As many of you are aware, the Federal False Claims Act (FCA) is a powerful tool that is often applied against construction contractors. Under the FCA, a person that “knowingly” presents to the government a false or fraudulent claim for payment faces liability. Liability under the FCA can also arise when a person “knowingly” makes a false statement that is material to a false or fraudulent claim. In these examples, knowledge is a key element to liability under the FCA.
The knowledge element has traditionally been construed to refer to one of three scenarios: (1) a person has actual knowledge of the falsity of information; (2) a person acts with deliberate ignorance of the truth or falsity of information; and (3) a person acts in reckless disregard of the truth or falsity of information. But what if the person acts in accordance with an objectively reasonable interpretation of a given legal requirement? Can liability still attach under the FCA?
These questions were the subject of a June 1, 2023 decision of the United States Supreme Court. Ultimately, the Supreme Court determined that what mattered in that case was what the defendant actually and subjectively knew, not what an objectively reasonable person may have known or believed.
The much anticipated decision arose in the context of federal reimbursement of prescription drug sales. In that case, whistleblowers had alleged that grocery store pharmacies regularly submitted false claims when seeking government reimbursement of prescription drugs under Medicare and Medicaid. Under those federal programs, reimbursement for covered prescription drugs is often capped at the pharmacy’s “usual and customary” charges to the public.
According to the whistleblowers, the pharmacies would often sell drugs at discounted prices (as part of price-match programs). However, when seeking reimbursement from the government, the pharmacies reported their higher retail prices. In 2021, a Federal Court of Appeals concluded that although the pharmacies knew that they had submitted false claims, they were not liable under the FCA because their actions were consistent with an objectively reasonable interpretation of what constituted the pharmacies’ “usual and customary” prices.
The Supreme Court disagreed. Relying on the text of the FCA and common law principles, the Supreme Court stated that “the FCA’s [knowledge] element refers to [defendants’] knowledge and subjective beliefs – not to what an objectively reasonable person may have known or believed.” The Court added that “[w]hat matters for an FCA case is whether the defendant knew the claim was false” at the time of submission – “not what the defendant may have thought after submitting it.” In other words, “the focus is not . . . on [the defendants’ after-the-fact] interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.”
Although the case did not arise in the construction context, the Supreme Court’s decision nevertheless applies to construction contractors working on projects involving federal funding. There are plenty of traps for the unwary and a risk of FCA liability can attach every time a contractor certifies an application for payment or submits a claim. Questions of interpretation frequently arise in construction contracts and there is often a fine line between recoverable and unrecoverable claims or requests for payment. Even where there may be interpretative arguments in the contractor’s favor, the contractor could still face FCA liability if the contractor actually and subjectively believed that its request for payment or claim was false or was based on a false statement.
As the Supreme Court clarified, regardless of objectively reasonable interpretations of a given person’s conduct, the person can be liable under the FCA if the person: (1) “actually knew” that the claim/statement was false; (2) was “aware of a substantial risk” regarding the accuracy of the claim/statement but “intentionally avoided learning whether” the claim/statement was accurate; or (3) was “aware of such a substantial and unjustifiable risk but submitted the claims anyway.” Contractors can and should expect continued FCA scrutiny in light of the Supreme Court’s decision.
