US Supreme Court Evaluates False Claims Act Scienter Standard in Potentially Landmark Case

The US Supreme Court heard oral arguments on April 18 in United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway Inc., companion cases that raise the important question of whether, under the False Claims Act, a defendant’s subjective intent is relevant where the conduct is consistent with an objectively reasonable interpretation of the relevant standard and the government issued no authoritative guidance countering that interpretation.

On one side, defendants contend (and have long contended) that False Claims Act (FCA) scienter is negated in these circumstances and have relied heavily on the Supreme Court’s opinion in Safeco Insurance Co. of America v. Burr, 551 US 47 (2007), to support that position. On the other hand, the Justice Department and relators argue that a defendant’s subjective belief that the claims were false conclusively establishes the requisite scienter, regardless of any later arguments that the defendant’s conduct conformed with an objectively reasonable interpretation of the requirement.

The Supreme Court’s ultimate decision is expected to go a long way toward resolving the circuit split on this issue, with important implications for FCA practice and procedure.

HISTORY OF SCHUTTE AND PROCTOR AND THE SPLIT IN AUTHORITY

The Schutte and Proctor cases came to the US Supreme Court by way of the Seventh Circuit. Both cases raise the question of whether a defendant can knowingly violate the FCA if its conduct is "objectively reasonable" and the government has not warned the defendant away with authoritative guidance.

The Seventh, Eighth, and DC Circuits held that a defendant can negate the FCA scienter standard by demonstrating that its position is supported by an objectively reasonable interpretation of the law, rendering its subjective intent irrelevant. Meanwhile, the Sixth, Ninth, Tenth, and Eleventh Circuits have considered evidence of defendants’ subjective intent: whether the defendant actually believed its conduct violated a regulation or law at the time of the alleged violation.

SUPREME COURT ORAL ARGUMENT

From the outset of the oral argument, the justices framed the question before the Court in somewhat different ways. Justices Elena Kagan and Ketanji Brown Jackson suggested the only question to be decided is extremely narrow—namely, whether the Seventh Circuit erred by ruling that subjective intent is irrelevant to the FCA scienter standard.

Justices Clarence Thomas, Samuel Alito, and Brett Kavanaugh suggested that the issue may be more broad because a statement requiring an interpretation of law cannot be “false,” let alone knowingly false, if the law is subject to more than one reasonable interpretation, seemingly channeling the Seventh Circuit majority, which wondered “how it would be possible for defendants to actually know that they submitted a false claim . . . if the requirements for that claim are unknown.”

Even so, an important pillar of the “objective reasonableness” standard may be coming unmoored, as several justices questioned whether the Court’s earlier Safeco objective-reasonableness test (which arose in the context of the Fair Credit Reporting Act (FCRA)) should apply to the FCA. The Safeco decision (lauded by industry and the defense) interpreted the “willful” scienter requirement under the FCRA to include (1) knowing and (2) reckless violations of the statute. The Court defined “recklessness” as conduct violating an objective standard.

A key battleground is a Safeco footnote stating: “[t]o the extent that [plaintiffs] argue that evidence of subjective bad faith can support a willfulness finding even when the company’s reading of the statute is objectively reasonable, their argument is unsound.” Justices noted that the FCRA is a consumer protection statute with no common law history, whereas the FCA expressly incorporates elements like “knowing” and “deliberate indifference,” which could be interpreted to evoke subjective intent.

Getting to the crux of the tension between the scienter and falsity requirements within the FCA, Justice Kavanaugh posed a hypothetical to relators’ counsel: Should a defendant be liable under the FCA when there are three objectively reasonable interpretations, a defendant selects the third option as being the most cost-effective, and it is later determined that the third option is “false” even though objectively reasonable?

In response, relators’ counsel argued that liability should be imposed where the facts showed that the defendant had subjective “knowledge” that its conduct was indeed “false.” However, counsel for the respondents and a few justices expressed concern that such a rule of liability would run afoul of the Supreme Court’s maxim in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), that the FCA is not a general anti-fraud statute and that its scienter and materiality requirements should be “rigorously” enforced and are “demanding” standards.

While the Court seemed skeptical about the Seventh Circuit’s conclusion that subjective intent is irrelevant, some justices suggested the potential for a narrow decision that subjective intent is relevant in some circumstances. Such a narrow ruling could seek to prevent defendants from devising post-hac rationales for their conduct but would preserve a Safeco-type defense.

Mostly overlooked in the oral argument is the fact that “objective reasonableness” only comes into play where the underlying statute or regulation is open to more than one reasonable interpretation and the government has failed to issue authoritative guidance establishing the proper one. As such, this circumstance largely could be avoided by enacting unambiguous statutes and implementing regulations or issuing authoritative guidance in the first instance.

IMPLICATIONS OF THE SUPREME COURT DECISION

The US Supreme Court’s decision has the potential to significantly impact scienter-based defenses to FCA claims. If the Court affirms the Seventh Circuit’s and other circuits’ holdings that an objectively reasonable interpretation of an ambiguous law or regulation negates scienter under the FCA (and by association upholds the existing Safeco standard), the objective standard will remain a powerful defense on a motion to dismiss or motion for summary judgment. If the Court holds that a defendant’s subjective intent is a factor to consider under the FCA scienter standard, it will be more difficult to prevail on motions to dismiss on scienter grounds, and evidence such as emails may make summary judgment more difficult as well.

Either way, the Court could use the occasion to confirm the principles it established in Escobar that make clear that courts should rigorously enforce FCA elements in pleading challenges.