In both cases, whistleblowers accused retailers of overcharging Medicare and Medicaid for prescription drugs. Both defendants argued that regardless of their actual intent, they should not be held liable for the violations since they were made based on “objectively reasonable” interpretations of ambiguous regulations and not because of a deliberate intent to defraud the government.
The Seventh Circuit decided that the violations failed to meet the False Claims Act’s (“FCA”) scienter (or knowledge) requirement, which only creates liability if billing errors occur as a result of “actual knowledge,” “deliberate ignorance,” or “reckless disregard” of the fraud. The question presented to the Supreme Court is whether violations must be accompanied by a dishonest intent to create liability under the FCA and impose penalties. This is an important question because FCA damages can be trebled, and fines up to $25,000.00 can be assessed for each and every erroneous billing.
Those favoring the Seventh Circuit’s interpretation argue that many FCA cases involve violations of highly complicated and often ambiguous regulations, which are bound to confuse compliance personnel. Therefore, they say the “objectively reasonable” analysis would remove the massive penalties for understandable compliance mistakes.
Whistleblowers and their counsel are understandably opposed to the Seventh Circuit’s decision, arguing that it effectively creates a loophole for defendants to intentionally ignore compliance violations and devise clever interpretations of regulations to avoid liability. Additionally, the Seventh Circuit’s analysis effectively removes FCA liability for subjective intent as long as defendants can come up with a plausible interpretation of the regulation in question.
Even if the High Court ultimately strikes down the Seventh Circuit’s ruling, defendants would still have a fair chance to argue that they reasonably interpreted a poorly written rule or regulation; however, if the Court affirms the decision, it has the potential to reshape FCA litigation by implementing new standards for the scienter requirement and granting future defendants an effective defense against the harshest FCA penalties.
The issue is very much split across the judiciary along partisan lines. Republican-appointed judges have overwhelmingly sided with defendants regarding the scienter requirement, while Democrat-appointed judges have overwhelmingly sided with relators.
However, the FCA has long been a bastion of bipartisan cooperation in the legislative realm, and the issue has already gained congressional attention. Any ruling in favor of the defendants is likely to draw congressional pushback and may result in future FCA legislation seeking to reaffirm the Act’s enforcement power.
Oral arguments will take place in April, and the Supreme Court is expected to issue a ruling in June. We’ll be monitoring this issue carefully.