Dear SCOTUS, Part Two: Industry Leaders Encourage Objective Reasonableness Standard in Schutte and Proctor

Qui Notes readers know that we have been tracking developments in U.S. ex rel. Schutte v. SuperValu, Inc. and U.S. ex rel. Proctor v. Safeway, Inc. Several amici filed briefs in support of respondents SuperValu and Safeway, and below, we highlight two that discuss the impact of the FCA’s scienter standard on different industries that may be targets of FCA actions. (We previously covered briefs that were filed in support of petitioners here.) While many of the amici supporting respondents made similar arguments, we highlight here the ones that are unique to the different amici. Check back soon for a final blog of amici in the healthcare and life sciences industry supporting respondents in advance of the argument on April 18.

And join us for our webinar on April 18 at 2 p.m. EDT, where we will recap the argument and share the key takeaways.

Chamber of Commerce Brief

The United States Chamber of Commerce (the Chamber) filed a brief, joined by several other industry stakeholders: the American Medical Association, Illinois State Medical Society, Business Roundtable, National Association of Manufacturers, and Pharmaceutical Research and Manufacturers of America (PhRMA) (collectively, the Chamber amici). The Chamber alone represents approximately 300,000 direct members and indirectly represents the interests of more than three million companies and professional organizations. Note that our colleagues at Arnold & Porter served as counsel of record on the brief.

The Chamber amici weighed in because “[r]ejecting the ‘objective reasonableness’ scienter standard would have far-reaching consequences for [their] members[,] harm[ing] the myriad of business, non-profit organizations, and even municipalities that perform work for (or [are] financed by) the federal government, or which receive funds through a vast array of federal programs.” Consistent with arguments made by respondents and other amici supporting respondents, the Chamber amici posit that “absent binding guidance, a party cannot ‘know’ whether an objectively reasonable interpretation of an ambiguous provision is right or wrong” so that party cannot act with the requisite intent to violate the FCA regardless of what its subjective intent may have been.

Responding directly to arguments by petitioners and the government, the Chamber amici explain that Safeco provides two safeguards that will prevent defendants from avoiding liability by pointing to any “post hoc rationale”: a court must (1) deem the relevant legal requirement to be ambiguous and (2) agree that the defendant’s interpretation is objectively reasonable. But, they go on to argue, any concerns about defense counsel coming up with after-the-fact interpretations that might pass muster with a court are “far outweighed” by “[f]undamental notions of due process [that] prohibit penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule.”

The Chamber amici further argue that agencies “have numerous tools at their disposal to address contractor errors and noncompliance” other than FCA actions, so the “only question is whether regulated parties should be liable for fraud … for acting consistent with an objectively reasonable interpretation of an obligation that was never made clear to them.” The “right way” to address regulatory ambiguities, then, is through the notice-and-comment rulemaking process, not a fraud case.

The Chamber amici explain that the “need for strict enforcement of the scienter requirement is particularly critical because of the complex contractual and regulatory schemes that businesses, nonprofits, and even governmental entities routinely fact when they assist the federal government in implementing programs.” In addition, a subjective standard “may force defendants to waive privilege in order to demonstrate their subjective belief” since debate about what the requirements are is often privileged. And as a practical matter, “[e]ven weak False Claims Act cases are tremendously expensive to litigate” so “[t]he prospect of expensive and risky litigation and unwarranted settlements has a chilling effect” on those who do business with the government. This effect, amici argue, reduces competition which “means that the government very likely will pay higher prices” — resulting in “costs ultimately … borne by the taxpayer.” Amici note that this is particularly relevant in the case of cost-contractors that can pass on to the government up to 80% of their legal expenses from litigating non-intervened qui tans when they prevail.

National Defense Industry Association and Coalition for Government Procurement Brief

The National Defense Industry Association and Coalition for Government Procurement (NDIA/CGP) filed a brief that focuses on issues specific to government contractors. They are two nonprofit, nonpartisan organizations that represent corporations and individuals that do business with the federal government and filed a brief “to apprise the Court of the ill effects that adoption of petitioners’ subjective standard … would have on government contracting, including in the area of national defense.” In particular, they argue that a subjective standard “would sweep up not only a hypothetical defendant that follows an interpretation it finds implausible, but also contractors that try their best to comply with what they recognize are uncertain legal obligations.”

Federal government contracting regulations are not only “extensive,” comprising “more than 4,000 pages of the published Code of Federal Regulations,” they are “riddled with contradictions and uncertainties.” NDIA/CGP amici argue that there are “no shortage of remedies” apart from the FCA that the government can use if a contractor misinterprets the law — from withholding payment, to contract termination, to breach of contract actions. And since past performance affects future contract awards, government contractors are incentivized to follow reasonable interpretations of their obligations, because “[d]eveloping a reputation as unreasonable or opportunistic could undermine the contractor’s ability to continue winning business from the federal government.” And they add that the possibility of FCA litigation also incentivizes government contractors “to hew to reasonable statutory, regulatory, and contractual interpretations.”

NDIA/CGP amici argue that adopting a subjective scienter standard would have “adverse effects on government contracting” because it would “discourage companies from participating in government procurement programs and increase costs to taxpayers.” And allowing relators to second-guess contractors’ objectively reasonable actions “would chill contractors’ ability to aid the government in responding to urgent needs.” They argue that a “contractor cannot wait for months or years for an agency to respond” to a request for clarification before taking action or submitting a claim, noting that “[e]xemplary private-sector responses to national emergencies from Pearl Harbor to September 11 and beyond have been marked by their speed.” They argue that discouraging industry from participating in government programs undermines the Department of Defense’s initiatives to increase the number of offerors for contracts and expand the participation of “non-traditional” offerors. Moreover, expanded FCA liability “would threaten more insidious harms to the federal government’s ability to tackle important public problems” because contractors may not respond “as promptly and as vigorously” when the next national crisis arises if they are expected to request and receive clarification from an agency before doing so.

© 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.