U.S. Supreme Court Issues Major False Claims Act Decisions on Scienter and Government Dismissal
The U.S. Supreme Court has issued two major decisions on the False Claims Act ("FCA") this month. In United States ex rel. Schutte v. SuperValu, Inc. and United States ex rel. Proctor v. Safeway, Inc., the Court rejected an "objective reasonableness" knowledge standard in cases where the false claim is based on an alleged misrepresentation of compliance with an ambiguous legal requirement, in favor of one based on the defendant's subjective belief about that requirement. In United States ex rel. Polansky v. Executive Health Resources, Inc., the Court held that the U.S. government may move to dismiss a qui tam case that it has declined to join as long as it subsequently intervenes, and that such dismissals will be governed by Federal Rule of Civil Procedure 41(a). Both decisions have significant implications for current and future FCA litigation.
United States ex rel. Schutte v. SuperValu, Inc. and United States ex rel. Proctor v. Safeway, Inc.
In consolidated cases decided June 1, 2023, the Court addressed the scienter standard for when an FCA case is premised on an alleged misrepresentation of compliance with an ambiguous legal requirement. In doing so, it rejected what had been previously interpreted as a safe harbor for objectively reasonable interpretations of such requirements, in favor of a defendants’ subjective beliefs about such requirements (and violations of them). In a unanimous but narrow decision authored by Justice Thomas, the Court held that if defendants correctly interpreted an ambiguous legal requirement and knowingly submitted claims in contravention of it, those claims are false even if they would not be under a different but objectively reasonable interpretation. The decision remanded both cases back to the court of appeals.
Here, relators alleged that the supermarket pharmacy defendants had submitted false claims by billing Medicare and Medicaid for the retail price of pharmaceuticals while charging customers a lower price under various discount programs. The issue of knowledge arose around the interpretation of the legal requirement for those drugs to be billed to and reimbursed by the government at a price that was "usual and customary," and whether the defendants' alleged belief that price should have been the discounted price (when they were submitting based on the retail price) constituted a false claim even if that retail price would have been an objectively reasonable interpretation.
The appellate court granted summary judgment in favor of defendants in both cases on the reasoning that their claims were consistent with an objectively reasonable interpretation of "usual and customary." In doing so, it operated under a standard that had been set out by the Court in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007) interpreting the Fair Credit Reporting Act. The Court disagreed with that precedent’s use in the FCA context, reasoning that it applied to a different statute and a different mens rea standard (of "willfully"). The Court also relied on the text of the FCA statute and its common law roots, finding that the definition of “knowledge” in the FCA tracks the common law scienter requirements for fraud.
The decision changes the law in many courts, but is not the outright victory that FCA plaintiffs had hoped for, given that they will now have to show that a defendant knowingly submitted claims in contravention of its own interpretation of an ambiguous legal requirement. It will also make it more difficult to prevail with scienter arguments on a motion to dismiss, since evidence demonstrating subjective intent will be more likely to require discovery.
United States ex rel. Polansky v. Executive Health Resources, Inc.
In Polansky, the Court was presented with the question of whether and what discretion the government has to dismiss a qui tam action in which it has initially declined to intervene. The case was brought by relator Jesse Polansky, who claimed that Executive Health Resources submitted false claims by overbilling Medicare. The government declined to intervene during the time period in which the case was sealed, after which the case proceeded to extensive discovery. However, as discovery obligations and privilege issues continued to escalate, the government moved to dismiss under 31 U.S.C. § 3730(c)(2)(A), over the objections of the relator. The district court granted the motion and the court of appeals affirmed. Polansky petitioned for certiorari, which was granted.
The relator had argued that the government must intervene during the seal period in order to dismiss the case, whereas the government argued that it could dismiss the action at any time. In an 8-1 decision authored by Justice Kagan, the Court affirmed the appellate court’s ruling in its entirety, looking to the structure, text, and purpose of the FCA in finding that the government may move to dismiss at any time after intervening in a case, which it may also do at any time, and that Rule 41(a) governs such dismissal as long as the relator has received notice and an opportunity to be heard, as required under section 3730(c)(2)(A).
The Court also emphasized that the government merits “substantial deference” on a motion to dismiss, since an FCA action is on behalf of the government and the injury has been suffered by the government alone. Opinion at 15-16. It elaborated that “a district court should think several times over before denying” such a motion, which should be granted if it presents a “reasonable argument” and even if the relator presents a “credible assessment” in opposition. Opinion at 16.
Justice Thomas filed a notable dissent that called into question the constitutionality of qui tam cases entirely, while finding for relators with respect to the timing of a government-requested dismissal. Justices Kavanaugh and Barrett concurred on the constitutionality question, agreeing with Justice Thomas that lower courts should address whether or not allowing private actors to litigate government interests violates Article II of the U.S. Constitution.
It remains to be seen whether this decision will lead the government to intervene to dismiss a greater number of qui tam FCA cases, since it has done so only in an extremely small fraction of the hundreds that are filed each year. It is almost certain, however, that the Polansky dissent will lead to further litigation on the question of whether qui tam cases are constitutional at all, given the invitation that three justices have extended to consider it.
Schutte and Polansky are significant decisions that not only impact the law on the questions presented, but also open further areas of legal uncertainty that will likely lead to additional change and substantial litigation. That litigation will not only affect which FCA cases succeed or fail, but whether qui tam litigants can bring cases at all, with potential outcomes that will both drastically alter the FCA and have constitutional consequences that reach far beyond it.