Member Article

After clarifying the meaning of “knowingly” in relation to ambiguous statutes under the False Claims Act (FCA), in U.S. ex rel. Schutte v. SuperValu Inc.,[1] the Supreme Court has unanimously vacated lower court orders in two other FCA cases and sent them back to the circuit courts of appeals. The remands of U.S. ex rel. Sheldon v. Allergan Sales, LLC[2] and U.S. ex rel. Olhausen v. Arriva Medical, LLC[3] to the Fourth and Eleventh Circuits, respectively, will offer an early window onto how the circuits implement the High Court’s new guidance on the FCA intent standard.

In Schutte, the Court swept away what had been an emerging consensus[4] that an FCA defendant could defeat scienter via the Safeco[5] defense. A defendant invoking Safeco needed to show that its interpretation of an ambiguous statute or regulation was “objectively reasonable”—regardless of whether it actually believed that interpretation.[6] Where the Seventh Circuit and other appellate courts had stressed objective reasonableness, the Supreme Court put the scienter inquiry squarely on subjective terrain, which necessarily means belief contemporaneous with the presentation of a claim for payment: “[T]he focus is not . . . on post hoc interpretations that might have rendered [the defendant’s] claims accurate. It is instead on what the defendant knew when presenting the claim.”[7]

The Fourth Circuit in Sheldon, like the Seventh Circuit in Schutte and Proctor predicated on alleged drug pricing misrepresentations, had also endorsed the Safeco defense based on a solidly objective standard.[8]  Also like those two Seventh Circuit cases, Sheldon was a divided decision featuring a blistering dissent that took strong exception to recognizing an FCA defense imported from an entirely different, non-fraud-related, statutory context.[9] The Fourth Circuit subsequently granted rehearing en banc and the full court deadlocked in a tie, thus affirming the district court’s judgment for the defendant.[10]

Olhausen involved different Medicare regulations, including the defendant’s alleged failure to obtain required assignment of benefit forms from patients.[11] Unlike Sheldon and the two Seventh Circuit cases, it was a unanimous opinion. However, as with the other cases, it resolutely backed the “objectively reasonable interpretation” defense to FCA scienter.[12]

The twin remands offer the prospect of early data points on how lower courts will be guided by the Supreme Court’s recent clarification of scienter. As Dinsmore noted  here, Schutte underscores the importance of contemporaneous documentation by government contractors and other companies receiving government funds. Our FCA Team will closely monitor the Fourth and Eleventh Circuits’ dispositions on remand for further practical guidance to companies operating in ambiguous statutory or regulatory environments.

[1] Nos. 21-1326 et al., 2023 U.S. LEXIS 2300 (June 1, 2023). The decision adjudicated the consolidated appeals of Schutte, 9 F.4th 455 (7th Cir. 2021), and U.S. ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022).

[2] 24 F.4th 340 (4th Cir. 2022), vacated and district court judgment affirmed by No. 20-2230, 2022 U.S. App. LEXIS 27437 (4th Cir. Sept. 23, 2022) (en banc), vacated and remanded by No. 22-593, 2023 U.S. LEXIS 2797 (June 30, 2023).

[3] No. 21-10366, 2022 U.S. App. LEXIS 10989 (11th Cir. Apr. 22, 2022) (per curiam) (unpublished), vacated and remanded by No. 22-374, 2023 U.S. 2831 (June 30, 2023).

[4] See, e.g., Sheldon, 24 F.4th at 348 (“In adopting this standard, we join each and every circuit that has considered Safeco’s applicability to the FCA.”) (citing Schutte, 9 F.4th at 465); see also U.S. ex rel. Streck v. Allergan, Inc., 746 F. App’x 101, 106 (3d Cir. 2018) (unpublished); U.S. ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017) (unpublished); U.S. ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015)).

[5] Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007). Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007).

[6] See id. at 70 & 70 n.20 (in a different statutory context, holding that, because defendant’s reading of unclear statutory text was “not objectively unreasonable,” it fell “well short of raising the unjustifiably high risk of violating the statute necessary for reckless liability” thus precluding a finding of scienter) (internal quotation omitted). The Safeco defense had a second element: the inexistence of authoritative guidance “from the courts of appeals or the [relevant agency] that might have warned [the defendant] away from the view it took.” Id. at 70 (alterations added). This element ensured that scienter could not be defeated merely by showing that a statute was ambiguous and then coming up with an “objectively reasonable” post hoc interpretation. See Sheldon, 24 F.4th at 350 (emphasizing that Safeco does not “write defendants a blank check,” in relevant part because it “does not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong”) (internal quotation omitted).

[7] Schutte, 2023 U.S. LEXIS 2300, at *13; see also id. at *8 (“What matters for an FCA case is whether the defendant knew that the claim was false. Thus, if respondents correctly interpreted the relevant [regulatory] phrase and believed their claims were false, then they could have known their claims were false.”) (emphasis and alteration added). For Dinsmore’s analysis of Schutte, see here,

[8] 24 F.4th at 348.

[9] Id. at 362–63 (Wynn, J., dissenting).  The dissents in Schutte and Proctor were equally vehement. See, e.g., Schutte, 9 F.4th atat 475–79 (Hamilton, J., dissenting).

[10] 49 F.4th 873, 874 (4th Cir. 2022) (per curiam) (vacating panel decision and affirming district court’s judgment for defendant in single-sentence opinion of “equally divided [en banc] court”). The intensity of the dissents in Sheldon and the Seventh Circuit cases, coupled with the en banc Fourth Circuit’s tie vote in Sheldon, suggested the existence of seriously divided opinion on Safeco’s applicability to the FCA despite no circuit court having outright rejected Safeco as an FCA scienter defense.

[11] 2022 U.S. App. LEXIS 10989, at *2–3.

[12] Id. at *5.