It’s Ambiguous — the Fourth Circuit Again Splits on FCA Scienter Over an Alleged Regulatory Violation

Of late, there have been a number of 2-1 split decisions at federal circuit courts on the issue of FCA scienter in cases charging defendants with submitting claims in violation of an arguably ambiguous regulation. Recent split decisions from the Seventh and Fourth Circuits have addressed the reckless disregard standard under the Supreme Court’s Safeco opinion (Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007)), dismissing cases where defendant’s interpretation of a regulation is “objectively reasonable,” and no authoritative government guidance warned defendant away from that interpretation. See U.S. ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022); U.S. ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340 (4th Cir. 2022); and U.S. ex rel. Schutte v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021). You can find breakdowns of these decisions in previous Qui Notes here and here. In Sheldon, the Fourth Circuit has granted en banc review following a panel’s affirmance of the grant of defendant’s motion to dismiss.

Last week, the Fourth Circuit issued another 2-1 split decision on the issue of “reckless disregard” scienter for claims alleged to have been submitted in violation of an ambiguous regulation in U.S. ex. rel. Gugenheim v. Meridian Senior Living, LLC, 2022 WL 1672142 (4th Cir. May 26, 2022). Two of the panel members held a regulation regarding the submission of claims for personal care to North Carolina nursing home residents was “sufficiently ambiguous to foreclose the possibility of proving scienter based solely on the clarity of the regulation.” The dissenting panel member thought to the contrary, stating that the regulation was “clear” and chastising defendant for not having sought guidance from North Carolina Medicaid. Significantly, the Gugenheim majority held that scienter cannot be established by showing “that Defendants could have sought more guidance about an ambiguous regulation.”

In Gugenheim, a relator sued 45 North Carolina adult care homes and their management group for submitting false personal care claims to nursing home residents using “census-based billing” (a form of task-based billing based on nursing home headcount). The relator contended that regulations required bills to be submitted based on the actual time spent on each task. The relator claimed that census-based billing overcompensated defendants because they were paid for the maximum amount of compensable time per patient.

Writing for the majority, Judge Rushing (joined by Judge Wilkinson) affirmed the district court’s grant of summary judgment in the defendants’ favor. The majority stated that North Carolina’s regulation and its supporting agency guidance was “not as clear as [the Relator claim[ed]” and the guidance “arguably suggest[ed]” that defendants used an acceptable reimbursement method. The majority found that the defendants did not know or have reason to know that their interpretation of the regulation was incorrect. Indeed, the majority noted that one of defendants’ employees confirmed with another company that census-based billing was correct, and that an audit of defendants by North Carolina Medicaid did not raise any questions about the appropriateness of census-based billing practices.

Judge Traxler dissented, arguing that evidence showed “that Defendants intentionally billed the government for the maximum amount of compensable time . . . without any inquiry whatsoever into what services the beneficiaries actually received.” He criticized defendants for doing “next to nothing” to educate themselves about the regulatory billing requirements, which he stated could constitute “reckless disregard or deliberate indifference of those requirements.” Judge Traxler did not find the regulation’s language ambiguous, nor did he believe defendants’ interpretation of the guidance documentation was reasonable. In his view, the majority’s interpretation of the FCA scienter element was “far too narrow.”

Gugenheim was a summary judgment decision in which the majority pointed out the lack of any evidence that defendants even suspected their regulatory interpretation was incorrect or that they ignored any relevant agency guidance. But it continues the recent trend of courts (or at least two judges of a circuit panel) strictly enforcing the FCA’s “rigorous” scienter requirement as counseled by the Supreme Court in Universal Health Servs., Inc. v U.S. ex rel. Escobar, 579 U.S. 176 (2016) in cases alleging that a defendant submitted claims in violation of a regulatory requirement.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.