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United States To Address Important Standard Under False Claims Act

January 27, 2023

Recently, the United States Supreme Court granted certiorari to two False Claims Act (“FCA”) cases to determine whether a defendant who acted with an “objectively reasonable” interpretation of the law can still be liable for “knowingly” breaking the law and submitting false claims to the government. The FCA defines “knowingly,” as acting with actual knowledge, deliberate ignorance, or reckless disregard. The Court will review two Seventh Circuit cases, U.S. ex. Rel. Schutte v. SuperValu, Inc. and U.S. ex. Rel. Proctor v. Safeway, Inc. for this critical question applicable to all who do business with the government or receive government funds. Relators have utilized ambiguous federal regulations to seek large damage awards for, at best, good faith actions by defendants. On the other hand, defendants often argue that their interpretation of certain requirements is reasonable to defeat the scienter requirement.

In Schuette and Proctor, the Seventh Circuit held that the defendants did not knowingly violate the FCA because their pricing practices followed an “objectively reasonable” interpretation of underlying requirements. For these consolidated cases, the Seventh Circuit followed the Supreme Court’s decision in Safeco Insurance Co. v. Burr, which held that a defendant could not have the requisite scienter to violate the Fair Credit Reporting Act if the law has “more than one reasonable interpretation,” the defendant acted in accordance with one of those interpretations, and no authoritative guidance warned the defendant away from the position it was taking. Under the Court’s holding, a defendant’s subjective intent is irrelevant as the standard is an objective one and a defendant does not need to show that they contemporaneously held the beliefs when engaging in the underlying conduct.

The majority of federal courts of appeals have applied Safeco in FCA cases. But relators have argued that extending this standard to FCA cases allows defendants to utilize after-the-law legal arguments to avoid liability and that other circuits have disagreed with the Seventh Circuit’s holdings. The relators in Schutte and Proctor have requested that the Supreme Court find that a defendant’s subjective understanding can show scienter even for ambiguous regulations or statutes.

To the extent that the Supreme Court follows the holdings in Schutte and Proctor, courts should not be able to find that ambiguous requirements can form the basis of an FCA claim. If the Supreme Court disagrees, it will be more difficult for defendants to argue that they lacked scienter through a motion to dismiss, even if the defendants’ conduct was “objectively reasonable.” This latter finding would likely increase the costs of litigation and ultimately leave the decision of whether a defendant acted with scienter to a jury.

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