What does it mean to “knowingly” or “recklessly” violate the law when that law consists of highly complex and ever-changing regulations, which may be open to interpretation? The U.S. Supreme Court recently agreed to review that question in two consolidated cases from the Seventh Circuit: U.S. ex rel. Tracy Schutte, et al. v. SuperValu Inc., et al. and U.S. ex rel. Thomas Proctor v. Safeway, Inc (collectively, “SuperValu”). The central question before the Supreme Court is whether a relator can allege a cognizable claim under the False Claims Act (FCA) if a defendant can prove that it acted in accordance with an objectively reasonable interpretation of regulations.
The concept of intent – known legally as “scienter” – has proven to be difficult in FCA cases involving allegations of “legal falsity.” In such cases, a defendant is typically accused of falsely attesting to compliance with conditions of payment or other requirements under government programs. In these cases, the relator is not alleging the absence of a product or service for which the government has paid. Rather, the relator typically asserts one or more claims based on allegations that the defendant failed to comply with regulatory conditions precedent to payment.
In SuperValu, the pharmacists-turned-whistleblowers allege that the defendants submitted false claims by failing to account for discounts when reporting the companies’ “usual and customary” prices for prescription medication. Pharmacies are required to submit these “U&C” figures to the federal government, which factors those discounts into the reimbursement calculation. By not reporting the discounts, the pharmacies allegedly received inflated reimbursement from the government. Below, the U.S. District Court for the Central District of Illinois confirmed that pharmacies are, in fact, required under applicable regulations to report the discounted price. However, the Court also found that the relators in these two cases had failed to establish that the defendants acted “knowingly” or acted with reckless disregard or deliberate indifference to that requirement. Therefore, the Court held, the defendants could not be liable under the FCA.
The district court, as well as the Seventh Circuit on appeal, applied the Supreme Court’s reasoning in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007). There, the Supreme Court held that a defendant does not act “willfully” or “recklessly” where its position is (i) supported by an objectively reasonable yet erroneous interpretation of the law (in that case, the Fair Credit Reporting Act) and (ii) there was no agency guidance to “warn away” the defendant from such a position. Safeco, however, is not a False Claims Act case. And some jurists are cynical about the impact of applying an objective standard to government fraud cases. In his dissenting opinion, for instance, Judge David Hamilton argued that extending Safeco to the FCA could create “a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.”
Other courts have refrained from embracing the objective standard. In 2017, in United States ex rel. Phalp v. Lincare Holdings, Inc., the U.S. Court of Appeals for the Eleventh Circuit held that scienter requires a defendant must actually know, or they should have known, that its conduct violated a regulation.” 857 F.3d 1148 (11th Cir. 2017). The Sixth, Ninth and Tenth circuits have since followed Lincare.
Ultimately, the Supreme Court’s decision here has the potential to impact the viability of “scienter” based defenses to False Claims Act claims significantly. A clear, objective standard would enable defendants to capitalize on reasonable interpretations of complex regulations as a defense at earlier stages of cases. Conversely, if the Supreme Court were to codify a subjective standard, the net effect likely would be to decrease the number of False Claims Act cases adjudicated prior to trial.
The Supreme Court is expected to hear arguments in the consolidated cases in late April with a decision likely to follow this summer.