Fourth Circuit Joins Other Circuits Recognizing Safeco 'Objectively Reasonable Interpretation' Standard As FCA Defense

• Published date: 22 March 2022
• Subject Matter: Litigation, Mediation & Arbitration, Food, Drugs, Healthcare, Life Sciences, Trials & Appeals & Compensation, Food and Drugs Law
• Law Firm: Dinsmore & Shohl
• Author: Pablo Davis

In a defendant-friendly opinion, a split panel held that conduct based on an "objectively reasonable" reading of an ambiguous statute, absent contrary circuit court precedent or agency guidance, cannot constitute "knowing" misconduct under the False Claims Act.

In United States ex rel. Sheldon v. Allergan Sales, LLC, a split Fourth Circuit panel affirmed the dismissal of a non-intervened qui tam, or whistleblower, action alleging fraudulent price reporting by a drug manufacturer to Medicaid in violation of the False Claims Act (FCA).¹ Relying on the Supreme Court's analysis of the Fair Credit Reporting Act's (FCRA) "analogous"² scienter provision in Safeco Insurance Company of America v. Burr ,³ the majority held that the defendant "did not act 'knowingly' under the [FCA]" because its reading of the relevant statute was "at the very least objectively reasonable" and because the defendant "was not warned away from that reading by authoritative guidance."⁴ In applying Safeco's scienter requirement in the FCA context,⁵ the court aligned with "every other circuit to consider the issue."⁶

Background and District Court Dismissal

The Medicaid Drug Rebate Statute is part of the complex landscape of federal Medicaid payments to states to help defray state spending on prescription drug reimbursements to low-income individuals.⁷ Under the statute, manufacturers must report pricing data for each prescription drug to the Centers for Medicare and Medicaid Services (CMS).⁸ That reporting includes 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.⁹

The defendant interpreted "Best Price" to mean the lowest price for the drug given to any individual customer net of discounts to that customer.¹⁰ The relator, in contrast, argued that the statute requires manufacturers computing "Best Price" to aggregate all discounts given to different customers, such as drug wholesalers, insurers, and pharmacies.¹¹ Under that view, not aggregating all discounts to multiple entities anywhere on the distribution chain in determining Best Price made defendant's invoices to Medicaid false claims under the FCA.¹²

To survive a Rule 12(b)(6) motion to dismiss, under the relevant FCA provisions, a plaintiff must plausibly plead four elements: (1) false statements or a fraudulent course of conduct, (2) made with the requisite knowledge, (3) that were material, and (4) that caused the government to issue payment.¹³ At issue in Allergan were the first two, falsity and scienter; the district court considered them together, focusing chiefly on scienter.¹⁴ This meant determining whether the relator adequately pled one of the three statutory definitions of "knowing" conduct: (1) actual knowledge, (b) deliberate ignorance, or (3) reckless disregard.¹⁵

Proving scienter in FCA actions alleging legal falsity can be particularly difficult where the statute or regulation in question is ambiguous.¹⁶ The district court, finding the Rebate Statute ambiguous, applied the two-step analysis laid out by the Third Circuit in Streck, asking (1) whether the defendant's interpretation of the ambiguity "was objectively []reasonable" and (2) even if it was reasonable, whether the defendant "was warned away from that interpretation by available administrative [or] judicial guidance."¹⁷ In light of the imprecisions and inconsistencies in the relevant statutory and regulatory texts, the court found that the defendant's interpretation was objectively reasonable,¹⁸ and that CMS did not "warn [the defendant] away" from that interpretation.¹⁹ Therefore, the district court found both falsity and scienter defeated, and granted the motion to dismiss.²⁰

Fourth Circuit Decision and Safeco

A divided panel of the Fourth Circuit affirmed, relying heavily on the Supreme Court's "objectively reasonable interpretation" test from Safeco concerning the FCRA's scienter provision, which the majority...