On June 1, 2023 the U.S. Supreme Court vacated and remanded two Seventh Circuit decisions involving the False Claims Act (FCA), holding in a unanimous opinion that the FCA’s scienter element turns on a defendant’s subjective belief and intent, not by an after-the-fact analysis of whether the defendant’s actions were “objectively reasonable.”
The two cases at issue, United States et al. ex rel. Schutte et al. v. SuperValu Inc. et al. and United States et al. ex rel. Proctor v. Safeway Inc., alleged that respondents SuperValu and Safeway separately defrauded Medicaid and Medicare by offering discount programs to their customers while knowingly submitting claims for the higher retail prices exceeding the “usual and customary prices” customers paid. Ruling in favor of SuperValu and Safeway, the Seventh Circuit applied an “objectively reasonable” scienter standard, determining that SuperValu and Safeway would be liable for submitting false claims only if their respective interpretation of the FCA’s “usual and customary” language was not “objectively reasonable.”
Authoring the opinion on behalf of the Court, Justice Clarence Thomas acknowledged that the “usual and customary” language “is, on its face, less than perfectly clear.” However, the appropriate standard for the FCA’s scienter element “is straightforward” in referring to a defendant’s knowledge and subjective beliefs. The Court focused on the FCA’s definition of “knowingly,” noting that the FCA’s definition tracks with the three-part test for establishing scienter in common law fraud claims. This three-part test utilizes a subjective intent standard, focusing on a defendant’s “culpable state of mind.” The Court concluded that scienter under the FCA in these cases requires that the respondents “(1) actually knew that their reported prices were not their ‘usual and customary’ prices when they reported those prices, (2) were aware of a substantial risk that their higher, retail prices were not their ‘usual and customary’ prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway.”
The Court’s decision requiring a subjective intent standard for the FCA’s scienter element elevates the importance of a party’s actual knowledge at the time the potentially false claims were submitted. Attempts to justify a party’s prior actions at a later date based on the party’s “objectively reasonable” interpretation of ambiguous statutory language, without taking into consideration a party’s subjective knowledge at the time, will be unsuccessful. As the Court reasoned, “the focus is not, as respondents would have it, on post hoc interpretation that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.” Accordingly, parties should ensure that they create and maintain records documenting their good faith operations. Subjective evidence of a party’s belief in good faith operation at the time of the claim will likely provide a more successful defense to any potential claims of FCA violations.