The False Claims Act (31 U.S.C. §§3729-3733; “FCA”) imposes liability on persons and companies who defraud the government. Last year, DOJ recovered more than $5.6 billion in settlements and judgments from civil cases involving fraud and false claims against the government. Notably, of the over $5.6 billion recovered, over $5 billion involved the health care industry. https://www.justice.gov/opa/pr/justice-department-s-false-claims-act-settlements-and-judgments-exceed-56-billion-fiscal-year.
One reason that the FCA is such a strong weapon in the government’s arsenal are courts’ expansive interpretation of the scienter element under the statute. The intent required under the FCA is “knowingly” and is defined as a person (1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information. The FCA requires no proof of a specific intent to defraud. §3729(b). Two recent cases interpret the scienter requirement when dealing with ambiguous governmental guidance.
United States ex rel. Schutte v. SuperValu Inc.
In United States ex rel. Schutte v. SuperValu Inc., et al., 9 F.4th 465 (7th Cir. 2021), the court held that a defendant does not act “knowingly” under the FCA if the defendant’s conduct complied with an objectively reasonable reading of the regulations. In Schutte, relator sued defendant pharmacies. According to relator, defendants provided discounts to its cash customers and thus were required to pass those discounts on to the government when billing its “usual and customary charge” instead of billing its higher retail cash prices. The district court agreed that these claims were “false” under the FCA based on defendant’s failure to pass on those discounts. However, the district court held, at the summary judgment stage, that even if its claims for payment were “false,” they were not “knowingly false” because defendants’ understanding of the “usual and customary price,” even if wrong, was objectively reasonable based upon the applicable regulations and cases.
Relying upon Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), the Seventh Circuit affirmed in holding that a defendant lacks scienter under the FCA—regardless of the defendant’s subjective intent —if its conduct complied with an objectively reasonable understanding of the law and did not conflict with any authoritative guidance.
United States ex rel. Sheldon v. Allergan Sales
Also relying on Safeco, the Fourth Circuit held, at the motion to dismiss stage, that a defendant does not violate the FCA when its reading of the regulation is objectionably reasonable and there is no government guidance discouraging that interpretation. United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340 (4th Cir. 2022). In Sheldon, relator filed a FCA case asserting that his former employer (“Forest”) had violated the Medicaid Drug Rebate Statute. Healthcare manufacturers must enter into a Rebate Agreement with the federal government and report their drugs’ average manufacture price (“AMP”) and best price (“Best Price”) to the federal government for Medicaid coverage. See 42 U.S.C. § 1396r-8; 42 C.F.R. § 447.505. Here, relator asserted that when Forest offered a discount to both an insurer and pharmaceutical company, it should have added those discounts to calculate the Best Price, and its failure to do so violated the FCA.
In rejecting the relator’s arguments, the court relied on language in the applicable regulations and lack of CMS’s calculation of the appropriate methodology. Thus, because of the lack of guidance challenging defendant’s reasonable interpretation of the statute, it could not have acted knowingly under the FCA. The court emphasized that “Sheldon’s position takes the FCA a very long step toward a strict liability statute. It conflates factual fraud and legal fraud, thereby facilitating steep liability for those whose factual representations are not alleged to be either false or duplicitous and those whose legal position is not only arguable but correct.”
These cases are particularly applicable when dealing with FCA cases based upon complex laws and regulations, such as in the healthcare arena. The cases make clear that when a defendant’s interpretation of the applicable guidance is objectively reasonable and there is no conflicting authoritative guidance, the government cannot satisfy the scienter requirement under the FCA. The Schutte court further held that even if the interpretation is wrong and the claim is therefore false, the intent standard would not be satisfied if the defendant’s interpretation is objectively reasonable. While not explicitly addressed, language in Sheldon could be relied on to also challenge the objective falsity element under the FCA when asserting an objectively reasonable interpretation of applicable guidance argument.
Thus, Schutte and Sheldon could be significant cases in early resolutions of FCA cases. They may be a factor in discouraging the government to intervene and could certainly be argued at both the motion to dismiss and summary judgement stages of a FCA action. It will be interesting to see if more circuits join the 3rd, 4th and 7th, 8th, 9th and D.C. Circuit courts in interpreting the FCA intent standard like the Sheldon and Schutte courts.