February 5, 2023

Volume XIII, Number 36

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February 03, 2023

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February 02, 2023

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“Objectively Reasonable” Interpretation Defeats FCA Knowledge in 4th Circuit

The Fourth Circuit Court of Appeals is now the latest in a growing number of courts holding that an objectively reasonable interpretation of governing law defeats the requisite element of intent or “scienter” under the False Claims Act (FCA). Since FCA violations must be knowing, the holding is very helpful to defendants seeking to dismiss complaints or win summary judgment.

In United States ex rel. Sheldon v. Allergan Sales, LLC, the Fourth Circuit — like all five other circuits that have considered the issue — found the scienter framework originally set forth by the Supreme Court with respect to the Fair Credit Reporting Act (FCRA) also applies to the FCA. 24 F.4th 340 (4th Cir. 2022), applying Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). Under this standard, a defendant cannot be found liable under the FCA if (1) its reading of applicable statutory or regulatory requirements was objectively reasonable and (2) no authoritative guidance warned it away from that interpretation.

The Sheldon relator claimed the defendant manufacturer had engaged in an allegedly fraudulent price reporting scheme under the Medicaid Drug Rebate Statute. Under the Rebate Statute, drug manufacturers seeking to have their drugs covered by Medicaid must enter into rebate agreements by which they provide quarterly rebates to states on Medicaid sales of covered drugs. The manufacturer reports the “Average Manufacturer Price” (AMP) and the “Best Price” for covered drugs to the Center for Medicare & Medicaid Services (CMS), and CMS then calculates the rebate amount based on the greater of (1) the statutory minimum rebate percentage or (2) the difference between the AMP and the Best Price. In Sheldon, the relator alleged the defendant had failed to aggregate discounts given to separate customers for purposes of reporting the “Best Price” for use in drug rebate calculations and appealed following the district court’s dismissal of his complaint. 24 F.4th at 345-46.

While the district court dismissed the relator’s complaint for failure to plead both falsity and scienter, the Fourth Circuit addressed only scienter. At the outset, the Court noted its obligation to strictly enforce the FCA’s “rigorous” scienter requirement under Escobar, as well as the Seventh Circuit’s recent adoption of the objective reasonableness Safeco standard in United States ex rel. Schutte. Id. at 344 (citing Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2002 (2016); Schutte v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021)). The Fourth Circuit took the same approach as “each and every circuit” considering the applicability of the Safeco standard to the FCA, holding there was no reason why the Safeco scienter standard for FCRA violations committed knowingly or with reckless disregard should not to apply to the same common law terms used in the FCA. Id. at 348.

The Sheldon court then held that under the FCA, a defendant cannot act “knowingly” if its actions are based on an objectively reasonable interpretation of a relevant statute or regulation when it has not been warned away from that interpretation by authoritative guidance. Id. The court further held the drug manufacturer defendant’s interpretation of the Rebate Statute was not only objectively reasonable but the most natural reading of the law — since the statute defined “Best Price” as the “lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity[,]” the plain language indicated that the “Best Price” was one offered to a single entity. Id. at 345 (citing 42 U.S.C. § 1396r-8(c)(1)(C)(i)). In addition, no authoritative guidance — either circuit court precedent or guidance from the relevant agency — had warned the defendant away from its interpretation of this language, i.e., CMS never clearly stated that discount aggregation to different entities was required. Id. at 353-54.

The Court did specify that this scienter standard does not apply to factually false claims, where the law is clear; rather, the objective reasonableness defense is “narrowly cabined to legally false claims” involve contested statutory and regulatory requirements. Id. at 350. This, however, is still a boon to FCA defendants struggling with the seemingly impossible task of navigating complex regulatory landscapes. Id. (“If the government wants to hold people liable for violating labyrinthine reporting requirements, it at least needs to indicate a way through the maze.”) (internal citation omitted). So, too, is the Fourth Circuit’s holding that to function as a warning, authoritative guidance requires “both the right source and sufficient specificity.” Id. at 353. Not only must guidance issue from circuit court precedent or a relevant agency, but it also must canvass the issue with sufficient specificity to function as a warning. A putative relator cannot simply point to vague or conflicting regulations to establish her FCA case.

Key Takeaways

The Sheldon decision is notable as the latest in a trend where defendants in six circuits have defeated the scienter element of an FCA claim by demonstrating their interpretation of the law (whether correct or not) was objectively reasonable. Given its impact on FCA claims, it would be unsurprising if the applicability of the objective reasonableness standard is taken up by additional circuit courts. Even though all circuits currently are in agreement, it remains to be seen whether any other circuits will take a different approach, which then would potentially require review by the Supreme Court.

© 2023 Foley & Lardner LLPNational Law Review, Volume XII, Number 67

About this Author

Jessica Joseph, Foley Lardner Law Firm, Boston, Healthcare and Litigation Law Attorney

Jessica Joseph is an associate and litigation attorney with Foley & Lardner LLP. Ms. Joseph is a member of the firm’s Business Litigation & Dispute Resolution, Health Care, and eDiscovery & Data Management Practices.

Previously, Ms. Joseph served as a summer associate in Foley’s Orlando office. Ms. Joseph has also interned with the Office of Audit and Investigation of the United Nations Development Programme, where she provided legal support for investigations into various types of internal misconduct by UNDP employees and officials...

Lisa Noller, Trial Lawyer, Foley Lardner Law Firm

Lisa Noller is a trial lawyer and investigator with Foley & Lardner LLP, where she is chair of the Government Enforcement, Compliance & White Collar Defense Practice. She has spent almost 20 years investigating, litigating and trying complex criminal and civil cases, including responding to government investigations, conducting corporate internal investigations, and persuading the government not to pursue clients. When cases proceed to trial, Ms. Noller also has significant experience successfully trying a wide variety of over 30 civil and criminal matters in...

Katy E. Koski, Foley Lardner, Life Sciences Lawyer, Products Distributors Attorney,

Katy E. Koski is a partner and litigation lawyer with Foley & Lardner LLP. She is an experienced trial lawyer with particular experience defending pharmaceutical and other life science companies in large, multi-jurisdictional government investigations and litigations. Ms. Koski also has represented clients on matters involving product liability claims in a variety of industries, including drug and medical companies, product distributors, and aircraft manufacturers.

Michael J. Tuteur, Foley Lardner, Healthcare lawyer, Government Enforcement Defense Attorney

Michael J. Tuteur is chair of the Litigation Department of Foley & Lardner LLP and focuses his practice on health care litigation and government enforcement defense. Mr. Tuteur represents clients in a broad range of industries, including healthcare, software, biotechnology, insurance, education, advertising, banking and mutual funds. His litigation experience is similarly diverse, and includes ERISA and RICO class actions, securities and syndicated debt disputes, licensing and copyright actions, contract and shareholder suits, and defense of civil false claims...