United States: No Ambiguity Here: Multiple Courts Reaffirm That Reasonable Interpretations Of Ambiguous Statutes Or Regulations Defeat Scienter

Companies operating in heavily regulated industries are subject to a morass of statutory, regulatory, and contractual requirements that, to be generous to the government drafters, are often less than clear. But ambiguity has never dissuaded relators from bringing FCA suits based on alleged noncompliance with the relators' subjective view of the applicable law. Two recent decisions reaffirm an important protection for companies defending these types of suits—that reliance on a reasonable interpretation of an ambiguous statute or regulation generally precludes a finding of knowing or reckless conduct necessary to impose FCA liability.

In United States ex rel. Complin v. North Carolina Baptist Hospital, No. 19-1243, 2020 WL 3167634 (4th Cir. June 15, 2020), the relator alleged that two hospitals violated the "Related Party" rule in billing Medicare for costs to provide medical care and services to the hospitals' employees through health plans administered by a jointly owned entity. The district court dismissed the FCA claims for failure to plausibly plead scienter under Rule 12(b)(6), relying, in large part, on the fact that the hospitals adopted a reasonable interpretation of the Related Party rule. The Fourth Circuit affirmed, reasoning that "establishing even the loosest standard of knowledge [under the FCA], i.e., acting in reckless disregard of the truth or falsity of the information, is difficult when falsity turns on a disputed interpretive question." Id. at *4 (quoting United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 288 (D.C. Cir. 2015)). Because the relator did not plead facts showing the defendant was "warned away" from its interpretation, the "regulatory ambiguity" prevented the relator from pleading scienter. The court further held that "non-authoritative guidance" is generally not enough to warn a defendant away from an otherwise reasonable interpretation. Notably, Complin relied on the DC Circuit's decision in Purcell for many of these points. Although that was a summary judgment decision, the Fourth Circuit found its reasoning equally applicable at the motion to dismiss stage.

The district court in United States ex rel. Proctor v. Safeway Inc., No. 11-cv-3406, 2020 WL 3132397 (C.D. Ill. June 12, 2020), applied similar principles in granting summary judgment to Safeway in a qui tam alleging violation of contractual provisions concerning "usual and customary prices."¹ Relying on the Supreme Court decision in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007) involving the Fair Credit Reporting Act, the court held, consistent with the views of numerous circuit courts, that the same "objective scienter standard" applies to the FCA. The court found that in order for Safeway's conduct to be "knowingly" or "recklessly" unlawful, and therefore objectively unreasonable, an authoritative interpretation must exist warning away from the position Safeway took. The court found that the absence of judicial decisions on the issue and a dearth of authoritative and binding guidance from the relevant government agencies created ambiguity that allowed for Safeway's conduct to be considered "objectively reasonable" even though the Seventh Circuit subsequently determined that Safeway's interpretation was incorrect. The court emphasized that only binding guidance, subject to notice and comment, is "authoritative"; non-binding documents aren't "sufficiently authoritative to warn defendants away."

Although these decisions are unlikely to deter relators from bring suit, they provide significant ammunition—at both the summary judgment and motion to dismiss stages—for companies defending FCA suits based on alleged noncompliance with ambiguous statutory, regulatory and contractual provisions.

Footnote

1. Safeway was obligated by contractual provisions to seek reimbursement of certain prescription medication for Medicaid beneficiaries by charging Medicaid the "usual and customary price" that Safeway charges other customers. At dispute was whether "usual and customary price{s}" included special discounted pricing for medication Safeway made available through membership discount programs and which required customer initiation in order to receive a discount. Id. at 4-10.

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