SCOTUS to provide the final say in landmark False Claims Act

Executive summary

Can someone be liable under the federal False Claims Act where they acted according to an “objectively reasonable” interpretation of an ambiguous statute or regulation? Federal appellate courts disagree and SCOTUS is going to decide. Any business that receives payment from the federal government (especially health care providers or government contractors) will be impacted.

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On Friday, the Supreme Court granted petitions for certiorari in two cases, United States ex. rel. Schutte v. Supervalu, Inc., and United States ex. rel. Proctor v. Safeway, Inc., to address one of the most debated subjects in False Claims Act (FCA) liability jurisprudence since the Court's decision in Universal Health Services, Inc. v. Escobar in 2016.

The Court consolidated the cases to answer the question of whether an "objectively reasonable" interpretation of an ambiguous regulation can shield a defendant from FCA liability. SuperValu and Safeway arose from an allegedly fraudulent prescription drug billing arrangement in which the companies charged the government a "usual and customary" price for the drugs but charged many customers lower prices through price-match discounts.

The District Court granted summary judgment, holding that although the defendants' understanding of "usual and customary" was incorrect, it was objectively reasonable at the time, with the Court referencing other District Court opinions endorsing the view or recognizing that it was subject to interpretation. The Seventh Circuit affirmed, adopting the scienter standard set by the Supreme Court in Safeco Insurance v. Burr, a Fair Credit Reporting Act case that determined the Act's common law scienter requirement in a case regarding rates offered to new customers. In that case, the Court held that a party acting under an incorrect interpretation of a statute that "allow[s] for more than one reasonable interpretation" could not have acted with the knowledge required under the statute.¹ The Court noted that the proffered interpretation had a "foundation" in "the less-than-pellucid" statutory text.²

The Seventh Circuit applied the Safeco rationale in SuperValu and Safeway, stating that although SuperValu and Safeway were ultimately wrong in their analysis of the "usual and customary" pricing, scienter was not shown because of their objectively reasonable interpretation of the term. Furthermore, the Court stated that the parties had not been "warned away" from their interpretations based on "authoritative guidance" with a "high level of specificity" from a circuit court or a federal agency.³

The Court also cited Safeco to state that to impose liability when there is an objectively reasonable interpretation would "defy history and current thinking to treat a defendant who merely adopts one such [reasonable] interpretation as a knowing or reckless violator."⁴ The Seventh Circuit summarized it's holding by stating that: "[i]ndeed, we do 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."⁵

The dissent issued a warning that the decision would create a "safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test," however the majority stated that the ruling would not "shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong."⁶

The Seventh Circuit's decision has been the source of much debate at CLEs and at industry conferences by counsel for whistleblowers, the government, government contractors and health care providers. The case also received Congressional attention – in the petition for certiorari stage, Senator Charles Grassley, the father of the modern False Claims Act who was instrumental in sponsoring its 1986 amendments, wrote an amicus brief, stating that the Seventh Circuit's opinion created a "robust liability shield for plainly culpable defendants."

Although the debate regarding the cases has trended towards "the sky is falling" if the Supreme Court affirms, the Circuit Court was clear that objectively unreasonable positions or positions taken after having been "warned away" will not escape FCA liability, thus there are limits to a FCA defendant's ability to "concoct" a legal theory. A defendant with an objectively reasonable interpretation of an ambiguous statute or regulation that has not been afforded authoritative guidance with a high level of specificity should not be subject to the extremely significant remedies provided under the FCA – treble damages and penalties for each false claim presented, which can often be voluminous. In addition, the collateral consequences of an FCA investigation, settlement or judgment including potential suspension and debarment proceedings, industry reputational concerns and grist for future protestors who want to challenge future awards based on the FCA allegations should not hinge on liability based on an objectively reasonable interpretation of a statute. This concept is analogous to the rule of lenity in a criminal prosecution, where ambiguity inures to the benefit of the defendant who is facing a potential loss of liberty. The same analysis should apply in FCA cases when there is ambiguity.  

There are obviously very significant impacts for relators and FCA defendants based on the ruling. From the defense perspective, a reversal could have the impact of potentially having to clarify with the government each and every aspect of ambiguity that a regulation presents which would be impractical and onerous and could cause significant delays and potential failures to perform. Furthermore, defendants may be forced to routinely rely on the advice of counsel defense where businesses seek advice on ambiguous regulations, provide a fulsome disclosure of information to enable counsel to render advice and then act on that advice, only to be investigated by the government. From the relator's perspective, affirming the objectively reasonable standard may enable defendants to, as the dissent noted, attempt to concoct a post-hoc rationalization for their conduct and make enforcement of the FCA potentially more challenging.

Therefore, relators, government counsel, government contractors, health care providers and their counsel alike will all watch with great interest as oral arguments are held and a decision issued by the close of the Court's term.