For False Claims Act Cases, a Unanimous Supreme Court Rules Courts Must Look at What Defendants Actually Knew at Time of Offense

On June 1, the Supreme Court of the United States decided two companion cases regarding the False Claims Act, coming down strongly in protection of the government’s primary anti-fraud statute. In United States ex rel. Schutte v. Supervalu Inc. and United States ex rel. Proctor v. Safeway, Inc., the Supreme Court reversed the Seventh Circuit, holding the knowledge of falsity requirement of submitting a false claim depends on the subjective belief of the claimant at the time of submission rather than the objective reasonableness of an interpretation of the relevant law.

The FCA is a powerful tool that the federal government and whistleblowers alike rely on to punish those who submit false claims to organizations receiving government funds. The government can seek treble damages and per claim penalties against these individuals and whistleblowers are able to collect a substantial portion of the damages.  To be liable under the FCA, a defendant must both submit a verifiably false claim and do so knowingly, which is defined as acting with actual knowledge, deliberate ignorance, or reckless disregard of the claim’s falsity.

In Supervalu, the Court handed a win to the government and rectified a circuit split regarding how to interpret the FCA’s knowledge requirement. Safeway and Supervalu had been selling their prescription drugs to many customers at reduced prices through their price match and membership programs. However, when filing claims to recover the cost of these drugs through Medicare and Medicaid, these companies charged the government the full price of the drug. This charge allegedly violated the FCA, as pharmacies cannot collect more than the “usual and customary” price of a drug from the government. Nonetheless, the district court found, and the Seventh Circuit affirmed, that the defendant pharmacies lacked the knowledge element necessary for liability to attach. The Seventh Circuit relied on Supreme Court jurisprudence regarding the definition of “knowing” in the FRCA, a different statute, finding that a defendant’s subjective belief as to a claim’s falsity was irrelevant to proving knowledge of falsity. In other words, Seventh Circuit held that the pharmacies’ subjective beliefs did not matter because “someone else, standing in the [defendants’] shoes, may have reasonably thought that” their interpretation was accurate.

A unanimous Supreme Court opinion authored by Justice Thomas vacated that opinion, rejecting the  Seventh Circuit’s approach and refocusing the FCA’s knowledge requirement on the defendant’s subjective belief. Writing for all nine members of the Court, Justice Thomas reasoned that because the FCA was derived from common law fraud, its language echoes the subjective scienter element of the crime. Thus, the claimant’s subjective belief is what is relevant to liability, rather than any person’s objectively reasonable interpretation of the law.

Before the Supreme Court’s latest decision, circuits were split on how to interpret the knowledge requirement, with the Seventh Circuit holding that subjective intent was irrelevant in the defendant’s conduct was otherwise objectively reasonable—essentially allowing defendants to avoid FCA liability if they could show an objectively reasonable interpretation of the law, regardless of whether they actually believed it when they engaged in the alleged misconduct. The Supreme Court disagreed, holding that for purposes of establishing scienter (knowledge) under the FCA, “it is enough if [defendants] believed that their claims were not accurate” [because] “what matters for an FCA case is whether the defendant knew the claim was false.”

This holding is likely to benefit the government and whistleblowers, as defendants may no longer seek protection from FCA liability by relying on a “reasonable” interpretation of the law, which the defendant did not actually believe when filing the false claim.  The decision highlights the importance of evidence concerning the subjective knowledge and beliefs of health care providers and other FCA defendants, including internal deliberations about regulatory requirements and notice or information from regulators. Going forward, FCA defendants will continue to push back on the subjective knowledge requirement as the lower courts flesh out the details of this unanimous ruling.

The attorneys in Graves Garrett’s White Collar Criminal Defense & Government Investigations practice regularly represent clients facing investigations pending before the Department of Justice and other government agencies. Graves Garrett lawyers have extensive experience representing companies and individuals in False Claims Act (“qui tam” and “whistleblower”) cases across a number of jurisdictions, in both the defense and relator side.

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