On Tuesday, April 18, 2023, the Supreme Court heard argument in the consolidated cases of United States ex rel. Schutte v. SuperValu, Inc., and United States ex rel. Proctor v. Safeway, Inc., to consider whether subjective knowledge about the falsity of a claim can establish liability under the False Claims Act ("FCA"). These cases both concern whistleblower allegations that pharmacies submitted false claims to the government by knowingly overbilling for prescription drugs. Several of the Justices' commentary and lines of questions suggest the Court might rule that the Seventh Circuit incorrectly held that evidence of subjective intent is irrelevant in assessing scienter in an FCA case. The Justices seemed particularly interested in the FCA's definition of "knowingly," and possibly also in Congressional intent concerning the importance of subjective knowledge.
As we previously discussed, the FCA imposes liability on any person who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment" to the government, or who "knowingly makes, uses, or causes to be made or used" a "false statement" material to such a claim. 31 U.S.C. § 3729(a)(1)(A) and (B). The Act defines "knowingly" to mean that a person (i) "has actual knowledge of the information"; (ii) "acts in deliberate ignorance of the truth or falsity of the information"; or (iii) "acts in reckless disregard of the truth or falsity of the information." 31 U.S.C. § 3729(b)(1)(A).
During argument, the Court posed hypothetical questions to delineate between these different categories of knowledge, both with respect to the cases presently before the Court and in future cases. Several Justices focused on how to determine whether a company should be liable for taking incorrect legal—as opposed to factual—positions, for example where the company took a legal position that, although plausible or defensible, would probably lose in court. The Court seemed to agree that the FCA's text suggests subjective factors demonstrating knowledge should be considered. However, some Justices recognized the difficulties inherent in that calculus given that companies are often faced with difficult questions of legal interpretation.
During oral argument, Tejinder Singh, counsel for the whistleblowers, and Deputy Solicitor General Malcolm Stewart contended that the pharmacies knowingly defrauded the government by overcharging for prescription drugs based on evidence, such as email communications, showing that they knew their interpretation of the term "usual and customary" price was unfounded. Carter Phillips, counsel for the pharmacies, asserted that the pertinent regulation was ambiguous, and that there was no clear guidance prohibiting the pharmacies' interpretation of that term. He argued that imposing FCA liability based on subjective intent could put companies in an untenable position, forcing them to choose whether to waive the attorney-client privilege in order to assert that they had a reasonable basis for the legal position they took at the time of a claim for payment.
In an interesting confluence of unlikely allies, Justice Gorsuch and Justice Jackson—and possibly also some of the other Justices—signaled they may agree with whistleblowers that the 7th Circuit incorrectly held that evidence of subjective intent is irrelevant to assessing scienter in an FCA case. A majority of the Court did not seem to be swayed by the practical implications of considering subjective intent–-for example, how to assess subjective knowledge about a debatable legal interpretation, and whether considering subjective knowledge will always require questions about scienter in FCA cases to go to trial. However, several Justices seemed leery of imposing FCA liability on a company that takes a plausible but ultimately incorrect legal position.
Given that most of the Justices kept their cards close to their vests, it remains possible that the Court could either affirm the 7th Circuit or reach a middle ground where the Safeco objective standard applies with some limitations—such as only to legal interpretations but not factual issues. If the Court does reverse the 7th Circuit, it may lead to difficult questions about what qualifies as a subjectively unreasonable legal interpretation. The 7th Circuit's position has the virtue of clarity: if a company's legal interpretation is objectively reasonable, courts need not consider what the company's various employees, managers, and lawyers thought about it at the time. Given the complex and often ambiguous landscape of statutes and regulations facing government contractors, litigating what qualifies as a subjectively reasonable or unreasonable belief would be extremely complicated.
This was the second FCA case before the Court this term. As we previously discussed, the first case, United States ex rel. Polansky v. Executive Health Resources, Inc., should resolve a circuit split over whether and under what circumstances the government can invoke its authority to dismiss qui tam cases. The Court's decision in SuperValu will likely hold even greater significance, shaping the FCA's knowledge requirement in ways that have lasting implications for whistleblowers and government contractors alike.
*Law Clerks Thomas Lee and Cody Fisher contributed to this blog post
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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