On June 1, 2023, the U.S. Supreme Court issued a unanimous opinion in United States ex rel. Schutte v. SuperValu Inc. reversing a pair of False Claims Act (FCA) cases on review from the Seventh Circuit Court of Appeals. In what is arguably the most important FCA decision in years, the Court held that a contractor can "knowingly" submit a false claim, where it would have been objectively reasonable for the contractor to believe that the claim was not false at the time it was submitted. A contractor's subjective belief that its claim for payment is (or is very likely) unlawful is, on its own, sufficient to establish "scienter," or knowledge of a claim's falsity, under the FCA.
As we recently wrote, the Court's decision one way or the other would have a significant impact on government contractors—and, for that matter, on all who do business with the federal government, including federal grant recipients and providers in the healthcare and insurance industries—as contractors routinely bill the government for costs incurred or other reimbursable services. Now that we have the Court's perspective on the FCA's scienter requirement in hand, we can unpack what it might mean for contractors. But first, some stage-setting.
The FCA prohibits "knowingly present[ing] . . . a false or fraudulent claim for payment or approval" to the government.[1] The statute's knowledge requirement distinguishes the FCA from strict liability—in other words, a defendant must act "knowingly" to commit fraud. Under the FCA, "knowingly" means that "a person, with respect to information—
- has actual knowledge of the information;
- acts in deliberate ignorance of the truth or falsity of the information; or
- acts in reckless disregard of the truth or falsity of the information[.]"[2]
Moreover, the statute does not require proof of specific intent to defraud.[3]
Earlier this year, the Supreme Court agreed to consolidate and review two cases from the Seventh Circuit[4] that raised the issue of whether a defendant's own subjective understanding or belief about the lawfulness of its conduct is central to whether the defendant "knowingly" violated the FCA. Or, could a defendant instead avoid FCA liability based on an objectively reasonable interpretation of the lawfulness of its conduct, even if that interpretation ultimately proved incorrect?
In SuperValu Inc., the plaintiffs ("relators") filed a qui tam action—i.e., stepped into the shoes of the government—under the FCA, alleging that SuperValu, for approximately ten years, knowingly charged the government more than its "usual and customary" (U&C) drug prices when seeking reimbursements from the government under the Medicare and Medicaid programs, even though federal law required charging only the U&C rates. The issue boiled down to whether the defendants had offered discounts off their normal retail drug pricing so frequently that the discounted prices had themselves become the U&C rates. The defendants—citing a lack of clarity in the term—interpreted U&C to mean their undiscounted retail pricing and allegedly failed to disclose to the government that they offered certain discounts to cash-paying customers.
Relators contended that defendants knew that some pharmacy benefit managers and governmental payors would interpret defendants' U&C practices as overbilling, and that this constituted actual knowledge of a false claim. In other words, what defendants charged customers was less than what they charged the government for reimbursement, and the defendants were knowingly and unlawfully pocketing the difference.
The Seventh Circuit, in affirming two district court decisions, held that an FCA defendant does not act with "reckless disregard" (in other words, "knowingly") in overbilling the government, as long as its interpretation of the relevant statute or regulation was "objectively reasonable" and no authoritative guidance from the government had warned it away from that interpretation. Thus, it did not matter what the pharmacy defendants themselves knew or believed, but rather what an objectively reasonable person would have believed under the circumstances.
Citing the FCA's text and the statute's common law roots, however, the Supreme Court on June 1 unanimously rejected the Seventh Circuit's reasoning and revived the relators' claims, stating that:
critically, these cases involve defendants . . . who may have correctly understood the relevant standard and submitted inaccurate claims anyway. The question presented is thus whether [defendants] could have the scienter required by the FCA if they correctly understood that standard and thought that their claims were inaccurate.
We hold that the answer is yes: What matters for an FCA case is whether the defendant knew the claim was false. Thus, if [defendants] correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.[5]
The Court's framing of its holding leaves unstated the necessary implication: a company's subjective belief that its interpretation of a rule was wrong means that it knew its claim was false, even if that interpretation was, objectively speaking, a reasonable one where that interpretation is ultimately determined to be incorrect and thus "false." The Court dismissed such reasonable interpretations as irrelevant post hoc legal justifications or rationalizations. According to the Court,
[b]oth the text [of the FCA] and the common law also point to what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it. . . . As such, the focus is not . . . on post hoc interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.[6]
Thus, whether the interpretation is correct or false is a matter of law, the Court held that the determination of "knowledge" requires a factual analysis that includes subjective intent. Accordingly, whether the defendant pharmacies are ultimately found liable under the FCA remains a question of fact for the lower court(s) to now grapple with, which will likely require a detailed inquiry and perhaps further discovery as to who knew what and when. But we can now say with certainty that a contractor's own subjective knowledge or belief about the lawfulness of its conduct matters.
Previously, we wrote—based on rulings in the Fourth (and later) Seventh Circuits—that, "[p]rovided that [contractors'] interpretation is reasonable and there is no guidance warning them away from that interpretation, it is unlikely that the [FCA's] scienter requirement would be found to be met." To be clear, this is no longer the case in light of the Court's decision in SuperValu Inc.
Now, if a contractor actually knows (or believes) that its claim is false, is aware of a substantial risk that its claim is false "and intentionally avoid[s] learning whether"[7] its claim is false, or is aware of such a substantial and unjustifiable risk of falsity but submits its claim nonetheless, it faces FCA liability—"it does not matter whether some other, objectively reasonable interpretation" of the law would support its actions.[8]
Of course, there remain questions that may require further clarification and with which lower courts will need to contend. For instance, what happens when one company executive (such as a compliance officer) knows or believes that a claim is false, but another (perhaps a general counsel) knows or believes that the claim is true? In other words, is an FCA "defendant" the sum of its parts, and if so, whose subjective intent matters? In a complex organization, whose knowledge and/or interpretation of a contractual or legal requirement controls?
Another question arises: What happens when a company subjectively believes that its interpretation of the contract or law is correct and its claims are true, but a reasonable third party would objectively believe the interpretation was wrong and the claims were false? The Supreme Court raised this question in note 5 of its opinion but declined to answer it.
Furthermore, when combining this decision with the Supreme Court's 2016 decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar,[9] which held that under the implied certification theory of the FCA, a noncompliance with law or contract must be material, what happens if reasonable minds within an organization differ over the materiality of a contractual or legal requirement that is similarly debatable? Again, such an issue is unresolved.
For now, contractors facing difficult questions about ambiguous or complex statutes, regulations, or contract provisions should continue to proactively seek guidance from the agencies with which they contract or by which they are regulated—especially now, where the impetus to protect yourself from liability is all the more (or, now unanimously) pronounced. That said, contractors should take care that such outreach does not imply that the contractor believes its preferred interpretation of the rule is unreasonable.
As always, we will continue to monitor these developments and provide timely guidance for our clients. If you have questions about how this significant Supreme Court decision may impact your organization's business with the federal government, please reach out to these Venable authors.
[1] 31 U.S.C. § 3729(a)(1)(A).
[2] 31 U.S.C. § 3729(b)(1)(A).
[3] 31 U.S.C. § 3729(b)(1)(B).
[4] See United States v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021), cert. granted sub nom. United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 644 (2023) and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), cert. granted, 143 S. Ct. 643 (2023).
[5] United States et al. ex rel. Schutte et al. v. SuperValu Inc. et al., No. 21-1326, slip op. at 2 (U.S. June 1, 2023).
[6] Id. at 11.
[7] Id. at 16.
[8] Id.
[9] 579 U.S. 176 (2016)