EnforceMintz — Practical Lessons Learned from FCA Litigation in 2023

In 2023, the Supreme Court and the United States Courts of Appeals published a number of significant decisions with implications for entities in the health care and life science industries facing False Claims Act (FCA) investigations or litigating FCA lawsuits. The Supreme Court ruled on the FCA’s intent requirement, and certain justices raised questions about the constitutionality of the FCA’s qui tam provisions. Meanwhile, at the circuit court level, there is a deepening circuit split on the causation standard applicable to FCA cases based on kickback theories under the Anti-Kickback Statute (AKS).

A. Implications of SuperValu on the FCA Scienter Standard

In June 2023, the Supreme Court held that the FCA’s intent or scienter requirement turns on a subjective intent standard, not on a defendant’s “objectively reasonable” interpretation of an ambiguous legal or regulatory issue.[1] Interpreting the FCA’s requirement that a defendant acted “knowingly,” the Court explained that “actual knowledge, deliberate ignorance, or recklessness” at the time of the alleged violation will suffice.[2] Deliberate ignorance means a defendant is aware of a “substantial risk” that their statements are false, but intentionally avoids taking steps to determine the truth or falsity of the statements.[3] As for recklessness, the Court articulated a new standard, stating that recklessness can be shown where a defendant is “conscious of a substantial and unjustifiable risk” of a false claim, but submits the claim anyway.[4] We previously discussed the SuperValu case in several posts (you can access them here and here), as well as the Supreme Court’s decision and reasoning in this case here.

SuperValu’s holding raises several implications that highly regulated entities in the health care and life sciences industries should consider. First, entities conducting business with the United States should document all interpretations of ambiguous legal requirements or regulations — if they recognize them as such — before or at the time of claims submission whenever possible. Doing so will help create a written record to show the entity’s lack of scienter at the time of the claims submission. Second, in the face of regulatory uncertainty, stakeholders should consult counsel and review all available regulatory guidance on the legal issue in question. Consulting with counsel can help avoid missteps in the face of regulatory guidance subject to multiple reasonable interpretations. Third, stakeholders should adapt and conduct audits of existing compliance programs to identify and address areas of potential “substantial and unjustifiable risk,” which is the Court’s articulated standard for the “reckless” prong of the FCA’s scienter requirement. In addition to reducing risk, an entity’s history of good compliance hygiene helps show lack of intent if litigation ensues. Fourth, in the event of an FCA investigation or enforcement action, stakeholders who previously consulted with counsel on the interpretation of ambiguous regulations or guidance might be faced with the decision of whether to waive the attorney-client privilege and provide such documentation to the government.

Because SuperValu holds that scienter is based on a defendant’s subjective intent, defendants should anticipate that intent-based pleading challenges will be more difficult. That is because a defendant’s subjective intentions are generally questions of fact. As such, defendants may need to develop the factual record through discovery to establish lack of intent at summary judgment.

B. Deepening Circuit Split on the Causation Standard for AKS-Based FCA Claims

The circuit split on the question of what causation standard applies to FCA claims based upon violations of the AKS continues to widen. In other words, what causal link between an alleged kickback and a false claim must be proven to establish an AKS/FCA violation? That issue arises because the AKS states that a claim that “includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim” under the FCA. As we previously discussed here, the Sixth and Eighth Circuit have interpreted the AKS’s “resulting from” language to require “but-for” causation, which requires proof that the service would not have been ordered without the alleged kickback. On the other hand, the Third Circuit has rejected that approach and instead permitted a more expansive, “proximate cause” interpretation of the AKS’s statutory language, which presumes that the alleged kickback influenced the ordering of health care services.

The First Circuit likely will be the next appeals court to weigh in on this issue. As we previously explained here, two district courts in the District of Massachusetts have rendered conflicting decisions on the applicable causation standard for AKS-based FCA claims.[5] Defendants in both cases immediately sought interlocutory appellate review of the issue. On November 17, 2023, the First Circuit granted the defendants’ petition for interlocutory review and scheduled briefing for the first quarter of 2023 to resolve the intra-circuit split. Notably, while interlocutory review is pending, the district court in Regeneron stayed discovery, and the court in Teva stayed the parties’ pending trial.

We expect district courts and other circuits will continue to grapple with this issue in 2024. For now, the Supreme Court remains on the sidelines. In October 2023, the Supreme Court denied a relator’s petition for certiorari on the Sixth Circuit’s “but-for” causation standard. While the law on this issue develops, stakeholders subject to litigation on AKS-based FCA theories of liability should consider a number of potential litigation strategies. If the law in the applicable circuit is not yet settled, litigants may wish to seek interlocutory appellate review of the applicable causation standard, if there is a procedural mechanism to do so. Alternatively, in cases where appellate review is already pending, such as the First Circuit, stakeholders may seek to stay litigation pending the appeal and to raise all applicable arguments to preserve them.

C. Justice Thomas’s Polansky Dissent Renews Questions on the Constitutionality of the FCA’s Qui Tam Provisions

In July 2023, the Supreme Court affirmed the authority of the Department of Justice (DOJ) to intervene to dismiss a whistleblower action, even after initially declining to intervene in the case.[6] We previously discussed that case here. While the Court’s holding in Polansky was not particularly surprising, Justice Thomas’s dissent was. Justice Thomas raised the question whether the FCA’s qui tam provisions violated the Appointments Clause and the Take Care Clause of Article II of the United States Constitution.[7] Additionally, in concurrence, Justices Kavanaugh and Barrett suggested their agreement with Justice Thomas on this point and noted that “the Court should consider the competing arguments on the Article II issue in an appropriate case.”[8]

This argument is not new. In 1989, in a memorandum authored by then-Office of Legal Counsel Assistant Attorney General William P. Barr, DOJ expressed the view that “the qui tam provisions in the False Claims Act are unconstitutional” and violate the Appointments Clause of the Constitution. Though DOJ later repudiated that view, Justice Thomas’s dissent raises the question of whether stakeholders subject to FCA liability in declined cases should be raising constitutional challenges.

Since then, defendants have challenged the constitutionality of the qui tam provisions in several cases. In United States ex rel. Wallace v. Exactech Inc., defendant Exactech brought a motion to dismiss relator’s declined FCA case arguing, among other things, that allowing private litigants to pursue government claims was unconstitutional and that the district court lacked subject matter jurisdiction because the FCA’s qui tam provisions violate the Appointments Clause and Take Care Clause of Article II of the Constitution.[9] The court rejected these arguments, finding that the Appointments Clause was not violated because relators are not “officers” under that provision and finding that the Take Care Clause was not violated because the government retains “sufficient control” over relators, even in a declined case.[10] (We discussed the Exactech case here.) Additionally, in United States ex rel. Thomas v. Mercy Care, the district court rejected defendants’ constitutional challenges under the Appointments Clause, Take Care Clause, and Due Process Clause as “conclusory and undeveloped” because defendants did not explain those arguments beyond a passing citation to the dissent and concurrence in Polansky.[11]

While the district court in Exactech rejected the constitutional argument, and the court in Mercy Care found the argument insufficiently briefed, defendants in declined FCA cases should now consider whether to seek dismissal on constitutional grounds. If so, defendants should fully explain, articulate, and preserve those arguments. Defendants who persist in these challenges may ultimately receive a receptive ear from the Supreme Court. A grant of certiorari requires only four votes. Justices Thomas, Kavanaugh, and Barrett have all expressed an interest in resolving the question in “an appropriate case” — so presumably, only one more vote would be needed. We expect that, in the coming year, additional FCA defendants will press this constitutional issue and seek to challenge the constitutionality of private relator suits under the FCA.

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