On June 1, 2023, the U.S. Supreme Court clarified a critical issue in False Claims Act (“FCA”) cases: whether and to what extent does a defendant’s subjective understanding or beliefs about the lawfulness of its conduct establish “knowledge” sufficient to impose FCA liability?  In U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway, Inc. (“SuperValu”), the Supreme Court held that the FCA’s scienter element refers to a defendant’s subjective knowledge and beliefs —not what an objectively reasonable person may have known or believed. In doing so, the Supreme Court rejected the Seventh Circuit’s reading of Safeco,^[1] namely that the defendants could not have acted “knowingly” if their actions were consistent with an objectively reasonable interpretation of “usual and customary” — the operative language at issue in both cases.

As detailed below, although SuperValu dealt with the interpretation of Medicare and Medicaid regulations, it has application to any government contractor, healthcare provider, or grant recipient that submits claims for payment to the government. There is no longer a safe harbor for conduct that appears objectively reasonable retrospectively. The critical inquiry is whether an organization submitted a false claim and whether the company had actual or constructive knowledge of its falsity at the time they submitted it.

FCA’s Scienter Element

Under the FCA, a defendant is only liable for submitting a false claim to the government if it acted “knowingly,” which the statute defines as acting with actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the information.

Background of SuperValu and Safeway Cases

The case before the Supreme Court was consolidated from two district court decisions involving allegations that pharmacies operated by SuperValu and Safeway defrauded Medicare and Medicaid by offering discounted prescription drugs to their customers without reporting those discounted prices when seeking reimbursement of their higher “usual and customary” prices from Medicare and Medicaid. The district court granted SuperValu and Safeway summary judgment based on the scienter element, finding that the defendants could not have acted “knowingly.”

The Seventh Circuit affirmed in both cases, relying heavily on Safeco to conclude that the companies were entitled to summary judgment “if their actions were consistent with an objectively reasonable interpretation of the phrase ‘usual and customary’ . . . even if they actually thought that their discounted prices were their ‘usual and customary’ prices (and thus thought their claims were false).”

In a unanimous opinion, the Supreme Court found the Seventh Circuit’s reliance on Safeco — a case that interpreted the term “willfully” in the Fair Credit Reporting Act — to be misplaced in the FCA context. The Supreme Court reasoned that the FCA’s statutory text, interpreted in accordance with common law fraud principles, makes clear that that subjective knowledge is relevant under all three prongs of the FCA scienter standard. More pointedly, “[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 or learned after submitting the claim.

The Supreme Court concluded that — irrespective of an objectively reasonable interpretation — a defendant may be liable under the FCA if it either (i) “actually knew” that its conduct was unlawful; (ii) was “aware of a substantial risk” of unlawfulness “and intentionally avoided learning whether” its conduct was lawful; or (iii) was “aware of such a substantial and unjustifiable risk but submitted the claims anyway.”

Key Takeaways

• There is no longer any doubt that the FCA’s scienter standard can be proven by a defendant’s subjective belief that its claims are false. Thus, a contractor’s subjective knowledge and beliefs about the legality of its actions is what matters.
• Facial ambiguity of a term, phrase or legal requirement/obligation does not, alone, preclude a finding of scienter under the FCA. The focus on subjective intent will likely make it easier for plaintiffs to survive summary judgment and prolong FCA litigation.
• An organization’s internal review and analysis of ambiguous laws or regulations will now become highly relevant in FCA litigation. Discovery regarding subjective intent will likely expand, raising the question as to whose knowledge at a large organization controls.
• Courts will be looking for evidence of a defendant’s subjective belief or understanding at the time the claim was submitted, not “post hoc interpretations that might have rendered the claims accurate.”

What to Expect Moving Forward

While the Supreme Court’s rejection of Safeco’s objective reasonableness standard narrows a powerful defense, the Court’s opinion is limited to situations where: (1) there is evidence of subjective knowledge of falsity when the claim was submitted; (2) the defendant adopted an incorrect interpretation even after it was advised of a substantial risk that its conduct was illegal; or (3) the defendant was aware that there was a substantial and unjustifiable risk that its claims were unlawful and submitted the claims to the government anyway. The SuperValu decision does not change a basic tenet of FCA liability, however: an organization that operates in good faith does not violate the FCA even if its interpretation of the law is incorrect.

Nevertheless, the focus on the defendant’s subjective understanding and beliefs at the time of claim submission, which is necessarily a fact-intensive issue, will undoubtedly result in additional discovery in future FCA cases. FCA defendants may also face a higher burden to demonstrate that they did not take an unjustifiable risk in submitting claims for payment to the government. The Supreme Court declined to define recklessness under the FCA and what circumstances were sufficient for a finding that a defendant had a subjective awareness “of an unjustifiable risk” of a claim’s falsity when it was submitted to the government. Finally, the fact-intensive scienter determination may hinder a defendant’s ability to obtain early dismissal or summary judgment in a FCA case on the basis of scienter.

Moving forward, if a client is faced with a vague or ambiguous regulation or contract provision, it should consider engaging with the government agency to get a better understanding of the agency’s interpretations and/or expectations and, further, should confirm those discussions in writing or seek an advisory opinion, to the extent available. This is especially critical in areas involving complex laws and regulations such as healthcare and cybersecurity.

In addition, clients should review and assess their internal compliance programs, including policies, training, and voluntary disclosure processes – to identify any new vulnerabilities in light of the Supreme Court’s decision.

[1]Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007)

This is for informational purposes only and is not intended to be legal advice.  Please contact a member of the White Collar & Government Enforcement group if you have any questions about how this Supreme Court decision may impact your organization.