The consolidated matter of Schutte v. SuperValu1 was appealed from the Seventh Circuit, after two split panels held that if a defendant is faced with an ambiguous statute or regulation, it does not act with reckless disregard if (1) its conduct was consistent with an objectively reasonable interpretation of the provision, and (2) the government had not issued authoritative guidance cautioning against the interpretation. Or, as Justice Jackson put it during the oral argument: a defendant’s subjective belief about the lawfulness of its conduct is not relevant to whether it had the requisite scienter to violate the FCA. Because cases focusing on the fundamental elements of the FCA rarely reach the Supreme Court, SuperValu could have major implications for FCA enforcement going forward.
Relators’ counsel contended that the Seventh Circuit’s rule was bad policy that invited creative defendants to invent post-hoc justifications for conduct they knew to be incorrect at the time they submitted false claims. Specifically, Relators’ counsel argued, the Seventh Circuit’s rule would allow companies to select the most profitable interpretation of a statute or regulation and then have attorneys give a post-hoc justification for the reasonableness of the interpretation regardless of whether the company actually thought the interpretation was correct from the outset.
Questions posed by Justices Thomas and Kavanaugh reflected some concern about holding a defendant liable for choosing the most beneficial interpretation of a regulation, even if it was an aggressive interpretation.
However, Justices Kagan, Gorsuch, Sotomayor, and Jackson each observed that those concerns overcomplicated what they saw to be a straightforward issue – a simple question to the Court: is the subjective intent or knowledge of a defendant ever relevant to FCA scienter? This focus on the simplicity of the question was a theme throughout the argument, to all parties. Those Justices, including Justice Sotomayor, appeared to view the case in its “easy” form – whether the Seventh Circuit rule inappropriately excluded a defendant’s actual knowledge or belief that its regulatory interpretation was incorrect from the analysis of scienter under the FCA.
As for the source of the Seventh Circuit’s rule, the Supreme Court’s earlier decision in SafeCo Insurance Co. of America v. Burr2, Relators’ counsel (and later the Deputy Solicitor General) argued that SafeCo was clearly distinguishable because the statute it addressed, the Fair Credit Reporting Act (FCRA) involved statutory terms not anchored in common law fraud. To Relators’ counsel, since Congress incorporated common law principles of fraud in the FCA, its scienter standard stands apart from the intent standard Congress included in FCRA .
Although the government notably declined to intervene in SuperValu and Safeway, the U.S. Department of Justice (DOJ) petitioned to be heard in argument at the Seventh Circuit and the Supreme Court, and the Solicitor General was a key participant at oral argument. Making no allowance for the manner and form by which most health care claims are submitted, the Deputy Solicitor General’s argument emphasized that a defendant acting on one interpretation of an ambiguous provision should have “shown their work,” apparently on a claim form, to inform the agency or its claims processor of the interpretation upon which it had relied. The Deputy SG argued that if such an explanation was provided, the government could not have been deceived. Several Justices again sought to narrow and simplify the scope of the question – reminding the Deputy SG that the question presented was whether subjective intent is irrelevant to the scienter analysis under the FCA.
During the SG’s argument, Justice Alito suggested that the case actually was more complicated than his colleagues’ questions allowed. He noted that questions of law are not the same as questions of fact, and many of the interpretations made by businesses combine the two. Justice Alito appeared to acknowledge, where two or more differing interpretations of ambiguous guidance or statutes could be plausible, and the fact that a court later decides one is “correct” does not mean that a claim relying on the other was “false.”
Defendants' overarching theme at argument emphasized the practical consequences of reversing the Seventh Circuit’s decision. Reversal, in Defendants' view, would create an “open season” on federal contractors. Not only would it encourage relators to sue, but focusing the inquiry on whether a defendant considered and believed that another interpretation of a rule was correct would force businesses that had approached the legal question with due care to waive the attorney-client privilege to “show their work.”
Instead, Defense counsel argued, the burden of insuring compliance with ambiguous provisions should lie in the first order with the government agency charged with interpreting and enforcing it. Justice Gorsuch, who addressed the point, seemed unmoved by the argument that privilege would need to be waived, asserting that non-privileged forms of communications could also reveal the defendant’s beliefs and understanding.
Once again, Justice Jackson and Justice Kagan challenged counsel about the scope of the matter before the Court, highlighting that Defendants were asking the Court to say that the only relevant inquiry into FCA scienter is objective intent. Justice Kagan was particularly interested in how one could square the text of the FCA with Defendants’ position that subjective intent could not be a part of the scienter analysis. Defendants’ counsel argued that in the context of FCA claims based on ambiguous regulatory provisions like those at issue in the case, objective intent is the only intent that should matter. Justice Kavanaugh ended the argument with a significant comment: if the Defendant lost this case on the narrow holding that a post-hoc interpretation of the law to justify a “wrong” interpretation could not negate scienter, it would be a lesser loss for the business community compared to “an all-out disaster” if the Defendant lost on the broader theory that if you guessed the interpretation of a statute wrong, you are liable under the FCA. Defense counsel agreed with the Justice’s statement.
The general line of questioning suggests that the Court is hesitant to outright affirm the Seventh Circuit’s application of the objective SafeCo standard under the FCA. Many justices seemed uneasy with the idea that subjective intent could play no part of the scienter inquiry in the context presented. Further, the practical implications to business did not garner much attention, save to understand a potential compromise position outlined by Justice Kavanaugh. Given some of the Justices’ interest in narrowing the scope of the question – combined with Justice Kavanaugh’s attempt to articulate a tamer reversal of the Seventh Circuit – we do not expect a broad ruling, nor do we expect one that will bring clarity to the broader questions each lawyer arguing the case sought to raise.
The Court will likely provide a narrow holding that provides a compromise solution. One such possibility would be a holding that says that subjective intent could be relevant, but a company cannot be held liable for an objectively reasonable interpretation if the company made a contemporaneous reasonable guess later determined to be incorrect. Regardless of the specifics, any compromise holding may raise complicated questions regarding liability, burden, and privilege. As Justice Sotomayor observed, when the Supreme Court seeks to offer distinctive guidance under the FCA, like it did in Universal Health Servs., Inc. v. United States ex rel. Escobar 3, it often fails. The Hogan Lovells team will continue to provide comprehensive analysis to clients regarding the best ways to navigate the FCA amidst interpretive changes.
Authored by: Jonathan Diesenhaus, Virginia Gibson, Gejaa Gobena, Michelle Gonzales Roberts, Clara Troyer, Tyler Waywell, Thomas Beimers, and Alex Tobin.
1 United States ex rel. Schutte v. Supervalu Inc., 9 F. 4th 455 (7th Cir. 2021) cert. granted sub nom. United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 644 (2023); United States ex rel. Proctor v. Safeway, Inc., 30 F. 4th 649 (7th Cir. 2022), cert. granted, 143 S. Ct. 643 (2023).