Supreme Court Unlikely to Tighten Scienter Requirements in FCA Case Argued Today
By: Martin Bienstock
The United States Supreme Court heard argument today on the question of whether a defendant who acted with the intention of violating the law, and who did in fact violate the law, can nevertheless escape liability under the False Claims Act. Such a get-out-of-FCA-liability-free card would potentially be available to malefactors if its attorneys could identify an objectively reasonable (but incorrect) interpretation of the law under which the defendants’ actions were lawful.
The upcoming decision, in the case of United States ex rel. Schutte v. SuperValu, Inc., has the potential significantly to limit the scope of permissible claims under the FCA in cases involving “legal falsity,” i.e., where claims were fraudulent because they fail to meet statutory requirements. The case should have a more limited impact on claims involving factual falsity, i.e., where the defendant submitted factually fraudulent information to generate increased government payments.
A decision almost certainly will issue in this case by the end of June. While the Chamber of Commerce and other business interests advocate adopting the narrower approach to FCA liability, we believe that the Supreme Court will reject the “objectively reasonable” defense in the case where a defendant understood the law correctly and intended to violate it. Until the Supreme Court provides its guidance, we will continue drafting our pleadings in a manner that satisfies even the more stringent Seventh Circuit requirements. A Scotusblog summary of the case before the Supreme Court is available here, and an article by Reuters is here.
The Supreme Court case arises out of two separate qui tam actions, both brought by former employees of retail grocery stores. The relators allege that the defendants violated the False Claims Act by overcharging the federal government for products purchased under the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program. Specifically, the relators claim that the defendants charged the government more than the prices they charged other customers for the same products, and that they failed to pass on certain discounts to the government as required by the program.
The district court dismissed the complaints in both cases, holding that the relators had failed to allege sufficient facts to show that the defendants acted with the required level of scienter. The district court held that the False Claims Act requires a showing of “specific intent” or “knowing” conduct, rather than mere negligence or recklessness.
On appeal, the Seventh Circuit affirmed the dismissal of the complaints. It held that the FCA requires that the alleged violation be based on a “well-established interpretation of the relevant law” in order to meet the scienter requirement.
Arguments by the Parties
Relators argue that the Seventh Circuit’s decision is incorrect and conflicts with other circuit court decisions. They contend that the FCA’s scienter requirement only requires the defendant to have acted with knowledge that its actions were unlawful, not that the actions were based on a well-established interpretation of the relevant law. In support of realtors, the Department of Justice also argued that the Seventh Circuit’s rule imposes an unnecessary burden on relators to show that a defendant had actual knowledge of a well-established interpretation of the relevant law in order to satisfy the scienter requirement.
The government’s view is that the FCA’s scienter standard is met where a person: (1) subjectively believes that a claim is false; (2) recognizes a substantial risk that the claim is false but deliberately avoids taking readily available steps to obtain clarification; or (3) knows or should know that the claim is probably false but acts with reckless disregard of that danger. Otherwise, a bad actor that knows it is acting illegally could escape liability if its attorneys later identified a loophole that might theoretically have applied.
The respondents argue that the Seventh Circuit’s decision is correct and in line with the purpose of the FCA. They contend that a well-established interpretation of the relevant law is necessary to show that the defendant had the required knowledge of the unlawfulness of its actions. The respondents also argue that the FCA’s scienter requirement is intended to deter fraudulent conduct, and that the Seventh Circuit’s rule supports that goal by requiring a higher standard of knowledge.
Impact on FCA Cases
The Supreme Court’s decision in this case could have a significant impact on how FCA cases are pleaded and litigated. If the Supreme Court agrees with the Seventh Circuit and holds that a well-established interpretation of the relevant law is necessary to satisfy the scienter requirement, then relators may have a harder time bringing FCA cases based on legal theories or interpretations that might be reasonably clear but subject to some ambiguity or dispute. This could also make pre-discovery dismissal more likely, since an objective reasonableness defense could preclude liability even in the face of wrongful intent.
Schutte has the potential to shape the future of False Claims Act litigation involving legal falsity. In those cases, the Supreme Court’s decision could have a significant impact on how plaintiffs draft their complaints and how defendants defend against False Claims Act allegations. While the outcome of the case is uncertain, the fact that both the Biden administration’s Solicitor General and Senator Grassley support a broad interpretation of the Act, combined with the approved lawlessness suggested by the Seventh Circuit’s approach, strongly suggests that the Court ultimately will reverse the Seventh Circuit’s decision and adopt a broader view of the Act.
In the interim, we will continue to draft False Claims Act complaints designed to satisfy even the Seventh Circuit’s more rigorous standard.