The U.S. Court of Appeals for the Seventh Circuit recently joined the ranks of every other circuit court of appeal to have considered the issue in holding that the False Claims Act (FCA) requires an objective scienter standard. Under this standard, defendants who act under an incorrect interpretation of the relevant statute or regulation do not act “knowingly” under the FCA if both of the following are true:
- The interpretation was objectively reasonable.
- “Authoritative guidance” did not warn the defendant away from their interpretation.
Background on Objective Scienter Standard
The FCA imposes liability on those who “knowingly” submit false claims to the government. The term “knowingly” is statutorily defined to cover defendants who act with “actual knowledge,” “deliberate ignorance,” or “reckless disregard.”
In construing the scienter requirement of the Fair Credit Reporting Act (FCRA) in Safeco Insurance Co. of Am. v. Burr, which punishes “willful” violations, the Supreme Court analyzed the common-law definition of that term and noted that willfulness as a statutory condition of civil liability has generally been understood to cover both knowing and reckless violations of a standard. The Court then held that a defendant interpreting an ambiguous statute or regulation did not act with “reckless disregard” where their interpretation was objectively reasonable and no authoritative guidance warned them away from their interpretation.
The Court found it significant that the defendant did not have the benefit of guidance from the courts of appeals or the Federal Trade Commission—the agency in charge of enforcing the FCRA—that “might have warned it away from the view it took.” The Court further observed that the argument that “evidence of subjective bad faith can support a willfulness finding even when the company’s reading of the statute is objectively reasonable” was unsound.
Seventh Circuit Holds Safeco Scienter Standard Extends to FCA
In United States ex rel. Schutte v. SuperValu, Inc., the relators alleged that from 2006 to 2016, SuperValu knowingly submitted to Medicare Part D and Medicaid false reports of its’ pharmacies’ “usual and customary” drug prices (U&C price). SuperValu’s reports listed its pharmacies’ retail cash prices—the price for uninsured cash customers—as its U&C price, rather than lower, price-matched amounts charged to qualifying customers under its discount program. Relying on Seventh Circuit precedent from 2016, the district court granted partial summary judgment for the relators on the issue of falsity, holding that SuperValu’s lower, price-matched prices fell within the definition of U&C price and that SuperValu should have reported them. On the question of scienter, however, the district court applied the Safeco standard to the FCA and held that SuperValu did not meet it.
The Seventh Circuit affirmed. Reasoning that the scienter provision of both the FCRA and FCA incorporates the common law definition of what it means to act “knowingly,” the Seventh Circuit extended Safeco’s decision in the FCA context. SuperValu argued that, during the relevant period, the relevant U&C price requirements did not clearly require it to report its discount program prices because those were not prices charged to the “general public.” The Seventh Circuit agreed, finding SuperValu’s interpretation of the regulatory definition of U&C price was an objectively reasonable one and no authoritative guidance existed at the time it submitted its reports to warn it away from that interpretation.
Although the Seventh Circuit declined to weigh in on the precise contours of the meaning of “authoritative guidance,” it concluded based on Safeco that such guidance, at a minimum, “must come from a governmental source—either circuit court precedent or guidance from the relevant agency” and “must have a high level of specificity to control an issue.” On the reasonableness prong, the court held that the inquiry is a question of law that must be “tethered” to the underlying legal text, not the clarity of a statute or regulation’s policy objective.
The Seventh Circuit further held that subjective intent is “irrelevant” to the FCA’s scienter inquiry and that while the FCA’s scienter provision is defined via three distinct definitions, a failure to establish the Safeco standard precludes liability under any of the three components—actual knowledge, deliberate indifference, or reckless disregard. As the court explained, “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.”
With this decision, the Seventh Circuit became at least the fifth circuit court to hold that Safeco’s objective scienter standard extends to the FCA. This ruling provides an important backstop on otherwise expansive FCA liability and is particularly important in the highly-regulated healthcare industry, where obligations are often alleged to be governed by “less-than-pellucid” texts and FCA actions historically have been brought based on failure to comply with non-binding guidance documents.
For more information about the FCA’s scienter requirement, contact the author or download Bass, Berry & Sims’ Healthcare Fraud & Abuse Review.