Dear SCOTUS: DOJ, Grassley, 33 States, and Others Support Subjective FCA Knowledge Standard in Schutte & Proctor

As Qui Notes readers know, the Supreme Court this term will address whether and to what extent subjective knowledge is relevant when there is an objectively reasonable interpretation of an ambiguous legal question in U.S. ex rel. Schutte v. SuperValu, Inc. and U.S. ex rel. Proctor v. Safeway, Inc. In these cases, the Seventh Circuit applied Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007), a Fair Credit Reporting Act case, and determined that a defendant cannot be liable if he adopts an objectively reasonable interpretation of his obligations under the law and no authoritative guidance warned him away from such an interpretation. This is true irrespective of the defendant’s subjective intent.

The Supreme Court’s upcoming foray into the FCA’s scienter standard has garnered widespread interest, and several interested parties (including the United States, Senator Grassley, and a group of 33 states) filed amicus briefs in support of petitioners Schutte and Proctor.

The United States’ Brief

The United States argues that the FCA’s ordinary meaning, statutory context, and historical background of common-law fraud support that a person may be subject to FCA liability when that person subjectively believed that they were submitting false claims, was subjectively aware of the risk but deliberately avoided taking reasonable steps to obtain clarification, or acted in reckless disregard of known or objectively obvious facts indicating a high likelihood of falsity, full stop. It faults the Seventh Circuit for adopting a standard where “a defendant’s subjective bad faith at the time . . . becomes irrelevant if the defendant (or defendant’s lawyers) can later identify an exculpatory theory that is wrong but objectively reasonable.”

The United States further argues that the Fair Credit Reporting Act and FCA are different statutory schemes with different aims, so Safeco should not apply. And, if Safeco does apply, the United States takes issue with the Seventh Circuit’s determination that “only circuit-court precedents or guidance from the relevant agency is sufficiently authoritative to give notice of a claim’s falsity.” According to the United States, since the FCA “applies to claims submitted under contracts with non-federal intermediaries who help to administer federal spending programs,” adopting this definition of “authoritative guidance” could provide a “carte blanche to ignore guidance from, or contracts with, the very entities that Congress has designated to administer their claims.” This analysis of authoritative guidance seems to call on SCOTUS to clarify what types of guidance count as “authoritative” (and who might issue such guidance) if it adopts an objective reasonableness standard.

Just yesterday, the Supreme Court granted the United States’ request to participate in oral argument, though only granted it 10 minutes, rather than the 15 minutes the United States had requested. Relators have 20 minutes and the companies have a combined 30 minutes. Arnold & Porter FCA attorneys will be present at the April 18 argument, and at a webinar later that day, will recap the argument and provide their immediate key takeaways. We hope that Qui Notes readers will join us for the fun.

Senator Grassley’s Brief

Senator Grassley — whose longstanding interest in the FCA we have covered before — also filed an amicus brief. According to Senator Grassley, the Seventh Circuit’s standard “makes a hash of the law of fraud” and “puts on the government a nearly impossible burden to anticipate and warn off future fraudsters from every colorable misinterpretation of the law.” He laments that SCOTUS “should repair this tear in the FCA” caused by courts interpreting the FCA in an unduly restrictive fashion, because, in his view, “[i]f it is not set right, it will not be long before the centerpiece of the government’s anti-fraud arsenal becomes unusable.”

Senator Grassley argues that the FCA must “be applied liberally and expansively” because its statutory design includes a “broad and comprehensive definition of scienter” intended to “block every avenue that creative lawyers might use to allow a defendant to escape liability.” He also takes issue with respondents’ emphasis on the importance of clarity in regulatory guidance given the FCA’s punitive nature, arguing that Congress — not the judiciary — should decide what the statute requires. According to Senator Grassley, the Seventh Circuit’s construction imposes “judicially constructed hurdles” on the government, which are not “found in the language of the statute.”

Brief of Thirty-Three States

Thirty-three states — ranging from California and New York to Oklahoma and Tennessee, and so drawing the views of states attorneys general from both sides of the political spectrum — also joined together to file an amicus brief. The states weighed in because of the implications of Schutte/Proctor on cases brought under the federal FCA and state false claims act analogues given that many state courts look to federal FCA law when interpreting state analogues and that FCA recoveries generate a state share for the jointly financed federal-state Medicaid program. In substance, like the federal government, the states raise concerns that the Seventh Circuit’s ruling “immunizes bad actors . . . so long as they can later propose a post-hoc ‘objectively reasonable’ reading of a Medicaid statute or regulation and argue there was ‘authoritative guidance’ ‘specific enough’ to directly contradict defense counsel’s concocted interpretation.”

The states also raise concerns about the degree of specificity required for guidance to be “authoritative” under the Seventh Circuit’s reading. They argue that the Seventh Circuit’s standard is “unworkable in the real world of state Medicaid programs” because it puts “states at risk of losing public funds to fraud if they do not issue guidance that is both ‘authoritative’ and ‘sufficiently specific’ to every billing scenario.” They further argue that Medicaid providers are discouraged from seeking regulatory clarity and instead are encouraged to “put on blinders, take the public’s money, and ask questions (or seek forgiveness) later.”

*          *          *

The respondents’ brief was filed yesterday, and briefs of amici in support of SuperValu and Safeway are set to be filed March 28. Check back to Qui Notes for a discussion of these additional briefs soon.

© Arnold & Porter Kaye Scholer LLP 2023 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.