Fourth Circuit Adopts Objective Reasonableness Standard In Determining Scienter Element Of The False Claims Act

• Published date: 22 February 2022
• Subject Matter: Government, Public Sector, Food, Drugs, Healthcare, Life Sciences, Government Contracts, Procurement & PPP, Food and Drugs Law
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Edward Arnold

The Fourth Circuit, in United States ex rel. Sheldon v. Allergan Sales, LLC, No. 20-2330, 2022 WL 211172 (4th Cir. Jan. 25, 2022) recently upheld the dismissal of False Claims Act ("FCA") lawsuit brought by a quit tam relator ("Relator") against his employer, Forest Laboratories, LLC ("Forest") alleging that Forest engaged in a fraudulent price reporting scheme under the Medicaid Drug Rebate Statute ("Rebate Statute").¹

Notably, the Fourth Circuit adopted the US Supreme Court's decision in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) in holding that the scienter element of the FCA is subject to an "objective reasonableness" standard, where a defendant can defeat FCA liability by establishing that its interpretation of the applicable statute or regulation was objectively reasonable and that no authoritative guidance from a court or agency could have "warned defendant away" from that interpretation. Just last year, the Seventh Circuit adopted this standard in U.S. ex rel. Schutte v. SuperValu Inc., joining the Third, Eighth, Ninth, and DC Circuits in holding the same.

At issue in Sheldon was the reasonableness of Forest's interpretation of the Rebate Statute in determining how it calculated certain discounts given to separate customers for purpose of reporting its "best price" to the government. The District Court dismissed the complaint on the basis that Forest's reading of the Rebate Statute was "objectively reasonable," there was no authoritative guidance to the contrary, and thus Forest did not act "knowingly" under the FCA. The Fourth Circuit affirmed.²

The FCA

The FCA applies to those who knowingly submit false or fraudulent claims for payment to the federal government.^[3] To this end, the FCA creates liability for any person who, inter alia, "(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim."^[4] Thus, the party alleging an FCA violation must prove: (1) defendant made false statements or engaged in a fraudulent course of conduct; (2) with the requisite knowledge; (3) the statements or conduct were material; and (4) caused the government to pay out money or to forfeit monies due on a "claim."^[5] The FCA defines several of its terms'"claim,"^[6] "knowingly,"^[7] and "material"^[8]'however, it does not define what is "false" or "fraudulent."

The Medicaid Rebate Statute

Medicaid offers federal financial assistance to states that reimburse certain medical expenses for eligible individuals, a well-known component of which includes prescription drugs.⁹ To ensure that Medicaid receives the "best price" from a manufacturer that it would otherwise sell its prescription drugs to a public or private purchaser, Congress enacted the Rebate Statute.¹⁰ Participating manufacturers are required to execute Rebate Agreements with Secretary of Health and Human Services ("HHS"), provide quarterly rebates to states, and report its "Average Manufacturer Price" and its "Best Price" for covered drugs to the Centers for Medicare & Medicaid Services ("CMS").¹¹ Thus, whatever rebate is provided to the state by the manufacturer, the payments by the Federal Government are reduced by the same amount.¹² Both the Rebate Statute and the CMS regulations define the "Best Price" to essentially include the lowest price the manufacturer sells its drugs to institutions and governmental entities. Due to Medicaid's complexity, both the Rebate Agreement and the CMS regulations provided for the ability of manufacturers to make reasonable...