The False Claims Act Standard – Why Do We Care?

Two contractors walk into a bar (named Public Disclosure). The first says, “Let’s cheat the Government!” The second says, “Great; I know just how to do it, I’m going to charge less than our regular prices – ON PURPOSE – just to mess with Uncle Sam.”  

The contractors are overhead by a serial whistleblower, a senior lawyer in the Civil Fraud Division at DOJ, and an Agent at the DoD IG. The whistleblower and the Agent say, “let’s go get ‘em.” The lawyer says: “wait, I can never remember, what Circuit are we in?”

At the expense of making this opening joke (even) less funny by explaining it, we’ll explain – and then all agree that there simply is nothing funny about a circuit split (let alone one involving the False Claims Act). So … on with the analysis!

Understanding which federal appeals court (or Circuit) you are in is important when discussing potential False Claims Act (“FCA”) issues because of current circuit splits on a variety of topics.  A “circuit split” means that different courts apply a different standard when ruling on the issue. In this instance, the disagreement is over the “knowledge” aspect of the FCA – meaning (using the example above) did the contractors KNOW that they were cheating the Government? If the contractor’s actions were objectively reasonable, does it matter what they were thinking?

This is the very question that the United States Supreme Court may take up in the upcoming term. In August 2022, the Supreme Court asked the Federal Government whether the Court should review United States et al. v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021). In Supervalu, two pharmacists accused Supervalu Inc. of misrepresenting the usual and customary pricing of pharmaceutical drugs when billing third-party vendors (such as Medicare and Medicaid) by failing to disclose the price-matching discounts Supervalu Inc. provided to its customers. The 7th Circuit found that Supervalu Inc. “had an objectively reasonable understanding of the regulatory definition of [usual and customary] price and no authoritative guidance placed it on notice of its error” and thus did not violate the FCA.

The pharmacists appealed the decision, seeking Certiorari with the Supreme Court. If the Court decides to take the case, the issue will be “[w]hether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”

To answer this question, the Court will have to take a deep dive into the FCA. The FCA prohibits a person from knowingly submitting false claims to the Government. Under the FCA, a person acts “knowingly” when they have (1) actual knowledge; (2) act in deliberate ignorance of the truth or falsity of the information; or (3) act with reckless disregard of the truth or falsity of the information. See § 3729(b)(1)(A). Currently, there is no statutory indication as to what Congress meant by its usage of “knowingly” outside of the definition it provided in § 3729(b)(1)(A). The definition has done little to prevent ambiguity, thus the existence of a circuit split on the issue.

In an attempt to resolve ambiguity, courts turned to Safeco Ins. Co. of Am. v. Burr to interpret what “knowledge” means in terms of the FCA. 127 S. Ct. 2201, 2204 (2007). Although Safeco does not discuss the FCA specifically, it does examine the scienter provision of the Fair Credit Reporting Act (“FCRA”) to determine when a person acts in “reckless disregard” of the statute. Id. at 2203. The Safeco Court found that a person does not act in “reckless disregard” of the FCRA if the action is objectively reasonable and there is no authoritative guidance on the issue. Id. at 2216. The Safeco Court determined that an “objectively unreasonable” action is one that is “not only a violation under a reasonable reading of the statute, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.” Id.

Currently, there are five Circuit Courts that apply the Safeco standard to FCA cases. United States et al. v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021); United States ex rel. Streck v. Allergan, 746 F. App’x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017); United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015). The Fourth Circuit is currently reviewing this issue. United States ex rel. Sheldon v. Allergan Sales, LLC, No. 20-2330, 2022 WL 1467710 (4th Cir. May 10, 2022). This means that, according to these five courts, a person does not act in “reckless disregard” of the FCA if the action was objectively reasonable and there is no authoritative guidance on the issue to suggest that the action taken was improper. For example, the Court in Supervalu explained that “nothing in the language of the FCA suggests that a defendant’s subjective intent is relevant” and thus only views the actions objectively (essentially what a reasonably prudent person would do under similar circumstances). United States et al. v. Supervalu Inc., 9 F.4th 455, 466 (7th Cir. 2021).

The question that remains (and the reason for the circuit split) is whether the knowledge of a person at the time he/she completed the action (the action that is a potential FCA violation) should be based on their subjective or objective intent.

Now, why do we care about how the Court will rule on this issue – if the high Court decides to take the case? We care for two reasons – depending on who you are in this scenario.

Again, using the example above, if you are the contractor in this scenario, do you want the court (or the Government) snooping around in your private business (or personal) data to see how and why you knew what you were doing was wrong? That could go to your subjective knowledge/intent. That gives the Government (or whistleblower) an advantage.

If you are the Government (or whistleblower) in this scenario, do you want private businesses to be able to price their goods however they would like – even if they subjectively knew it was wrong? And then have an opportunity to create an after-the-fact reason for why they priced their goods that way to circumvent Federal violations? That gives defendants an advantage.

Either way, all parties have a stake in the game here. Ward & Berry will continue to monitor the situation and whether the Supreme Court will take the case. In the meantime, if you have any questions about potential FCA related issues, please contact Ward & Berry.