Evenly Divided En Banc Fourth Circuit Upholds District Court’s Dismissal in Sheldon After Hearing Addressing FCA’s Falsity And Knowledge Requirements

Evenly Divided En Banc Fourth Circuit Upholds District Court’s Dismissal in Sheldon After Hearing Addressing FCA’s Falsity And Knowledge Requirements

September 26, 2022, Covington Alert

On Friday, September 23, 2022, an en banc Fourth Circuit Court of Appeals issued an order affirming, by an equally divided court, the district court’s grant of dismissal with prejudice in an important case concerning the “knowledge” element of the False Claims Act—United States ex rel. Sheldon v. Allergan, No. 20-2330.  The 7-7 split of the en banc court is just the latest significant development in the line of cases considering the application of the U.S. Supreme Court’s Safeco scienter standard to False Claims Act cases.

As Covington has reported in the past, this appeal concerned questions related to the scope of the False Claims Act’s “knowledge” requirement. In its January 25, 2022 decision, the Fourth Circuit upheld the district court’s dismissal, finding that under the FCA “a defendant cannot act ‘knowingly’ as a matter of law if it bases its actions on an objectively reasonable interpretation of the relevant statute when it has not be warned away from the interpretation by authoritative guidance” and that “this objective standard precludes inquiry into a defendant’s subjective intent.”  United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 348 (4th Cir. 2022). That opinion was also subject to a strong dissent by Judge Wynn, which argued that the majority opinion disregarded two of the three FCA’s enumerated forms of knowledge (actual knowledge and deliberate ignorance), focusing only on the Safeco test for objective recklessness.

At the September 15 en banc hearing, the Fourth Circuit was active, posing numerous questions for both parties during the oral argument, which spanned approximately 94 minutes. The audio recording of this hearing is available here.

Counsel for the government went first, having moved to participate in oral argument despite declining to intervene in the case.  The government began by arguing that the “fundamental point” at issue was that the court’s application of the Safeco standard would allow defendants to escape liability under the FCA even if they actually intended to defraud the government, or acted with deliberate indifference to the falsity of claims submitted, so long as their lawyers develop an after-the-fact basis to claim that the conduct at issue was objectively reasonable.  The government also disputed one judge’s view that the “judicial drift” clearly favors application of Safeco to FCA cases by noting that only one of the other circuit court decision was decided at the motion to dismiss stage (United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) (available here)).  In addition, the government argued that a contrary outcome was required by the 2016 decision Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93 (2016), which declined to apply Safeco when interpreting the scienter standard of the Patent Act.

The relator’s counsel also emphasized that this case was determined at the motion to dismiss stage, arguing that it was entirely possible that discovery would show that the allegations in the complaint concerning deliberate ignorance of the law were fully supported.  At least one judge appeared to agree, stating that a defendant should not be able to stick its head in the sand and then claim after the fact that its actions had been objectively reasonable.

One judge queried whether the relator was asking the court to rule that Safeco does not apply to the FCA at all.  Counsel responded that it was not necessary to make such a ruling, as the key question was whether a defendant can be liable on the alternative basis of actual knowledge or deliberate ignorance even if the recklessness standard was not met.

The judges also closely questioned the relator’s counsel about whether the statute was ambiguous as to whether it prohibited the alleged method of calculating average manufacturer price (AMP). Several judges stated that if the underlying statute unambiguously permitted the defendant’s actions, then it would be irrelevant whether agency rules or guidance materials suggested a contrary position. However, the relator’s counsel argued that the statute was at minimum ambiguous as to whether it permitted the activity in question, and that deference was owed to CMS in light of that ambiguity.

Counsel for the defendant argued first that there was no falsity because the statute and regulations did not prohibit the actions alleged.  Pushing this argument a step farther, several judges, including Judge Niemeyer, asked questions that suggested agreement with the district court that it was not possible for actions to be “objectively false” if they were supported by a reasonable interpretation of the law. 

As to knowledge, the defendant’s counsel argued at length that the previous Court of Appeals decision had gotten the issue right by finding – with numerous other circuit courts that have addressed the issue – that Safeco’s objective reasonableness requirement applies under the FCA.  Addressing a question from the court, the defendant’s counsel emphasized that the governing regulations allow the government to recover its money if it makes a payment based on an accidental or good faith violation of a legal requirement.  However, the FCA is only intended to apply to cases of fraud, which requires a more serious level of culpable behavior.

Judge Wynn in particular emphasized arguments made by Senator Grassley in an amicus brief in support of a pending petition for certiorari of the Seventh Circuit’s SuperValu decision, which argued that courts applying Safeco have engaged in improper judicial activism by negating two of the three forms of knowledge.  And, Judge Harris asked about the common law history of fraud statutes depending on the subjective knowledge of the defendant, and whether a single footnote in Safeco concerning a different statute should be read to wipe out that history.  In response, defendant’s counsel argued that in statutes with multiple forms of culpable knowledge, it is inevitable that not every level of knowledge will apply in every case, and that the Safeco objective reasonableness standard was consistent with the FCA’s language and the common law understanding of recklessness.

Just over a week after the hearing, the Fourth Circuit issued a published per curiam opinion vacating the panel opinions in Sheldon and affirming the judgment of the district court by an equally divided court.  Thus, the district court’s dismissal on scienter grounds in Sheldon stands, but there is no longer binding Fourth Circuit precedent regarding the application of Safeco’s objective test in this context. 

The en banc decision in Sheldon is unlikely to be the last word on the application of Safeco in FCA cases.  Petitions for certiorari are already pending for two Seventh Circuit cases that applied Safeco under the FCA: Supervalu, and the earlier decision United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), which Covington reported on here. The parties have completed briefing on the SuperValu petition, and the Solicitor General has been invited to file a brief stating the views of the United States.  The brief opposing certiorari in Safeway is due October 6, 2022.  The questions posed by the judges during the Sheldon hearing provide a preview of the arguments that will likely be made by advocates on both sides of this important issue.

If you have any questions concerning the material discussed in this client alert, please contact the members of our False Claims Act practice.