Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Fraud, Deception and False Claims, Government Contracts

Supreme Court Clarifies the False Claims Act’s Knowledge Requirement, Eliminating a Potential Defense for Government Contractors and Healthcare Providers Accused of Fraud

On June 1, 2023, the Supreme Court unanimously ruled in favor of whistleblower plaintiffs (referred to as “relators”) in consolidated False Claims Act (“FCA”) cases in a decision that clarified the application of the FCA’s knowledge requirement.  In United States ex rel. Schutte v. SuperValu Inc., the Court held that the FCA reaches defendants who knew that the claims they submitted were fraudulent, even if they subsequently offered an “objectively reasonable” interpretation of an ambiguous legal or contractual requirement material to the government’s payment decision.  McGuireWoods previously reported that the Supreme Court’s resolution of the case and the underlying circuit split was set to be significant.

In a concise ruling (with no concurring or dissenting opinions), Justice Thomas’s opinion interpreted the FCA’s knowledge requirement in a manner that is more favorable to relators and prosecutors, while foreclosing a line of defense for FCA defendants that several courts had previously allowed.

The FCA provides for liability for a defendant that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”[1]  “Knowingly” is defined in the statute as acting with (1) “actual knowledge” of the falsity, (2) “deliberate ignorance of the truth,” or (3) “reckless disregard of the truth.”[2]  In the consolidated cases before the Court, the Seventh Circuit held that the defendants, which own and operate retail pharmacies, had not “knowingly” presented false claims for reimbursement because they had offered in litigation “objectively reasonable” (if not accurate) interpretations of the complex Medicare and Medicaid prescription drug pricing schemes at issue (involving accurate reporting of “Usual and Customary” pricing to government payors) that would have rendered their claims true.  The Seventh Circuit reasoned, consistent with several other circuits, that even if a defendant’s statements are false under the best interpretation of an ambiguous provision, the defendant does not “knowingly” present false statements if there exists “an objectively reasonable reading of the statute or regulation” under which the statement was true.[3]  In making that determination, the Seventh Circuit concluded, “a defendant’s subjective intent does not matter for [the FCA’s] scienter analysis—the inquiry is an objective one.”[4]

The Supreme Court unanimously rejected the Seventh Circuit’s interpretation of the FCA, emphasizing that “[w]hat matters for an FCA case is whether the defendant knew the claim was false,” because “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”[5]  In other words, the inquiry into the knowledge element of the FCA should “focus primarily on what the respondents thought and believed” when they submitted “the false claim[s]—not what the defendant[s] may have thought after submitting” them or “post hoc interpretations that might have rendered the claims accurate.”[6]

In so ruling, the Court rejected the Seventh Circuit’s reliance on the Supreme Court’s 2007 interpretation of the Fair Credit Reporting Act’s knowledge standard in Safeco Insurance Co. v. Burr.[7]  The Supreme Court first explained that the Safeco Court interpreted “a different statute, the [Fair Credit Reporting Act], which had a different mens rea standard, ‘willfully.’”[8]  While that interpretation referenced the “knowing” and “reckless” standards that also apply in the FCA, the decision was not meant to “establish[] categorical rules for those terms.”[9]  The Court also explained that its Safeco decision itself “did not purport to set forth the purely objective safe harbor that respondents invoke.”[10]  Instead, Safeco held that recklessness “encompassed actions involving ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’”[11]  “By a similar token here,” the Schutte Court refused to consider “legal interpretations that respondents did not believe or have reason to believe at the time they submitted their claims.”[12]

The Court’s rejection of the “objectively reasonable” standard under the FCA is a clear win for prosecutors and relators.  The Court’s holding will bolster FCA enforcement by removing an argument previously available to FCA defendants in several jurisdictions.  Moreover, while the existence of an “objectively reasonable interpretation” of an ambiguous regulatory provision or contract term in an FCA case may be ripe for resolution as a matter of law in a motion to dismiss or an early summary judgment motion, determining a defendant’s subjective intent is a fact-intensive inquiry that is generally unsuitable for early resolution.  Meaning, defendants are less likely to win early dismissals of complaints and will be forced to bear the costs and burdens of discovery and protracted litigation to resolve questions regarding what the defendant “thought and believed” when they submitted the claim.  And even beyond the FCA, the Court’s narrow description of the Safeco standard may also strengthen the federal government’s fraud enforcement efforts more broadly.

All is not lost for government contractors and healthcare providers, though.  There is some helpful language in Justice Thomas’s opinion that future defendants will cite to in arguing they had a good faith, if mistaken, interpretation of the vague terms at issue.  Furthermore, the Court suggested that even some objectively unreasonable interpretations may escape liability if the defendant believed they were accurate:  “The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”[13]  Putting the focus primarily on what the defendant thought or knew at the time, as opposed to an arguably more reasonable interpretation, will aid some defendants in future cases.

Companies that transact with the government can take prophylactic steps to protect against future FCA suits by making (and documenting) good faith efforts to reasonably interpret and comply with legal and contractual provisions.  The Court’s focus on subjective intent will aid those defendants who document their efforts to fairly interpret and comply with relevant provisions at the time they submit their claims.

Please contact the authors if you have any questions regarding the FCA and other government-contractor or healthcare-related enforcement or compliance concerns.

About McGuireWoods’ Government Investigations & White Collar Litigation Department

McGuireWoods’ Government Investigations & White Collar Litigation Department, which includes members of the Government Contracts team, is a nationally recognized team of more than 80 attorneys representing Fortune 100 and other companies and individuals in the full range of civil and criminal investigations and enforcement matters, including litigation and action under the False Claims Act. Our False Claims Act team includes former federal prosecutors, and experienced civil and white collar criminal litigators with experience in this unique area of law. We also tap attorneys from the firm’s other practice groups and our subsidiary McGuireWoods Consulting LLC. Strategically centered in Washington, D.C., our Government Investigations & White Collar Litigation Department has been honored as a Law360 Practice Group of the Year and earned the trust of international companies and individuals through our representation in some of the most notable enforcement matters over the past decade. For more information on our False Claims Act practice, download our brochure: False Claims Act Investigations, Litigation and Enforcement.

About McGuireWoods’ Government Contracts Team

The Government Contracts team at McGuireWoods has decades of collective experience assisting contractors and subcontractors in government contracting, including the navigation of proposal submission and compliance issues. Based strategically in the Washington, D.C., area, our full-service practice leverages McGuireWoods’ strong defense and national security credentials at every step in the procurement process. Our attorneys counsel clients ranging from small businesses to the nation’s largest government contractors on issues arising under the Federal Acquisition Regulation and its agency-specific supplements, and our team regularly assists clients in negotiating significant federal contracts and contract modifications.

We also have the deep experience necessary to defend our clients’ interests in bid protests, in litigation with the government and other contractors, and in investigations and regulatory enforcement actions involving a wide range of federal and state agencies, inspectors general, and law enforcement personnel. We provide these services to clients operating in a broad variety of industries and sectors, including defense, national and homeland security, intelligence support, technology, construction, healthcare, aerospace and energy.

About McGuireWoods’ Healthcare Team

With a team of more than 55 experienced, industry-focused lawyers, McGuireWoods’ Healthcare Department helps clients address ongoing, day-to-day obstacles and create new models for delivering healthcare services in the United States and abroad. Our healthcare group and individual lawyers are ranked by Chambers USABest Lawyers in AmericaLegal Elite and Super Lawyers as among the top legal providers in the nation. We represent clients from all sectors of the healthcare industry, as well as investors in healthcare-related transactions.

[1] 31 USC § 3729 (a)(1).

[2] 31 USC § 3729 (b)(1).

[3] United States v. SuperValu Inc., 9 F.4th 455, 468 (7th Cir. 2021), cert. granted sub nom. United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 644 (2023), and vacated and remanded sub nom. United States ex rel. Schutte v. SuperValu Inc., No. 21-111, 2023 WL 3742577 (U.S. June 1, 2023).

[4] Id. at 470.

[5] United States ex rel. Schutte v. SuperValu Inc., No. 21-111, slip op. at 2, 8 (June 1, 2023).

[6] Id. at 10–11.

[7] Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007).

[8] SuperValu, slip op. at 13 (quoting Safeco, 551 U.S. at 52).

[9] Id.

[10] Id. at 14.

[11] Id. (quoting Safeco, 551 U.S. at 68).

[12] Id.

[13] Id. at 8.

Fraud, Deception and False Claims

New York Pharmacy Owners Indicted for Alleged Healthcare Fraud Scheme

On May 2, the U.S. Department of Justice announced the indictment of two New York state pharmacy owners for their participation in an alleged $29 million healthcare fraud scheme. They face charges of conspiracy to commit healthcare fraud, conspiracy to commit money laundering and conspiracy to pay illegal healthcare kickbacks and bribes.

Read on for analysis of the case and takeaways for healthcare providers and pharmacies.

Fraud, Deception and False Claims

7th Circuit Sides With Insured Party Seeking Coverage for False Claims Act Settlement

On May 3, the 7th U.S. Circuit Court of Appeals sided with the policyholder, resolving an insurance coverage dispute over a $100 million settlement related to claims under the federal Anti-Kickback Statute and the federal False Claims Act.

Read on for analysis of this decision, which tries to clarify the difference between compensatory damages, which may be covered by insurance under Illinois law, and restitutionary damages, which generally are not.

Securities and Commodities

FINRA Enforcement Previews Initial CAT Enforcement Philosophy

On May 18, 2023, during an “Ask FINRA Senior Staff” panel held as part of FINRA’s 2023 Annual Conference, Christopher Kelly, Acting Head of FINRA Enforcement, provided a first look into how FINRA Enforcement intends to address CAT reporting violations as the industry nears the three-year anniversary of the first Phase of CAT go-live and ahead of any published enforcement activity to date.

Continue Reading

Securities and Commodities

Update on FINRA’s Use of CAT Data – They Are “Just Scratching the Surface”

During FINRA’s 2023 Annual Conference held on May 16-18, 2023, several panels provided insight into how FINRA is currently using CAT data for market surveillance and how FINRA plans to use the data going forward to both develop more sophisticated surveillance reviews and further promote industry-wide efficiencies. 

Continue Reading

Securities and Commodities

FINRA Continues to Prioritize Compliance with CAT Reporting

On May 17, 2023, as part of FINRA’s 2023 Annual Conference, staff from FINRA’s Market Regulation and Member Supervision Departments, along with representatives from FINRA CAT, participated in a panel entitled “Consolidated Audit Trail (CAT): What You Need to Know.”[1] 

Continue Reading

Energy Enforcement

McGuireWoods Releases Update to One-of-a-Kind FERC Enforcement Reporter

Over the past year, there have been major Federal Energy Regulatory Commission developments as more cases moved from the agency to adjudication in the courts. McGuireWoods’ update to its innovative FERC Enforcement Reporter — led by lawyers Carrie Mobley and Corban Coffman — organizes energy enforcement cases from 2005 to present by topic and presents the information in an easy-to-use index format.

The FERC Enforcement Reporter, a web-based tool, consists of an alphabetical index of key terms with citations to cases in which FERC discussed or applied the term in a significant way. McGuireWoods partners Todd Mullins and Noel Symons created the reporter in 2015.

Users can sign up for access to the FERC Enforcement Reporter.

Fraud, Deception and False Claims

Ophthalmic Distributor May Face $848M in Penalties for Kickbacks, False Claims Act Violations

On Feb. 28, a federal jury in the District of Minnesota found the Cameron-Ehlen Group, d/b/a Precision Lens, and its founder and owner guilty of paying kickbacks to ophthalmic surgeons in violation of the False Claims Act and Federal Anti-Kickback Statute between 2006 and 2015.

Read on for details about this case, which illustrates the risks medical device manufacturers and distributors can incur without an effective compliance program.

Enforcement and Prosecution Policy and Trends

U.S. Department of Education Launches Secret Shoppers Program to Investigate Colleges and Universities

Federal Student Aid’s Office of Enforcement announced a “secret shoppers” program to evaluate a college or university’s recruitment, enrollment, financial aid and other practices. The secret shoppers program will focus on student recruitment and enrollment practices, which may include the practices of online program managers.

Read on for details about this initiative, including types of practices that present red flags, and recommended next steps for colleges and universities.

Financial Institution Regulation

Silvergate, Silicon Valley Bank, Bank Receiverships in General, and Payroll Regulatory Challenges

In the wake of Silvergate’s collapse, Silicon Valley Bank entering receivership and another bank following in SVB’s footsteps, startups and other companies directly affected by these events are struggling to manage their payroll and other obligations while credit facilities are frozen. Although depositors likely will be fully protected and most businesses can expect to avoid the brunt of this banking crisis, some employers still may face tough decisions.

Read on to learn about state and federal law considerations and recommended next steps for employers.

We use cookies to enhance your experience of our website. By continuing to use this website, you agree to the use of these cookies. For more information and to learn how you can change your cookie settings, please see our policy.