On January 13, 2023, the Supreme Court of the United States granted a writ of certiorari in two cases, United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) and United States ex rel. Proctor v. Safeway, Inc., 70 F.4th 649 (7th Cir. 2022), weighing the issue of whether a defendant acts “knowingly” in violation of the False Claims Act (“FCA”) if he relied on an objectively reasonable interpretation of an ambiguous law. This issue goes to the heart of FCA liability in cases involving “legal falsity.”
These cases will also call into question whether a defendant’s subjective intent matters when evaluating FCA liability. To be liable under the FCA, a defendant must act “knowingly,” which means the defendant “(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). Proof of specific intent to defraud is not required under the FCA. However, because FCA liability is frequently based upon an alleged violation of complex laws and convoluted regulations, defendants often argue that they did not act “knowingly” as their subjective interpretation of the requirements was reasonable.
Currently, a circuit split has developed on the issue of “objective reasonableness,” and whether an objectively reasonable interpretation of a regulation, even if incorrect, can shield a defendant from FCA liability. In the United States Court of Appeals for the Seventh Circuit, the court found that there is no scienter when a defendant acts (1) consistent with an “objectively reasonable” interpretation of an ambiguous legal requirement; and (2) there was no “authoritative guidance” from a circuit court or relevant federal agency at the time. The defendant’s subjective intent is “irrelevant.” United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021). In the United States Court of Appeals for the Eleventh Circuit, the court held that scienter “can exist even if a defendant’s interpretation is reasonable,” if the plaintiff can show that the defendant “actually knew or should have known that its conduct violated a regulation . . . at the time of the alleged violation,” including whether the defendant had “knowledge of a different authoritative interpretation.” United States ex rel. Phalp v. Lincare Holdings, Inc., 867 F.3d 1148 (2017). In a later decision, the Eleventh Circuit added that “the analysis of whether an interpretation of ambiguous law is reasonable is an objective one” and that “[e]ven if [the defendant’s] interpretation is wrong,” dismissal is proper where that interpretation is “objectively reasonable.” Olhausen v. Arriva Medical, LLC, 2022 WL 1203023 (11th Cir. Apr. 22, 2022). Finally, the Fourth Circuit recently deadlocked over these questions after initially finding that a defendant’s subjective intent is irrelevant so long as the defendant’s position is supported by an objectively reasonable interpretation of the law and there is no guidance to the contrary. United States ex rel. Sheldon v. Allegan Sales, LLC, 49 F.4th 873 (2022) (en banc).
In response to this growing circuit split, the Solicitor General submitted an amicus brief in support of the petitioner in SuperValu and emphasized the importance of subjective intent. The government asserts that scienter exists when a defendant (1) subjectively believes that a claim is false; (2) recognizes a substantial risk that the claim is false but deliberately avoids taking readily available steps to obtain clarification; or (3) knows or should have known that the claim is likely false but acts with reckless disregard. Br. Of United States as Amicus Curae, No. 21-1326 (Dec. 2022). Now, the Supreme Court will decide whether and how a defendant’s subjective intent in violating the law factors into whether he acted “knowingly” to violate the FCA. SuperValu and Safeway Pets. for Cert., Questions Presented.
The practical implication of these cases boils down to whether scienter is a question of law or a question of fact. If the Supreme Court adopts the Seventh Circuit’s view in SuperValu, FCA defendants may avail themselves of much-needed protections in the face of ambiguous laws and regulations. Alternatively, if the Supreme Court rejects the SuperValu approach, defendants will face an uphill battle based on objective reasonableness. Regardless of the outcome, this decision will be hugely impactful in future FCA litigation where scienter is in issue.