Supreme Court Unanimously Rejects “Objective Reasonableness” Defense to Whistleblower Claims

By: Martin Bienstock

The Supreme Court’s unanimous decision United States ex rel. Schutte v. SuperValu Inc., No. 21-111, 2023 WL 3742577 (U.S. June 1, 2023) has correctly been described as a boost for whistleblowers. It will benefit whistleblowers in a number of ways. It will make liability easier to impose, eliminate specious arguments that defense lawyers might make on behalf of their fraudster clients, and shorten the time in which relators can obtain a judgment.

At issue in Schutte was the interpretation of the term knowingly as used in the False Claims Act (FCA). A lawsuit filed under the FCA must show that the defendant knowingly submitted or contributed to a false claim. Knowingly is defined to include someone who has actual knowledge that the information is false; or acts in deliberate ignorance of the truth or falsity of the information; or acts in reckless disregard of the truth or falsity of the information. 31 U.S.C. § 3729(a)1), (b)(1). So, you can’t say I don’t want to learn whether this is true or false, and you can’t say I don’t care whether this is true or false. If you do, you’ve acted knowingly even if you don’t know the information is false, and can still be held liable.

The Schutte case involved a law that required health care providers to charge Medicare and Medicaid their lowest usual and customary rates. The defendants in that case had a list price for pharmaceuticals but offered a discounted price to anyone who requested it. The government interpreted usual and customary to mean the discounted rates; and the pharmacies understood it the same way. Yet the pharmacies still billed Medicare and Medicaid their rack rates instead of discounted rates.

The Seventh Circuit Court of Appeals dismissed the case because it held that the term usual and customary was ambiguous, and an objectively reasonable person could have interpreted it to mean the pharmaceutical companies’ rack rates, not its discounted rates. In its view, even though the claim was false, and even though the claimants understood the claim to be false, the claim was not knowingly false because an objectively reasonable person standing outside of the process might have mistakenly (but not fraudulently) made the same claim. This approach would have created opportunities for savvy lawyers to defend their clients’ fraud by finding ambiguities in the underlying laws applicable to the claim (such as usual and customary in the Medicare/Medicaid context) and using them as a basis to excuse the fraud. (The law says no; my client knew the law said no; but some other reasonable person might have thought the law says yes. Therefore, my client is not liable.)

The Supreme Court rejected this approach. It held that the FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed. United States ex rel. Schutte v. SuperValu Inc., No. 21-111, 2023 WL 3742577, at *6 (U.S. June 1, 2023). Under the Supreme Court’s decision, if the claim is false and you know, or should know, that it is false, you can be held liable.

The decision makes FCA claims more efficient in three ways. First, in cases falling directly within the ambit of Schutte, defendants will not be able to invoke the objective reasonableness defense. If the law says no, and the defendant understood it to mean no, then fraudulent activity is knowing under the statute.

Second, the decision forecloses expansion of the objectively reasonable standard to protect factually ambiguous fraud. Imagine a case in which a defendant fraudulently manipulated a formula to achieve a beneficial outcome, but the outcome still was objectively reasonable (that is, wrong but in a way that might have occurred through an honest mistake). Defense attorneys would likely have argued that the objectively reasonable standard at issue in Schutte would protect that fraud. The Supreme Court’s decision should preclude that argument.

Finally, the decision means that the government can obtain a judgment more quickly. In cases in which fraudulent intent could readily be proven, the objective reasonableness standard might form a basis on which a defendant could survive summary judgment and place the case before the jury. Even if the government prevailed, this would add time and expense to completing the case.

If you have questions about this decision or wish to speak to an attorney to discuss your whistleblower claim, please contact us.

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