The Supreme Court’s SuperValu Decision on the “Knowingly” Element in the False Claims Act: Protecting Against Liability When There is Regulatory Ambiguity

In a resounding unanimous 9-0 decision, the Supreme Court rejected the argument that a defendant’s subjective belief is irrelevant under the False Claims Act (FCA) when evaluating whether a defendant “knowingly” submitted a false claim to the government for payment. On June 1, 2023, the Court issued its highly anticipated opinion in the consolidated cases U.S. ex rel. Schutte v. SuperValu, Inc. and U.S. ex rel. Proctor v. Safeway, Inc. (SuperValu) and addressed the question of whether a defendant is liable under the FCA if its conduct is consistent with an “objectively reasonable” interpretation of ambiguous statutory or regulatory language. Justice Thomas, writing for the Court, held that an “objectively reasonable” interpretation does not provide a complete legal defense to liability under the FCA. Rather, a defendant meets the FCA’s intent (scienter) requirement if the defendant’s subjective beliefs indicate it had knowledge that its submission of claims was “false or fraudulent,” regardless of whether the defendant’s conduct could be supported by a later “objectively reasonable” interpretation of the ambiguous legal or regulatory issue. Further, the Court articulated new standards for what might constitute “deliberate ignorance” or “reckless disregard” under the “knowledge” prong of the FCA.

Background

The conduct involved the defendant pharmacy chains’ submission of prescription claims to Medicare and Medicaid for reimbursement. Applicable regulations limit reimbursement for prescription drugs under these federal health care programs to the lower of two amounts, one of which is the provider’s “usual and customary charges to the general public” 42 CFR §447.512. Accordingly, the pharmacy chains were required to disclose their “usual and customary” prices. The relators in Schutte and Proctor alleged that the defendants violated the FCA by misrepresenting their “usual and customary” prescription drug prices. The complaints asserted that the defendants provided deep discounts on prescription drugs at the point of sale to customers but reported these sales – as their “usual and customary” prices - to Medicare and Medicaid at the retail price without accounting for these discounts. The pharmacy chains argued that, at the time under applicable guidance, discounts provided to self-pay customers at the point of sale on request to match other pharmacies’ prices did not meet the ambiguous “usual and customary” price requirement. The pharmacy chains argued that: (i) as a matter of law they could not have met the scienter requirement of “knowingly” if their actions were consistent with an objectively reasonable interpretation of the ambiguous “usual and customary” phrase, and (ii) the Seventh Circuit had properly issued summary judgment for them without determining whether they had any subjective belief as to the accuracy of the claims at the time of their submissions for payment.

An essential element of FCA cases is the scienter requirement; a relator must prove that the defendant acted “knowingly”. The FCA’s statutory language sets forth a three-part definition of this term: a defendant acts knowingly if the person (i) has actual knowledge, (ii) acts in deliberate ignorance, or (iii) acts in reckless disregard. 

Circuit Split over FCA Scienter Requirement

The Supreme Court agreed to hear the consolidated Schutte and Proctor cases to resolve a circuit split over the FCA scienter requirement. Both the Schutte and Proctor cases arose out of the Seventh Circuit, which affirmed the District Court’s ruling granting the defendants summary judgment finding that the scienter element could not be met; the District Court held that the defendants could not have acted “knowingly”. The Seventh Circuit relied on the Supreme Court’s “objectively reasonable” doctrine in SafeCo Ins. Co. of America v. Burr, 551 U.S. 47 (2007). In both cases, the Seventh Circuit held that, as a matter of law, a defendant cannot be found to have met the FCA scienter requirement to defraud if the defendant can prove that their actions relied on an “objectively reasonable” interpretation of the ambiguous legal requirement, regardless of their subjective intent or belief. 

Before the Supreme Court’s SuperValu decision, the Fourth, Eighth, and D.C. Circuits had joined the Seventh Circuit in finding that a defendant could successfully negate the scienter element of an FCA claim if it could demonstrate that its actions were consistent with an objectively reasonable interpretation of the law. However, the Sixth, Ninth, Tenth, and Eleventh Circuits had been willing to consider evidence of subjective intent involving an ambiguous requirement when considering the question of whether a defendant “knowingly” submitted false claims for payment.

Decision and Holding

The Supreme Court recognized that the regulation was ambiguous, but rejected the Seventh Circuit’s reliance on the SafeCo doctrine. In SafeCo, the court was interpreting a “knowing” and “reckless” standard under the mens rea (mental state) of “willingly”, not the mens rea of “knowingly.” In its rejection of the Seventh Circuit’s decision, the Supreme Court stated that the FCA’s scienter element turns on a defendant’s subjective beliefs which it described as often involving mixed issues of law and fact.

The Supreme Court articulated two new standards for the FCA scienter requirement: (i) “deliberate ignorance” means that a defendant has knowledge of a “substantial risk” that its statements are false but “intentionally avoids” confirming the relevant legal or regulatory requirement; and (ii) “reckless disregard” means that a defendant understands that there is a “substantial and unjustifiable risk” that its claims are false but submits the claims anyway. Notably, the Supreme Court did not define how lower courts might decide what is a “substantial risk” or “substantial and unjustifiable” risk.

We note that the Court did not exclude, as a factor in determining “reckless disregard,” a company’s actual reasonable interpretation of an ambiguous legal or regulatory requirement. Other factors that might help determine a company’s subjective understanding of the legal or regulatory requirement might include authoritative guidance, non-authoritative guidance or communications, legal and other professional advice, or any material considered by the company at the time of the conduct to demonstrate that it did not take a “substantial risk” (deliberate ignorance) or a “substantial and unjustifiable” risk (reckless disregard) in submitting claims. 

SuperValu will likely affect how companies and their counsel approach: (i) the manner in which they obtain and provide advice and (ii) the defense of FCA investigations and cases.

Developing an Approach to Avoid Liability for taking a “Substantial” or “Substantial and Unjustifiable Risk” of Non-Compliance and Potential FCA Liability

Now that the legal defense under the SafeCo doctrine is definitively unavailable and the Court’s test looks at the defendant’s contemporaneous subjective belief to determine actual knowledge, deliberate ignorance, or reckless disregard, companies and their counsel should consider all available information and advice that might bear on their compliance obligations at the time of the conduct. Such assistance can be found in regulatory guidance, sub-regulatory guidance, communications with federal agencies or their contractors, advice from qualified consultants, and legal advice from counsel. The decision underscores critical issues for providers, including how to obtain and document that advice, whether the information and advice are accurate, and how to grapple with the enormous complexity and frequent ambiguity of the requirements. These tasks should all be done, ideally, in a deliberate manner, with advice of counsel, consistent with the teachings of SuperValu.

Defenses of FCA Investigations and Cases

In any FCA investigation and litigation, providers and their counsel will be well advised to be guided by SuperValu’s holding that the determination of FCA scienter is subjective and relates to what the client knew at the time that the claim(s) was submitted (actual knowledge); whether the client was aware of a “substantial risk” that the submitted claim was false (deliberate ignorance); or whether the client was aware that there was a “substantial and unjustified risk” that the submitted claim was false but submitted the claim anyway (reckless disregard).

The Supreme Court’s articulation of standards for the FCA’s “deliberate ignorance” and “reckless disregard” definitions of “knowingly” adds to the statute’s jurisprudence and should guide counsel’s formation of his or her client’s defense during an investigation, in response to the government’s or a relator’s allegations, and in determining litigation risk and the settlement value of FCA claims. In litigation, with respect to the “knowledge” element, it will be more difficult to obtain dismissals at the motion to dismiss and summary judgment stages. Also, as the pharmacies’ counsel argued before the Court, the lack of the legal defense based on the SafeCo doctrine will raise very difficult issues about privileged advice of counsel, which may strike at the core of the issue of whether the provider took a “substantial” or “substantial and unjustified” risk. In any event, SuperValu will likely add to the challenges that defendants confront in facing FCA investigations and litigation.

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