CLIENT ALERT: Supreme Court Emphasizes Defendants’ Knowledge in Landmark False Claims Decision

By , | Published On: June 2, 2023

In a unanimous opinion issued Thursday, June 1, the U.S. Supreme Court retained the current “scienter” or “knowledge standard” governing False Claims Act (“FCA”) cases, and, in doing so, offered guidance to federal grantees relating to their compliance obligations.

The consolidated cases of United States ex rel. Tracy Schutte, et al v. SuperValu, Inc. (No. 21-1326) and United States ex rel. Thomas Proctor v. Safeway, Inc. (No. 22-111) had the potential to radically change the federal government’s primary anti-fraud statute. Under the FCA, a defendant is liable for submitting a false claim for payment to the government only if it knew its claims were false. The statute defines “knowing” as actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the claim.

The Court accepted review of the two Seventh Circuit decisions to determine whether the established FCA knowledge standard should be altered to shift focus away from a defendant’s contemporaneous subjective belief if the defendant’s actions represented an objectively reasonable interpretation of a compliance obligation.

The case presented a situation in which the evidence indicated that retail pharmacy chains knew their discounted drug prices were their “usual and customary” prices—defined as the cash price charged to the general public—and took steps to prevent Medicaid and Medicare from finding out, thus collecting more from public payors than they believed they were entitled to.

The Court overturned the Seventh Circuit’s holding that the defendant pharmacy chains could evade FCA liability so long as they were able to offer an objectively reasonable regulatory interpretation for their conduct after the fact—even if they knew that interpretation was not true when the claims were made.

Writing for the full Court, Justice Thomas emphasized that the core focus must remain on the defendant’s thought-process as it submitted the false claims, finding that the FCA’s “scienter element refers to [the defendants’] knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”

The Government and others had warned that a contrary ruling by the Supreme Court—to uphold the Seventh Circuit’s decision—could have led to pervasive changes in healthcare and government contracting, as companies would have been able to defend against an FCA claim by asserting that their conduct was “objectively reasonable,” even if the company actually knew its claims were false, or deliberately ignored or recklessly disregarded a substantial risk of falsity.

At oral argument in April, counsel for petitioners argued that upholding the Seventh Circuit’s decision would allow defendants to “escape liability” because they could interpret an unclear statute in whatever manner would best benefit them, and, after they faced liability, hire counsel to develop an after-the-fact rationale for the “reasonableness” of their interpretation.

In response to this concern, Justice Thomas wrote that the FCA’s scienter determination must center on defendants’ beliefs at the time they submitted their claim, and not on whether there may be “post hoc interpretations that might have rendered their claims accurate.”

Feldesman Tucker Leifer Fidell attorneys continue to review the significance of the Supreme Court’s decision and the impact it may have on recipients of federal funds. Attorneys Mindy B. Pava and Rosie Dawn Griffin, who assist federal grantees in investigations and litigation involving potential False Claims Act liability, will provide deeper insight into the decision via a webinar on Thursday, June 15 at 3 p.m. EDT entitled “False Claims Act Liability and Risk for Federal Grantees.” To register for our webinar, please visit the FTLF Learning Center.