Earlier this year, we previewed two significant False Claims Act (FCA) cases before the U.S. Supreme Court, United States ex. rel. Schutte v. SuperValu, Inc., No. 21-1326 (“SuperValu”), and United States ex. Rel. Proctor v. Safeway, Inc., No. 22-111 (“Safeway”). The FCA provides that “any person who knowingly presents, or causes to be presented, a false or fraudulent claim” to the United States, or who engages in other related activity as set forth in the statute, is liable to the United States for substantial civil penalties plus treble damages. 31 U.S.C. § 3729 (emphasis added.) The SuperValu and Safeway cases involved a situation where the defendants were alleged to have subjectively believed their claims were false, but because of ambiguity in the underlying regulations (which limited reimbursement for prescription drugs based on a pharmacy’s “usual and customary” drug prices), it would have been objectively reasonable to have believed the claims were proper. The question for the Supreme Court was whether in such a situation the defendants could be said to have “known” their claims were false. After all, so the defendants argued, even if they subjectively believed their claims were false, it was objectively reasonable for them to have believed they were not.
The answer, according to a unanimous ruling handed down last week in favor of the government and relators and against the defendant pharmacies: “[w]hat matters for an FCA case is whether the defendant knew the claim was false.” (emphasis added.) “Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.” In other words, “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” That the underlying regulation “may be ambiguous on its face” was insufficient, according to the Supreme Court, “to preclude a finding that the defendants knew their claims were false.”
After reviewing the text of the FCA and common law, the Supreme Court concluded that “[b]oth the text 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.” “[T]he focus is not, as respondents would have it, on post hoc interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.”
The Supreme Court recognized, though, the difficulty presented by the “less than perfectly clear” underlying regulations, specifically, the inherent ambiguities in the terms “usual and customary.” The Supreme Court observed that “it might have been a forgivable mistake” if the defendants had made an honest mistake in its interpretation of the underlying regulation. “But the [lower court] did not hold that respondents made an honest mistake; it held that, because other people might make an honest mistake, defendants’ subjective beliefs became irrelevant to their scienter.” (emphasis original.) The Supreme Court rejected all arguments presented in defense of the lower court’s holding. Ambiguity was not enough and did not “preclude respondents from having learned their correct meaning.” The Supreme Court’s found inapposite its decision in Safeco Ins. Co. of America v. Burr, 551 U. S. 47 (2007)—a case interpreting the term “‘willfully’” as used in the Fair Credit Reporting Act. And, the Supreme Court rejected the notion that the representations at issue were ones of law (typically not actionable at common law), as opposed to fact.
The Supreme Court importantly took a moment to review what it was not deciding: “[w]e are not reviewing the meaning of the phrase “usual and customary” or whether any of respondents’ claims were, in fact, inaccurate or otherwise false.” Lower courts had already determined that the claims were false, and those rulings were not before the Supreme Court. “Nor are we reviewing whether respondents actually thought that the phrase “usual and customary” referred to their discounted prices. Nor, for that matter, are we reviewing any factual disputes about what respondents did or did not believe or do.” Those matters are left for further litigation and, as discussed below, provide avenues ripe for continued examination.
In the end, the Supreme Court returned to the statutory text:
"Under the FCA, petitioners may establish scienter by showing that respondents (1) actually knew that their reported prices were not their “usual and customary” prices when they reported those prices, (2) were aware of a substantial risk that their higher, retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway. [31 U.S.C.] §3729(b)(1)(A). If petitioners can make that showing, then it does not matter whether some other, objectively reasonable interpretation of “usual and customary” would point to respondents’ higher prices. For scienter, it is enough if respondents believed that their claims were not accurate."
In short, what matters for an FCA case is whether the defendant knew the claim was false. If it did, even if it would have been objectively reasonable to believe in the propriety of the claims, liability may attach.
The devil, of course, is in the details. As mentioned, the Supreme Court did not decide the factual issues, including the sufficiency of the evidence of the alleged subjective belief in falsity. Raising questions, seeking guidance and counsel, and even disagreeing with government entities, should not be deemed subjective belief in falsity. And we believe last week’s decision should “cut both ways,” in that the door is still and must remain open to honest mistakes (“it might have been a forgivable mistake if respondents had honestly read the phrase as referring to retail prices, not discounted prices.”). In other words, genuine, subjective belief in a claim’s propriety should cut against later assertions of fraud, particularly where the subjective belief is objectively reasonable. However, in the wake of SuperValu and Safeway, courts may be less inclined to determine the issue of a defendant’s knowledge as a matter of law, and thus less willing to dismiss False Claims Act cases when relators allege some evidence of a defendant’s subjective belief that a claim was false.
Our observation prior to the decision remains true today: “[e]ven if a particular practice or action may be deemed ‘objectively reasonable,’ the knowledge standard will be informed by agency practice, prior decisions of courts or administrative bodies, and guidance provided by government entities with authority in the subject area. If it does, companies may be more secure against FCA challenges when their conduct is consistent with objectively reasonable interpretations of law and regulation. This would be an important protection for companies striving to comply in increasingly complex and shifting regulatory environments.” As we also previously observed, companies should consider ensuring their compliance programs are robust, effective, and up to date, backed by regular training and internal testing. Companies should also consider engaging outside counsel to assist with any review of, training regarding or internal testing of any compliance program. Companies also should use best practices regarding document management and retention as part of their ongoing compliance efforts.
The FCA continues to present challenges for companies and individuals doing business with the federal government and those seeking payments or reimbursements related to healthcare or other government programs. Presenting evidence of subjective belief involves complicated and difficult legal and practical issues, including those surrounding the attorney client privilege.