On June 1, 2023, the U.S. Supreme Court delivered a ruling in one of two cases litigating the issue of whether a defendant can skirt False Claims Act (“FCA”) liability by developing “objectively reasonable” interpretations of the law. The cases against retail chains Safeway Inc. and Supervalu Inc. have garnered significant attention within the FCA Bar due to their potential to reshape FCA litigation by making it significantly harder for relators to prove a defendant knowingly submitted fraudulent claims to the government for payment.
In U.S. ex rel. Schutte et al. v. SuperValu Inc., the relator’s claims revolve around the retailer’s failure to offer their “best prices” to federal payors for prescription drugs that it often sold at steep discounts to customers who did not receive federal healthcare benefits. Supervalu based its defense on the Supreme Court’s 2007 decision in Safeco Insurance Co. of America v. Burr, which they interpreted to mean their liability hinged on whether they had adopted “objectively reasonable,” albeit incorrect, interpretations of regulations. In other words, the defendant argued that their interpretations did not create FCA liability since they were in line with what any reasonable person could have understood, considering healthcare regulations’ confusing or ambiguous nature. The defendants in these cases argued that their “objectively reasonable” interpretations failed to illustrate “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” Therefore, they could not meet the FCA’s knowledgeability and intent requirement, also known as scienter.
The High Court’s opinion in the case unanimously ruled against the defendant, finding that FCA liability exists when a defendant believes their claims were false and not contingent on whether their interpretation was objectively reasonable.
In their opinion, the Justices clarify that the Safeco objective standard for liability does not apply to FCA cases where liability should depend on a defendant’s subjective knowledge and beliefs. The dismissal of Safeco by the High Court indicates the end to its use by defendants attempting to skirt FCA liability using the objectively reasonable scienter standard. As a result, defendants will no longer be able to seek an FCA safe harbor by claiming their interpretations were “objectively reasonable” despite knowing they were incorrect.
This is a big win for relators and their counsel as it prevents defendants from circumventing their compliance responsibilities by arguing that their interpretations were in line with what any reasonable person would have interpreted. This cements the FCA’s scienter as subjective and not as easily challenged by defendants who can concoct creative interpretations to excuse their non-compliance. As a result, it’s far more likely that when scienter is contested, the case will proceed to a jury trial which could rule in favor of the relator.
The High Court’s opinion also interprets the FCA as a fraud statute read under the common law of fraud. According to the justices, the FCA’s scienter focuses on what a defendant thought and believed, which under common law would determine fraud to begin whenever the legality of a claim is called into question.
With this momentous decision, the High Court finally struck down the use of the “objectively reasonable” argument by FCA defendants, making it significantly harder for companies to avoid liability by arguing that they were unsure whether their practices were unlawful.