DOJ To Join Oral Argument In En Banc Rehearing Of Fourth Circuit Case On 'Objectively Reasonable' Defense

• Published date: 12 September 2022
• Subject Matter: Intellectual Property, Litigation, Mediation & Arbitration, Patent, Trials & Appeals & Compensation
• Law Firm: Dinsmore & Shohl
• Author: Mr Patrick M. Hagan and Pablo Davis

Next week, the full Fourth Circuit will hear oral argument in US ex rel. Sheldon v. Allergan Sales, LLC to determine whether a defendant's"objectively reasonable interpretation" of an ambiguous statute or regulation is sufficient to preclude a finding of intent under the FCA. Defendants and the entire FCA bar will be watching the case closely.

The Fourth Circuit will consider a critical issue for False Claims Act (FCA) defendants'whether an objectively reasonable interpretation of a statute or regulation, even if erroneous, is a defense under the FCA. In United States ex rel. Sheldon v. Allergan Sales, LLC,¹ a split panel aligned with "every other circuit to consider the issue"² and held that the defendant drug manufacturer "did not act 'knowingly'" because its reading of the relevant statute was "objectively reasonable" and no U.S. circuit court case or other "authoritative guidance" warned it otherwise.³ In May, the Fourth Circuit granted rehearing en banc, and next week, it will hear oral argument with the Department of Justice (DOJ) participating.⁴ The FCA bar will be watching the argument closely for signs of whether the full Fourth Circuit will follow other circuits in applying an objective test for intent.

Background and District Court Dismissal

The relator (or qui tam plaintiff) alleged the defendant violated the Medicaid Drug Rebate Statute by improper price reporting and sought single damages of over $680 million.⁵ The statute requires manufacturers to report pricing data to the Centers for Medicare and Medicaid Services (CMS) for each prescription drug they make.⁶ That includes reporting the "Best Price" at which the manufacturer sells the product "to any purchaser in the United States," including "prices to wholesalers, retailers, [nonprofits], or governmental entities" and net of rebates and other discounts.⁷ The defendant read "Best Price" to mean the lowest price charged for a drug to any one customer, net of discounts to that customer;⁸ the relator contended that the calculation must aggregate all discounts given to different customers'and that not doing so made the manufacturer's invoices to Medicaid false claims under the FCA.⁹

The district court focused its analysis mainly on scienter'the FCA's knowledge element,¹⁰ which can be satisfied by (i) actual knowledge, (ii) deliberate ignorance, or (iii) reckless disregard.¹¹ The court found the Rebate Statute ambiguous,¹² and then applied a two-step test.¹³ In the first step, the court found defendant's interpretation of the statute "not . . . objectively unreasonable,"¹⁴ and in the second step found defendant was not "warn[ed] . . . away" from that interpretation by CMS.¹⁵ Accordingly, the court found falsity and scienter defeated, and granted the motion to dismiss.¹⁶

Fourth Circuit Decision

A divided Fourth Circuit panel affirmed, relying largely on Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), a case in which the Supreme Court endorsed an "objectively reasonable interpretation" test for intent under the Fair Credit Reporting Act (FCRA).¹⁷ In particular, the majority drew on Safeco's treatment of the FCRA's "willfulness" requirement, which the Supreme Court interpreted to include not just "knowing" misconduct but also "reckless disregard."¹⁸ Therefore, under both the FCA and the FCRA, "reckless disregard" is the lowest level of culpability that is actionable.¹⁹...