United States: Compliance And Enforcement Takeaways From Two Supreme Court False Claims Act Decisions

In June 2023, the Supreme Court issued two major decisions concerning the U.S. False Claims Act ("FCA"). These decisions, which clarify the FCA's scienter standard and certain procedures around the government intervening in FCA cases, have key implications for in-house counsel and compliance officers involved in litigating FCA actions and implementing FCA-related compliance programs. FCA compliance is a key issue for companies considering applying for, or taking part in, government grant and loan programs, given these programs often require applicants and participants to make both express and implied representations in connection with receiving federal funds.

I. Overview

While there are several different theories of liability under the FCA, at its core, the statute prohibits "knowingly" presenting a false claim for payment to the U.S. government, or "knowingly" causing such a claim to be made. See 31 U.S.C. § 3729. One unique procedural aspect of FCA actions is that the statute allows a private plaintiff, called a qui tam plaintiff or "relator," to initially file suit on behalf of the federal government, after which the Department of Justice may "intervene" and proceed with the suit initially filed by the private plaintiff.

II. United States ex rel. Schutte v. SuperValu Inc.

In the first case, United States ex rel. Schutte v. SuperValu Inc., decided on June 1, the Court addressed how the FCA's scienter standard is evaluated when the alleged false claim is based on a misrepresentation concerning compliance with a facially ambiguous regulation.

A. Background: "Usual and Customary" Prices

Medicaid regulations and many Medicare contracts allow reimbursement for drugs based on the "usual and customary" retail prices for the drugs.

The plaintiff in Schutte sued a pharmacy chain alleging that, even though a large majority of the pharmacy chain's sales were at discounted prices, the chain sought reimbursement from Medicare and Medicaid by instead citing, as the "usual and customary prices," higher, non-discounted prices.

On appeal, the Seventh Circuit had held that, as long as the pharmacy's interpretation of "usual and customary" was "objective reasonable," it could not be liable under the False Claims Act because it could not have "knowingly" submitted a false claim.

B. The Court's Decision

The Supreme Court reversed. The Court's analysis focused heavily on the FCA's statutory language and the traditional, common-law scienter requirements in fraud cases, both of which, the Court concluded, concern "primarily . . . what [ a defendant] thought and believed," not what might be objectively "reasonable." The Court explained that all three theories of knowledge permitted in FCA actions-"actual knowledge," "deliberate ignorance," and "reckless disregard"-ask about the defendant's state of mind at the time of the false claim, not whether that state of mind was objectively reasonable.

The Court went on to note that the "difficulty" in Schutte was that the phrase "usually and customary" "is less than perfectly clear" "on its face." But the Court noted that "the facial ambiguity of [a] phrase . . . does not by itself preclude a finding of scienter under the FCA" because there could be evidence, for example, that a defendant knew of an unjustifiably high risk that is preferred interpretation was false and proceeded anyway, i.e., the definition of "reckless disregard." Put another way, the Court's decision emphasizes that "knowledge" under the FCA can be shown not only by "actual knowledge" that a claim was false, but also by either "reckless disregard" for, or "deliberate indifference" to, the falsity of the claim.

III. United States ex rel Polansky v. Executive Health Resources Inc.

Second, in United States ex rel Polansky v. Executive Health Resources Inc., the Court addressed when the government may dismiss an FCA case over the objection of a qui tam relator and what standard of review governs that decision.

A. Background

The FCA explicitly empowers DOJ to "dismiss the action notwithstanding" the relator's objections if the relator "has been notified" and "the court has provided the person with an opportunity for a hearing on" DOJ's motion. 31 U.S.C. § 3730(c)(2)(A).

In recent years, changes in DOJ policy have resulted in the government seeking to exercise this dismissal power more frequently¹. That in turn sharpened a circuit split over what standard governed review of a government dismissal.

B. The Court's Decision

In Polansky, the Court held that the government may seek dismissal as long as it intervenes "sometime in the litigation" and that district courts should review such a motion by "apply[ing] the rule generally governing voluntary dismissal of suits: Federal Rule of Civil Procedure 41(a)."

First, the Court held that the government's dismissal power required it to actually intervene in the case, but that it could do so any point in the litigation. In doing so, the majority opinion relied largely on a textual analysis of the statute to stake out a middle ground between the government's and the defendant's position (which was that the government could dismiss at any time and didn't need to intervene) and relator's (which was that the government loses its power to dismiss unless it does so while the qui tam case was still sealed and only by intervening).

Second, as to what standard of review applies if the government intervenes and chooses to dismiss the case, the Court again adapted a middle ground. It rejected that government's "unfettered discretion" proposal and the qui tam relator's proposal for what the Court termed "a complicated form of arbitrary and capricious review . . . ." The Court concluded that, as with voluntary dismissals generally, the standard in Rule 41 of the Federal Rules of Civil Procedure should govern, because "nothing in the FCA suggest that Congress meant to except qui tam actions from the usual voluntary dismissal rule."

The Court noted that Rule 41(a)(2) requires, when a case is voluntarily dismissed after the opposing party has answered or moved for summary judgment, that the Court consider whether the dismissal be "on terms that the court considers proper." In FCA cases, this "assessment is more likely to involve the relator," and the district court consider their interests, instead of largely focusing on only the defendant's interests, as it would in a non-FCA case. Further, the Court noted that, regardless of whether the case is pre or post answer, the Court still must abide by the FCA's requirement to have a "notice and a hearing" on the government's dismissal motion. However, the Court also observed that most government motions to dismiss "will satisfy Rule 41 in all but the most exceptional cases," given that a qui tam suit "is on behalf of the government and in the name of the Government"; "alleges injury to the Government alone"; and once the Government has intervened, it assumes primary responsibility for the action."

IV. Takeaways

• Schutte reinforces that FCA scienter is broader than just "actual knowledge." It can also be shown by "reckless disregard" or "deliberate ignorance to the truth or falsity of a statement."
• While rejecting the "objectively reasonable" test for FCA scienter, Schutte does not completely eliminate the relevance of "reasonableness" altogether. A company faced with interpreting an ambiguous regulation should consider contemporaneously documenting their interpretation of the regulation and be prepared to show why that analysis did not show any "substantial" or "justifiable" risk their interpretation was wrong.
• Schutte also left open the issue of whether misstatements of law can be actionable under the FCA. Specifically, the Court rejected the defendant's assertion that the representation that the pharmacy had charged the "usual and customary" prices was, at most, a misrepresentation of law, which was not actionable as common-law fraud or under the FCA. The Court "assume[d] without deciding" that FCA incorporated the common law rule that misrepresentations of law were not actionable as fraud. But the Court noted that "statements involving some legal analysis remain actionable if they 'carry with [them] by implication' an assertion about 'facts that justify' the speaker's statement" and determined that the "usual and customary" statements met this standard.
• Polansky emphasizes the needs for both defendant and qui tam relators to remain engaged with the government, given the wide discretion courts now must afford the government's decision to dismiss an FCA case at any point during the proceedings, even if it has previously declined to intervene.

Footnote

1 Before 2018, the government had rarely exercised its power to dismiss a qui tam relator's suit. But early that year, Michael Granston, the Director of the Fraud Section in DOJ's Civil Division, issued a memorandum (the "Granston Memo") encouraging DOJ attorneys to consider exercising their dismissal authority to "advance the government's interests, preserve limited resources, and avoid adverse precedent," which has led to an increase in the number of dismissals since that time.

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