Update: DOJ Recommends Supreme Court Address The Role Of Objective Reasonableness Under FCA’s Knowledge Requirement

On Wednesday, December 7, 2022, at the request of the Supreme Court, the United States Department of Justice (DOJ) filed an amicus brief in the appeal of the Seventh Circuit’s August 2021 panel decision United States ex rel. Schutte v. SuperValu Inc.. 9 F.4th 455 (7th Cir. 2021) (available here). DOJ recommended that the Supreme Court grant certiorari. In SuperValu, the Seventh Circuit applied the holding of the Supreme Court decision Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), a case concerning the Fair Credit Report Act (FCRA), to find that a defendant cannot act with culpable knowledge under the False Claims Act (FCA) as a matter of law “if (a) it ha[d] an objectively reasonable reading of the statute or regulation and (b) there was no authoritative guidance warning against its erroneous view.”  Schutte, 9 F.4th at 468.

The Seventh circuit decision is only one of numerous circuit court decisions that have found that the Safeco test applies under the FCA – in fact, not a single federal court of appeal has held that Safeco does not apply.[1] However, SuperValu remains one of the only published appellate decisions to apply this rule at the motion to dismiss stage,[2] and it is among the strongest examples of the position that, applying the Safeco framework, a defendant’s subjective bad faith is legally “irrelevant” so long as the defendant’s position was supported by an objectively reasonable interpretation of the law, and the defendant was not “warned away” from its position by sufficiently authoritative guidance.

The DOJ’s brief, available here, argues that the Seventh Circuit erred in finding that the “knowingly” element of the FCA cannot be proven, as a matter of law, if the defendant’s position was consistent with an objectively reasonable interpretation of the law, even if the defendant correctly believed at the time that it was violating the law. The DOJ argued that each of the forms of knowledge provided for in the FCA – actual knowledge, deliberate ignorance, and recklessness– should be assessed based on subjective state of mind. Thus, the DOJ argued that “[i]f a defendant believes (correctly) that it is violating a legal requirement that makes its claims false and ineligible for payment, the defendant acts with “actual knowledge” if it submits the false claims—even if its lawyers subsequently identify an objectively reasonable (but incorrect) exculpatory interpretation.” Brief at 11. It further argued that “[i]f a defendant is aware of a substantial risk that its submissions are false, but chooses not to make readily available inquiries that could clarify their truthfulness,” then the defendant acts with “deliberate indifference. And if a defendant disregards warnings about likely falsity from knowledgeable sources such as attorneys, internal compliance officers, or government contractors, that defendant acts with ‘reckless disregard’ of the truthfulness of its claims.” Id. at 11-12 (cleaned up).

Beyond the SuperValu petition for certiorari, a cert. petition is pending in another Seventh Circuit decision, United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), which Covington addressed here. Another cert petition has been filed appealing the unpublished Eleventh Circuit decision United States ex rel. Olhausen v. Arriva Medical LLC., addressing the same issues.

Each of these petitions tees up the issues in terms of scienter – whether a defendant can knowingly submit a false claim when its conduct is consistent with an objectively reasonable interpretation of the statute or regulation. If certiorari is granted, it will be interesting to see whether and how the briefs and argument address the separate FCA element of falsity, where the supposed “falsity” is premised on alleged noncompliance with ambiguous statutory or regulatory requirements. If a statute is subject to multiple different interpretations, and the at-issue conduct complies with one of the objectively reasonable interpretations, how could it be legally false based on alleged noncompliance? It could not be. Analysis of both the scienter and falsity elements supports the 7th Circuit’s conclusion that conduct consistent with an objectively reasonable interpretation of an ambiguous statute or regulation cannot be the basis for FCA liability.  

Past Covington articles on this developing line of cases can be found here, here, and here.

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