that they were seeking payment from the government on false or fraudulent grounds. The Court has been asked to resolve a circuit split as to whether a defendant may be found to have acted “knowingly” even though it was acting consistent with an objectively reasonable interpretation of the applicable legal requirements.

Background

The FCA cases before the Court involve pharmacies that presented or submitted claims for payment that the government alleged were false. The government’s theory was that the prices quoted by the pharmacies as their “usual and customary” prices for medications did not account for certain discounts routinely given to retail customers. U.S. ex rel. Schutte v. SuperValu Inc., No. 21-1326; U.S. ex rel. Proctor v. Safeway, Inc., No. 22-111. The pharmacies argued that their actions were consistent with an objectively reasonable interpretation of the regulations’ ambiguous phrase “usual and customary” and therefore they could not have acted “knowingly” in the absence of authoritative guidance from the government. The Seventh Circuit affirmed the district court’s grant of summary judgment in favor of the defendants, relying on Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). In Safeco, the Supreme Court found that a party did not act “knowingly” if it followed an objectively reasonable interpretation of the Fair Credit Reporting Act and no authoritative guidance warned the party away from that interpretation. In SuperValu and Safeway, the Seventh Circuit analyzed the text of the FCA and found the scienter requirement applied similarly. Thus, the Seventh Circuit concluded, a defendant’s contemporaneous subjective belief when it sought payment from the government was irrelevant as long as the defendant’s interpretation was supported by an objectively reasonable interpretation of the law.

The Seventh Circuit’s application of Safeco to the FCA created a circuit split with the Sixth, Ninth, Tenth and Eleventh Circuits, which have taken into account a defendant’s subjective state of mind regarding its compliance with applicable regulations. In their merits briefs to the Supreme Court, both petitioners and the federal government argued that Safeco should not apply to the FCA and that use of the Safeco standard would allow a defendant to escape liability through post-hoc explanations of objective reasonableness that are divorced from the defendant’s state of mind when it sought payment. The pharmacies, however, argued that a defendant cannot have acted “knowingly” when the government’s legal requirements are unclear, even if the government later determines that the defendant’s actions were inconsistent with the regulations.

Oral Argument and Implications for a Reversal

Based on the questions and hypotheticals posed, the Court appeared reluctant to agree with the Seventh Circuit’s blanket statement that subjective intent is not relevant if the entity’s regulatory interpretation was objectively reasonable. Several hypotheticals questioned whether a business would be liable under the FCA for making a judgment call in the face of ambiguity where the business believed its interpretation to be the correct one. The Court did not ask many questions about Safeco, potentially indicating that they were not persuaded of its application to the FCA.

Should the Court reverse the Seventh Circuit and rule that a defendant’s contemporaneous intent when interpreting ambiguous regulations remains relevant to scienter, such a rule could have implications going forward for attorney-client privilege, given that an entity’s belief as to the correctness of its interpretation could depend on advice of counsel.

We expect a decision by the end of the term and will alert you of the Court’s decision.