The US Court of Appeals for the Fourth Circuit’s en banc decision Sept. 23 interpreting the False Claims Act’s heavily litigated “knowledge” element makes it highly likely that the US Supreme Court will grant certiorari on the issue.
The meaning of the FCA’s knowledge requirement—the subject of a 4-4 split in the courts of appeals and intense debate in the lower courts—is essential to determining FCA liability.
The ruling in United States ex rel. Sheldon v. Allergan Sales LLC and two Seventh Circuit decisions with certiorari petitions already pending in the Supreme Court are similar. The courts in these cases have said that a defendant cannot act “knowingly” under the FCA if the actions are an “objectively reasonable interpretation” of the statute and there is no “authoritative guidance” to the contrary. As these courts have succinctly stated, “this objective standard precludes inquiry into a defendant’s subjective intent.”
Several courts have reached this conclusion by applying the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, which applied a purely objective standard to the scienter, or knowledge, requirement under the Fair Credit Reporting Act.
Allergan and cases like it have in recent years provided FCA defendants with a powerful and early defense in cases involving alleged false representations concerning even arguably ambiguous statutory or regulatory requirements. In such cases where there are less than clear statutory requirements, there is frequently at least one “objectively reasonable interpretation” that the defendant may—at least in hindsight—point to as a basis for its conduct.
And there will rarely be “authoritative guidance”—i.e., a specific court of appeals decision or agency guidance—providing a clear warning against the reasonable interpretation. The objective approach often favors the defense.
Several large FCA cases in recent years have been dismissed based on this objective Safeco analysis. Critically, the importance of the issue goes beyond the opportunity to obtain an early dismissal on the merits. It extends to the costs of litigating the claims.
In particular, the objective standard imported from Safeco allows for critical dispositive motion practice before discovery. That is, under the Safeco standard as applied in Allergan, the question is simply how the statute or regulation may objectively be read. Nothing more is needed than the statute book.
On the other hand, a subjective analysis—i.e., whether the defendant truly believed it was violating the law at the time of the conduct—typically entails discovery of the defendant’s internal communications and testimony, drastically driving up the costs of defense.
Why SCOTUS Will Grant Review
For several reasons, it is likely that the issue will be taken up in short order by the Supreme Court.
First, as the two petitions from the Seventh Circuit currently pending demonstrate, a significant circuit split exists on the issue, with the Fourth, Seventh, Eighth, and D.C. circuits applying Safeco’s objective “reasonable interpretation” standard. Meanwhile, the Sixth, Ninth, Tenth and Eleventh circuits inject some subjective element into FCA’s knowledge requirement.
Second, one of the currently pending petitions is supported by an amicus brief on behalf of Sen. Chuck Grassley (R-Iowa), the principal Senate sponsor of the False Claims Amendments Act of 1986, which included the FCA’s scienter provision under examination. Grassley’s amicus in United States ex rel. Schutte v. SuperValu Inc. has substantially raised the profile of the issue.
Third, the Supreme Court in August in SuperValu asked the US solicitor general’s office for its views on whether to grant the petition. Historical studies show that such cases—known as call for the solicitor general cases—are far more likely to be granted certiorari.
And the Allergan en banc decision—over a lengthy and vigorous dissent by Judge James Wynn—raises the issue to even greater prominence. These factors make it highly likely that the high court will grant certiorari in one of the pending cases, or the Allergan case if a petition is filed.
The takeaway is that we are likely to hear in short order from the Supreme Court. The court could decide whether Safeco ’s objective standard and the “objectively reasonable interpretation” defense will continue to provide a strong defense against a large number of FCA qui tam cases or alternatively, scale back the defense and impose a subjective element into the analysis.
The results will resonate in FCA litigation for years to come.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Elisha Kobre is a partner in Bradley’s Government Enforcement and Investigations and Litigation practice groups. He represents corporations, executives, and financial institutions in criminal investigations and trials, regulatory enforcement proceedings, and complex civil litigation.