Federal Court of Appeals Emphasizes Only Defendants Who Act "Knowingly" Can Be Liable Under the False Claims Act

A recent split decision from the United States Court of Appeals for the Seventh Circuit strengthens an argument many defendants of False Claims Act ("FCA") cases have been advancing for years: the violation of an ambiguous law or regulation is not the same thing as "knowingly" committing fraud against the government. In United States ex rel. Schutte v. SuperValu Inc., et al., the Seventh Circuit endorsed that argument by holding that the Supreme Court's holding in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), which addressed the Fair Credit Reporting Act's analogous scienter requirement, applies with equal force to the FCA's scienter provision. The opinion is significant for FCA defendants who are often subject to vague and ambiguous regulations, because it confirms their ability to contest scienter as a matter of law, instead of courts leaving scienter issues for juries to decide.

In Schutte, the qui tam relators brought suit against a group of defendants (collectively, "SuperValu") that operated a grocery store chain and more than 800 in-store pharmacies. According to Relators, SuperValu provided discounts to its cash customers who requested them and thus was, Relators argued, required to pass along those discounts to Medicare and Medicaid when it billed them its "usual and customary charge" for its products. SuperValu allegedly violated the FCA by instead billing its higher retail cash prices to Medicare and Medicaid. The district court agreed that, by failing to pass along such discounts as its "usual and customary charge," SuperValu's claims were "false" under the FCA. But SuperValu argued—and the district court held at summary judgment—that even if its claims for payment were "false," they were not "knowingly false." That is because SuperValu's understanding of the "usual and customary price," even if incorrect, was objectively reasonable based upon the governing regulations and case law at the time. 

Relying upon Safeco, the Seventh Circuit affirmed. Joining certain other courts, the Seventh Circuit held that a defendant lacks scienter under the FCA—regardless of what the defendant's subjective intent may have been—if its conduct complied with an objectively reasonable understanding of the law and did not conflict with any authoritative guidance. The opinion emphasized that the majority's decision was compelled by the FCA's "rigorous" scienter requirement, as the FCA is not "a vehicle for punishing garden variety breaches of contract or regulatory violations."

Judge Hamilton dissented. He argued that the text, context, and purpose of the FCA was materially different than that of the FCRA, such that Safeco should not apply. By holding otherwise, in Judge Hamilton's view, the majority "creates a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test." The majority rejected that argument for multiple reasons. 

First, a defendant could not have acted "knowingly" within the meaning of the FCA if the underlying regulations were subject to multiple reasonable interpretations. Second, the Safeco test still requires an objectively reasonable reading of the text, so unreasonable justifications for a party's conduct would not save them from FCA liability. Further, even with an objectively reasonable interpretation, if authoritative guidance had warned the defendant away from the interpretation, then the defendant still could have acted knowingly. And finally, the majority explained, "Even if the Relators can raise an issue of fact on [whether the defendant actually believed it was violating the requirement at the time it submitted its claims to the government], it is irrelevant. The FCA establishes liability only for knowingly false claims—it is not enough that a defendant suspect or believe that its claim was false."

Schutte is an important decision for all FCA defendants and is particularly instructive for defendants operating in heavily regulated industries governed by dense and highly complex regulations that can be subject to multiple interpretations. Schutte provides further support to seeking early resolution on a dispositive motion and defending against allegations that any regulatory violation may potentially result in FCA liability.