Supreme Court Sends Two FCA Cases Back to Circuits After Major Scienter Decision in Schutte
by Pablo J. Davis
A month after nixing the “objectively reasonable interpretation” (Safeco) defense under the False Claims Act, the Supreme Court has vacated and remanded two other cases for further consideration of the defendant’s subjective state of mind when it filed payment claims with the government. The Fourth Circuit in Sheldon and the Eleventh Circuit in Olhausen will provide the first tests of the High Court’s newly minted FCA intent standard.
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.