On April 18, 2023, the Supreme Court of the United States (SCOTUS) heard oral arguments in a pair of monumental False Claims Act (FCA) cases to decide whether and when a defendant’s subjective understanding of an objectively reasonable interpretation of an ambiguous law is relevant in proving scienter. Under review is the scope and applicability of the Court’s landmark scienter decision in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), in FCA cases. Questions and comments from conservative and liberal justices at the oral argument signal that SCOTUS will likely reject a blanket rule that evidence of subjective intent is irrelevant to the scienter calculus. However, the Court provided mixed signals regarding how broad its ruling will be.
In the cases under review – United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc., the Seventh Circuit affirmed summary judgment for the defendants in two non-intervened pharmacy cases brought under the FCA based on the theory that the defendant-pharmacies defrauded the federal government by underreporting their “usual and customary” (U&C) drug prices because they excluded lower pricing offered to customers through discount programs. See United States ex rel. Schutte v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021); United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022). The fraud theory in Schutte and Proctor hinges on the interpretation of the regulatory definition of U&C pricing. The defendants won summary judgment in both cases by invoking the scienter standard articulated in Safeco. Counsel argued that the relators could not establish a triable issue of fact on the question of scienter because the defendants had an objectively reasonable interpretation of the U&C price definition that was not contradicted by authoritative guidance, and any evidence of a contrary subjective understanding of the definition was irrelevant. In split panel decisions, the Seventh Circuit affirmed the dismissal of both cases.
SCOTUS consolidated the cases and granted certiorari to address a circuit split regarding whether FCA liability should be rejected whenever there is an objectively reasonable interpretation of an ambiguous legal requirement, regardless of subjective intent. The Sixth, Ninth, Tenth, and Eleventh Circuits evaluate a defendant’s subjective understanding in proving scienter under the FCA. See, e.g., United States ex rel. Prather v. Brookdale Senior Living Communities, 892 F.3d 822, 838 (6th Cir. 2018); United States v. Chen, 402 F. App’x 185, 187-88 (9th Cir. 2010); United States v. Boeing Co., 825 F.3d 1138, 1145-50 (10th Cir. 2016); United States ex rel. Phalp v. Lincare Holdings Co., Inc., 857 F.3d 1148, 1155 (11th Cir. 2017). Meanwhile, the Fourth, Eighth, and D.C. Circuits have joined the Seventh Circuit in adopting the objective standard that a defendant’s reasonable interpretation does not satisfy the scienter element, even where that interpretation is wrong, unless authoritative guidance warns the defendant against that interpretation. United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 343-44, 351 (4th Cir. 2022), vacated en banc by 49 F.4th 873 (4th Cir. 2023); United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 503-03 (8th Cir. 2016); United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1272 (D.C. Cir. 2010).
Numerous stakeholders filed amicus briefs in Schutte/Proctor. The Department of Justice, Senator Chuck Grassley, a group of 33 states, and relators’ attorneys filed briefs to support a subjective scienter standard. A consistent policy argument raised by critics of the Seventh Circuit’s decision is that they would undermine the enforcement mandate of the FCA and allow crafty lawyers to “twist” ambiguous language to “avoid accountability.” On the other side, numerous industry stakeholders, such as the American Hospital Association, filed amicus briefs to support the objective scienter standard used by the Seventh Circuit. They argue that Medicare and Medicaid billing regulations are often ambiguous and complex, and healthcare providers unfairly face treble damages and substantial civil monetary penalties under the FCA if they erroneously, but reasonably, interpret an ambiguous regulation. Proponents of the Seventh Circuit’s interpretation argue that it is not “too much to ask agencies to speak clearly before recovering quasi-criminal treble damages and penalties for noncompliance with ambiguous regulations.”
Based on the justices’ questions and comments at the oral argument, the Court will likely overturn the rulings in Schutte and Proctor and reject a bright-line rule holding that a defendant’s subjective intent of an ambiguous law is irrelevant to proving scienter under the FCA. Several justices seemed to agree with the argument made by counsel for petitioners that adopting the Safeco standard in this context would give companies “an incentive to plunder every ambiguity for all its worth.” Justices Kavanaugh and Alito suggested they were considering a broader application for the scienter rule, while Justice Gorsuch believes that “the question before us is a narrow one.” Justice Jackson commented that she was “struggling as to why this is a hard case.” Justice Sotomayor even stated that she had “never heard an attorney fighting people trying to help them” in response to petitioners’ counsel’s continued attempts to address theoretical issues. The comment was met with a chorus of laughter. Further, some justices seemed to grapple with the procedural context in which the Safeco standard was applied at the district court level, with Justice Gorsuch commenting, “Mr. Phillips [counsel for respondents], it sounds to me like an excellent jury argument.” The justices’ collective questions and comments signal that the Court will likely reject the defense-friendly Safeco standard collectively.
Ultimately, the majority of the justices were skeptical that Schutte and Proctor were correctly decided under Safeco. What will be interesting to gauge is whether the Court crafts its opinion in narrow or broad terms. We anticipate the Court’s decision in the mid-June 2023 timeframe.
