"Hard Cases:" Supreme Court Hears Arguments on FCA Scienter Issue
The U.S. Supreme Court on April 18, 2023, heard oral arguments on a critical issue in False Claims Act (FCA) cases – the defendant's state of mind (i.e., scienter). The statute ascribes liability to anyone who "knowingly" submits false claims to the government.1 The statute defines knowingly as encompassing "actual knowledge" as well as "reckless disregard" and "deliberate ignorance," but no specific intent to defraud is required.2
The court was asked to determine whether a defendant's subjective intent can ever be considered relevant when the defendant's interpretation of a rule or regulation is deemed objectively reasonable. The Supreme Court agreed to hear the case, United States ex rel. Schutte v. SuperValu, Inc.,3 after the U.S. Court of Appeals for the Seventh Circuit held that subjective intent is irrelevant to the scienter inquiry under the FCA when a defendant's interpretation is considered objectively reasonable. Relators and the government sought certiorari, arguing the interpretation was contrary to the plain text of the FCA. They theorized the decision would open up the floodgates to post hoc rationalizations that ignore any contemporaneous beliefs defendants had that their conduct was in fact wrongful.
The Seventh Circuit's holding stemmed from the Supreme Court decision in Safeco Insurance Co. of America v. Burr,4 a case interpreting a similar scienter requirement under a different statute. There, with respect to reckless disregard or willfulness, the Supreme Court stated in a footnote "scienter cannot be shown as a matter of law if the defendant's conduct was consistent with a reasonable interpretation of an ambiguous legal requirement. …" The Seventh Circuit joined several other circuits in finding the Safeco standard applied to the FCA.
The Seventh Circuit's decision extended further, stating "while the FCA's scienter provision is defined via three distinct definitions, a failure to establish the Safeco standard as a threshold matter precludes liability under any of these definitions." The Seventh Circuit explained that "[u]nder Safeco, a defendant will be successful only if (a) it has an objectively reasonable reading of the statute or regulation and (b) there was no authoritative guidance warning against its erroneous view."
The case has significant implications; companies in the government contracts and healthcare industries often deal with situations where their legal obligations are not clear because of ambiguous rules and regulations. Efforts to obtain clarity from the government itself are often rebuffed, leaving companies without clear guidance. In those circumstances, it seems grossly unfair for relators and the government to come in after the fact, injecting clarity where none existed before. As the Seventh Circuit recognized, "[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."
The above discussion encompasses both issues of legal falsity and scienter, something that the Supreme Court appeared to grapple with during argument. Some of the first questions from the court involved questions of falsity rather than scienter. Counsel were presented with hypotheticals that highlight the daily dilemmas faced by companies in determining whether they are complying with laws, recognizing that legal interpretations can range from safe to "aggressive" but still fit within the confines of an "objectively reasonable" interpretation. Several justices appeared to question whether such claims were false and the appropriateness of ascribing liability in those circumstances.
Yet it was clear from oral argument that the court viewed the issue before it as very narrow: whether subjective intent was relevant to the FCA's scienter analysis. Comments by the justices appear to indicate that they may swiftly answer that question in the affirmative, noting "fraud has always looked at subjective intent."
However, several justices appeared to recognize companies' dilemma and the potential that its decision could be a "full disaster" for the business community. The court recognized that under the FCA there are "easy" cases and "hard" cases, the latter involving situations where businesses make objectively reasonable interpretations of legal requirements, even if those efforts are later determined to be erroneous. Hopefully, the court's decision – which is due out this summer – provides clarity and reprieve for defendants grappling with the truly hard cases.
1 31 U.S.C. § 3729(a)
2 31 U.S.C. § 3729(b)
3 9 F.4th 455 (7th Cir. 2021). The Supreme Court consolidated the Supervalu case with another decision from the Seventh Circuit, United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022)
4 551 U.S. 47 (2007)