Supreme Court Cases Raise Key Scienter Issue in False Claims Act

The False Claims Act is a potent tool of federal prosecutors to combat fraud against the federal treasury by those receiving government reimbursement for items or services provided through federal programs.

The statute impacts a range of industries and sectors. Liability under the FCA is significant, with the prospect of staggering monetary penalties and treble damages imposed for filing of false claims for payment.

One contentious issue for litigants is the FCA’s scienter element, or nature of intent under the statute that gives rise to liability. The statute specifies that liability arises where the defendant “knowingly” files false claims for payment.

The FCA defines “knowingly” to mean a person acts with actual knowledge, deliberate ignorance, or reckless disregard. The central inquiry though is how the scienter element is construed as a matter of law. Appeals courts have been divided on this question, and there is a circuit split on the statute’s scienter requirement.

In January, the US Supreme Court granted review of two consolidated cases, United States ex rel. Schutte v. SuperValu, Inc. and United States ex rel. Proctor v. Safeway. The court will consider those two Seventh Circuit decisions on the question of the scienter element—the requirement that a person “knowingly” filed false claims under the FCA.

Background

The litigation began by filing in federal district court qui tam, or whistleblower, lawsuits against SuperValu and Safeway pharmacies. The complaints alleged filing of false claims by those pharmacies seeking government payment for dispensed prescription drugs under Medicare and Medicaid programs.

Federal rules mandate that pharmacies seeking reimbursement for dispensed drugs under those programs must limit filed claims to the “usual and customary” prices for a drug. In both cases, the inquiry was whether pharmacies had a legal duty to report discounts for dispensed drugs.

Alleged failure to report those discounts resulted in false claims filed with the government, and excessive government payments for dispensed drugs. Plaintiffs in the two cases insisted that the pharmacies “knowingly” filed false claims, and thus were liable under the FCA. The district courts ruled in favor of the pharmacies.

On appeal, the Seventh Circuit affirmed the lower court rulings. In each case, the court of appeals applied an “objectively reasonable” standard for the scienter element under the FCA.

The Seventh Circuit ruled that intent to defraud under the FCA, as a matter of law, requires proof that the “plain language” of the governing law or rule at issue precludes defendant’s reading.

Thus, under that standard, the defendant could argue in litigation a “post hoc legal rationale” that it objectively relied upon, in its view, a reasonable reading of an ambiguous governing statute or rule in seeking reimbursement.

The defendant does not act, as a matter of law, with scienter to defraud if it relied upon an objectively reasonable interpretation of an ambiguous legal requirement, regardless of subjective intent.

This rule does not apply if “authoritative guidance” from an agency or circuit court warns, or puts the defendant on prior notice, of legal requirements for seeking reimbursement that the defendant seeks to thwart or evade.

Generally, though, as explained by the Seventh Circuit in Schutte, the defendant could have “acted in bad faith” at the time of filing a claim for payment. Under the objectively reasonable standard, the defendant’s actual subjective intent at the time of filing the claim is, however, irrelevant.

In reaching its decisions, the Seventh Circuit analysis was informed by the Supreme Court’s 2007 ruling in Safeco Insurance Company of America v. Burr. There, the court construed the scienter provision under the Fair Credit Reporting Act.

A school of thought rejects the objectively reasonable test. It has been argued, and circuit courts have ruled, that a defendant is liable under the FCA, for scienter purposes, where at the time of presenting a false claim, that person has no honest subjective belief in the truth of the claim. Here, the focus is on the subjective intent of the person filing a claim.

Under that construct, based on common law and FCA text, the defendant has intent to defraud by “knowingly” presenting a false claim, as “knowingly” is defined under the statute.

In Schutte and Proctor, the Seventh Circuit rejected that position—one that is advanced by the plaintiff-petitioners before the Supreme Court. There are thus dueling interpretations of the scienter element under the FCA.

The Seventh Circuit’s decisions rendered by a three-judge panel in Schutte and Proctor were based on similar facts. Those rulings though were not unanimous.

Judge David Hamilton dissented, writing that the majority’s view is contradicted by statutory text and history. Hamilton explained that an intent under the FCA to submit false claims is grounded in common-law fraud, and the “state of mind” of one submitting false claims is “critical.”

Outlook

In Schutte and Proctor, the Supreme Court must decide how to interpret the FCA scienter element and assume its traditional role of engaging in statutory construction.

Those two consolidated cases pertain to government payments under federal health-care programs. Significant ramifications arise from the court’s consideration of these cases, for the health-care industry and a range of sectors that seek government reimbursements.

Due to risk of significant monetary and penalty liability under the FCA, a whole swath of industries will be impacted by a Supreme Court decision. The pending matter presents an opportunity to expand the court’s jurisprudence on the FCA of significant import.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stuart Silverman is a licensed attorney in Washington, D.C, and he has practiced health-care law.

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