False Claims Act: Businesses should consider how to document their interpretations

On April 18, 2023, the U.S. Supreme Court heard oral argument in the consolidated cases of U.S. ex rel. Schutte v. SuperValu and U.S. ex rel. Proctor v. Safeway Inc. The Court was asked to review the scienter standard for False Claims Act (FCA) cases. The justices’ commentary during oral argument, discussed below, suggests that even in the face of an objectively reasonable interpretation of the applicable law, and the lack of any contrary authoritative guidance to that interpretation, a party’s subjective understanding of its conduct may still matter.

Background on the cases at issue

In U.S. ex rel. Schutte v. SuperValu, the relator alleged that the defendants, a group of retail pharmacies, charged Medicare Part D and Medicaid programs their retail cash prices as their “usual and customary” prices for drugs rather than the prices offered through competitor price-match discount programs. The U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of the complaint, holding that the defendants’ interpretation of the law at issue was objectively reasonable, without any contrary authoritative guidance, so the defendants could not be shown to have acted “knowingly” as required under the FCA.

In the nearly identical case of U.S. ex rel. Proctor v. Safeway Inc., the Seventh Circuit came to the same conclusion as it did in SuperValu and further explained when guidance is “authoritative.” In order for guidance to be “authoritative,” it must “come from a source with authority to interpret the relevant text.” Accordingly, the Seventh Circuit held that a single footnote in a lengthy manual that can be revised at any time is not authoritative guidance.

In rendering these decisions, the Seventh Circuit joined the Third, Eighth, and Ninth Circuits in applying the Supreme Court’s reasoning in the Safeco Ins. Co. v. Burr decision, a case involving the Fair Credit Reporting Act. There, the Supreme Court held that a defendant who acts under an incorrect interpretation of a relevant statute or regulation does not act with the requisite “reckless disregard” scienter if the interpretation is objectively reasonable and no authoritative guidance cautioned the defendant against it. A defendant might “suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements of the claim are unknown.” As a result, it determined that a defendant’s subjective intent is “irrelevant.”

In an action consolidating SuperValu and Safeway, the petitioners asked the Supreme Court to answer “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 [FCA].”

Posture of oral arguments

During oral argument on April 18, 2023, the petitioners and the government argued that even in the face of an objectively reasonable legal interpretation, without any contrary authoritative guidance, a court should consider evidence of a defendant’s subjective understanding of its actions to determine if it acted “knowingly” under the FCA. In response, the respondents argued that the knowledge inquiry should be based on objective intent, as held by the Seventh Circuit in SuperValu and Safeway. In their eyes, it would be absurd to be subject to the scrutiny of subjective intent.

The Supreme Court’s reaction was surprising. Justice Jackson noted, “I’m over here struggling as to why this is a hard case.” Similarly, Justice Gorsuch said, “[T]he question before us is a narrow one, and that is, did the Seventh Circuit err when it said that the only evidence that could be admitted against your client was objective proof? And I think the statute makes that argument pretty hard.”

However, other justices’ comments suggest that a potential ruling may not be so sweeping. Justice Kavanaugh suggested that a contemporaneous objectively reasonable interpretation may be treated differently than an interpretation made after the activity in question takes place. He noted that while an after-the-fact interpretation of the law might not negate scienter, an understanding at the time of the submission of the claims, which, while perhaps wrong, would not support scienter. On another hopeful note for FCA defendants, the justices seemed to reject an expansive view and instead suggested limiting their inquiry to the instant case.

Implications for businesses

The Supreme Court’s colloquies suggest a belief that under the FCA, a party’s subjective understanding of its actions, even in the face of a completely appropriate interpretation of the law at issue supporting its conduct, is nevertheless relevant in the determination of whether an action was taken “knowingly,” as defined under the FCA.

This would be a disappointing outcome. FCA cases are notoriously expensive to defend, and the statute is punitive in nature, providing for both treble damages and an award of civil monetary penalties per claim (which currently is in the range of $13,508 to $27,018). An entity could have a reasonable interpretation of the law, in a situation where there is no authoritative guidance, and still be forced to participate in protracted and costly discovery to explore what its subjective beliefs were during the period in question. Such an outcome would require an expenditure of greater resources in defending investigations and lawsuits and could result in a compelled need to disclose material otherwise protected under the attorney-client privilege. As the respondents argued, legal interpretations are often made under the advice of counsel; inquiry into subjective intent in this context might force the reliance on same as a defense.

The FCA was never intended to be a catchall for every potentially problematic claim. It is a fraud statute, designed for situations where false claims are knowingly submitted. How can a party be determined to have acted knowingly when there is no legal authority to suggest that its interpretation of the law regulating its conduct was not objectively reasonable? The government has other readily available enforcement mechanisms — audits, breach of contract actions, program suspension, and more — at its disposal for problematic claims. However, every concerning claim does not — and should not — automatically translate into a false claim.

The Supreme Court’s decision will be of particular significance for businesses involved in highly regulated industries. Businesses often seek interpretive guidance from government regulators, often to no avail. The petitioners’ position would punish reasonable interpretations of ambiguous rules and regulations, even in the absence of authoritative guidance. As the Seventh Circuit pointed out, regardless of what a business might suspect, if the requirements are unknown or unclear, the business should not be held liable for knowingly violating the FCA.

Read more: DOJ recovered $1.7B in false claims cases in 2022

In light of this development, businesses should consider how to document their interpretations, consider who in the company is making and discussing those interpretations, and factor attorney-client privilege into any discussion or documentation of the same.

For now, the ruling remains highly anticipated.

George B. Breen is a member at Epstein Becker Green, a Chair of its National Health Care & Life Sciences Practice Steering Committee, and serves on the firm’s board of directors.

Chloe T. Hillard is an associate in Epstein Becker Green’s Health Care & Life Sciences Practice.