Supreme Court To Resolve Whether "Objectively Reasonable" Interpretation Of Legal Obligation Insulates Defendants From False Claims Act Liability

• Jurisdiction: United States,Federal
• Law Firm: Seyfarth Shaw LLP
• Subject Matter: Litigation, Mediation & Arbitration, Food, Drugs, Healthcare, Life Sciences, Criminal Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Edward Arnold and Jesse Coleman
• Published date: 25 January 2023

On January 13, 2023, the United States Supreme Court granted certiorari on a pair of hotly contested Seventh Circuit decisions, paving the way for a decision that will dramatically impact the way in which courts determine liability under the False Claims Act ('FCA'). Specifically at issue is whether the Court's 'objectively reasonable' scienter standard for reading a statute or regulation applies to FCA cases, thereby insulating defendants from liability (even when such a reading ultimately turns out wrong), or whether a defendant's contemporaneous subjective understanding of the law or regulation, and its conduct, are relevant to whether it 'knowingly' violated the FCA. At issue in particular is application of the Supreme Court's 2007 Safeco decision (discussed infra) to FCA cases where the basis of the claim turns on the interpretation of a legal obligation, rather than a defendant's factual understanding.

Background on FCA

The FCA applies to those who knowingly submit false or fraudulent claims for payment to the federal government.¹ 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.'² 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.'³ The FCA defines several of its terms'claim,'⁴ 'knowingly,' ⁵ and 'material'⁶'however, it does not define what is 'false' or 'fraudulent.'

Safeco scienter standard and its application to the False Claims Act

The scienter element of the FCA is established in three ways'actual knowledge, 'acting in deliberate ignorance,' or 'acting in reckless disregard.' Actual knowledge is 'subjective knowledge,' while deliberate ignorance is 'the kind of willful blindness from which subjective intent can be inferred' and reckless disregard is 'an extension of gross negligence, or gross-negligence-plus.'⁷ The Supreme Court noted in Universal Health Servs., Inc. v. United States, 579 U.S. 176, 136 S. Ct. 1989, 2001, 195 L. Ed. 2d 348 (2016) ('Escobar') that the scienter element of the FCA is a 'rigorous' requirement. Noting that, although the FCA defines 'knowingly' to include actual knowledge, deliberate ignorance, and reckless disregard, the FCA does not provide guidance as to how these terms apply in situations where a defendant has the subjective belief that it complied with a statute or regulation.

To compensate for this gap in the statute, many circuit courts confronted with this issue have turned to the Supreme Court's scienter analysis in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) ('Safeco'), which, in interpreting the scienter requirement under the Fair Credit Reporting Act ('FCRA'), requires a finding that a defendant acted 'willfully' to support a violation of the statute. The Supreme Court then determined that 'willfully' under the FCRA includes both (1) knowing and (2) reckless violations of the statute.⁸ The Supreme Court defined 'recklessness' as 'conduct violating an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known,'' and...