US Supreme Court unanimously decided eagerly anticipated False Claims Act case

On June 1, 2023, the Supreme Court issued eagerly anticipated decisions regarding the scope and reach of the False Claims Act. In US ex rel. Proctor v. Safeway Inc., (22-111), and US ex rel. Schutte et al. v. SuperValu Inc. et al., (21-1326), the Court answered the question which was posed in a prior Norton Rose Fulbright alert)—whether a defendant's contemporaneous subjective understanding or belief about the lawfulness of its conduct is relevant to whether it "knowingly" violated the False Claims Act and whether a post hoc, "objectively reasonable" interpretation of an ambiguous statute or regulation can shield a defendant from liability. As background, the conduct in question was an alleged fraudulent prescription drug billing arrangement in which the two subject companies charged the government a "usual and customary" price for the drugs while actually charging many customers lower prices through price-match discounts. 

Both sides of the issue proclaimed doomsday-type scenarios if the Court ruled against them. The whistleblowers stated that it would frustrate and chill False Claims Act enforcement and enable crafty lawyers to make up post hoc reasons why their client acted in an objectively reasonable fashion while ignoring any contemporaneous belief their client had that the conduct was in fact wrongful. And the Defense bar warned of opening the False Claims Act floodgates if defendants were not able to raise objectively reasonable defenses.

After an oral argument in which several Justices called it an "easy case," the opinion demonstrated that sentiment. Further, neither doomsday scenario was realized because the Court relied heavily on statutory text and common-law underpinnings in a very narrow opinion about the timing of a defendant's knowledge. Indeed, at oral argument Justice Kavanaugh stated that it would be a "narrow loss" for the business community if all the Court did was challenge a post hoc theory of objective reasonableness, but it would be a "full-out disaster" if a defendant could be held liable under the False Claims Act when "even if you've considered it at the time and you guess wrong." The "narrow loss" option emerged in the opinion, but because the Court did not deal with the issue of how to deal with ambiguity in often confusing government regulations, those businesses that submit (or cause to submit) claims to the government received little guidance from the opinion.

The Court held that the FCA's text and common-law roots rendered a very "straightforward" answer to the question before the Court – whether a defendant who knows a claim is false despite a post hoc objectively reasonable defense is subject to FCA liability. A unanimous Court held, simply, that "[w]hat matters for an FCA case is whether the defendant knew the claim was false," and if the companies correctly interpreted the "usual and customary" phrase and believed their claims to the government were false, then those claims are actionable.     

The Court referred to the three-part FCA definition of the term "knowingly" and how that definition tracks the traditional common-law scienter requirement for fraud claims – actual knowledge, deliberate ignorance, or recklessness. The Court stated that these three mental states "focus primarily on what respondents thought and believed," thus the Court held, not surprisingly, that subjective intent is relevant. 

The Court held that "the focus is not, as respondents would have it, on post hoc interpretations that might have rendered their claims accurate." Rather, the Court held that scienter could be established under the FCA if the Respondents:

1. actually knew that their reported prices were not their "usual and customary" prices when they reported those prices (actual knowledge);
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 (deliberate ignorance); or
3. were aware of such a substantial and unjustifiable risk but submitted the claims anyway (recklessness).

However, the Court did not define the terms "substantial and unjustifiable risk" or provide any guidance regarding these terms, thus leaving defendants in a potentially precarious position when it comes to dealing with ambiguous terms and regulations. Indeed, with respect to the ambiguity of the term "usual and customary" the Court acknowledged the phrase on its face "appears somewhat open to interpretation," and "less than perfectly clear," but the Court then placed a burden on FCA defendants by stating that the "ambiguity does not preclude respondents from having learned their correct meaning – or, at least, becoming aware of a substantial likelihood of the terms' correct meaning." 

The Court also referenced that the subject companies were allegedly informed that prices lower than what were charged to the government were the "usual and customary" prices and allegedly tried to hide their discounted prices from regulators and contractors. The Court referred to e-mails between SuperValu executives that referred to a "stealthy approach" and noted concern for the integrity of the program; however, the Court also cautioned that it was not reviewing the meaning of the "usual and customary" phase or whether the companies actually thought their usual and customary prices were their discount prices.

The Court also made an analogy that if a driver saw a road sign that said
"Drive Only Reasonable Speeds," and that the driver was informed earlier in the day by a police officer that speeds over 50 mph were unreasonable and that the driver then noticed that all other cars around him were driving only 48 mph, if that same officer pulled him over later, "he would be hard pressed to argue that some other person might have understood the sign to allow driving at 80 mph."

Unfortunately, government contractors and FCA practitioners alike may find this analogy not very useful, pertinent or helpful – seldom is there an available "police officer" or government agent ready, willing and able to inform a contractor on what is and what is not exactly and precisely reasonable on every aspect of applicable regulations or contract terms. Nor is a contractor generally privy to how all other contractors construe and interpret specific regulations or contract terms. And, of course, nuanced government contract performance or Medicare/Medicaid regulations are seldom, if ever, as black and white as how fast one can or should drive. Indeed, companies often encounter repeat scenarios where their legal obligations are not clearly known because of poorly defined or otherwise ambiguous rules and regulations and their questions and efforts to obtain clarity from the government are ignored or not addressed adequately, leaving them without any clearly stated or articulated guidance or checkpoints. The lack of adequate warnings leads to judgment calls on how to interpret regulations and terms to determine whether the chosen course of action is a "substantial risk" as noted by the Court. Entities dealing with the government no doubt would have appreciated actual guidance on how to better deal with ambiguity rather than a speeding analogy that many may find has very limited practical impact.

However, the Court preserved the ability of FCA defendants to argue that they contemporaneously believed or had reason to believe at the time of their submission of the claim that the claim was not false – "we do not look to legal interpretations that respondents did not believe or have reason to believe at the time they submitted their claims." The Court observed that both the text of the FCA statute and common law are congruent on this point –"[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." Therefore, the opinion leaves government contractors in a similar place that they were in before the opinion – if a claim for payment is believed to be false when submitted, the contractor has knowledge of its falsity, and is therefore subject to the FCA, but when there is an honestly held, reasonable belief that a claim for payment was not false when submitted, then the contractor may still be the subject of an FCA investigation and a qui tam action but will have to show why it held the belief or be subject to treble damages, penalties and potential suspension and debarment proceedings. 

In short, the Court issued what could be seen as a warning to those who do not do sufficient due diligence or who put their collective heads in the sand with respect to ambiguous statutory or regulatory language. Of course, it would have been more helpful if the Court went a bit further to provide specific guidance concerning how lower courts are to evaluate proof of contemporaneous subjective intent relative to and in combination with other objective evidence that may be available in a given case bearing on an FCA defendant's state of mind at the time claims are submitted. Undoubtedly, the intersection and interplay between the two will most likely differ in FCA cases based on the specific facts of each case.