August 18, 2023
United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391 (2023) (Thomas, J.)
United States ex rel. Polansky v. Exec. Health Res., Inc., 143 S. Ct. 1720 (2023) (Kagan, J.)
Response by Jessica Tillipman & Teddie Arnold
Geo. Wash. L. Rev. On the Docket (Oct. Term 2022)
Slip Opinion: Schutte & Polansky | SCOTUSblog: Schutte & Polansky
Shutte & Polansky: Shifting the Landscape of False Claims Act Litigation & Compliance
Introduction
The Supreme Court issued two opinions in June 2023 that are set to alter the False Claims Act (“FCA”) landscape for years to come. In one decision, the Court elevated the scienter element of the FCA in cases dealing with a defendant’s compliance with law or regulation, whereby no longer can a defendant point to an objective interpretation of an ambiguous law or regulation to the exclusion of a company’s subjective knowledge at the time of claim submission.1 In the other decision, the Court affirmed the government’s near unfettered dismissal authority under Federal Rule of Civil Procedure (“FRCP”) 41(a), so long as the government has intervened at any point in the case.2 On one hand, FCA defendants will have a more difficult time obtaining summary judgment in legal falsity cases, while on the other hand, qui tam relators with marginal cases will be at the mercy of the government’s dismissal authority.
An Overview of the False Claims Act
The FCA applies to those who knowingly submit false or fraudulent claims for payment to the federal government.3 To this end, the FCA creates liability for any person who, inter alia, “(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”4 Thus, the party alleging an FCA violation must prove: (1) the defendant made false statements or engaged in a fraudulent course of conduct; (2) with the requisite knowledge; (3) the statements or conduct were material; and (4) it caused the government to pay out money or to forfeit monies due on a “claim.”5 The FCA defines several of its terms—“claim,”6 “knowingly,”7 and “material”;8—however, it does not define what is “false” or “fraudulent.”
United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391 (2023):
The Supreme Court Narrows a Key Defense for FCA Defendants.
On June 1, 2023, the Supreme Court issued its opinion in United States ex rel. Schutte v. SuperValu Inc.,9 a case that addresses the FCA’s scienter element in cases involving “ambiguous” statutes or regulations.
In a unanimous opinion, Justice Thomas vacated and remanded the Seventh Circuit’s pair of holdings, which had held that there is no scienter under the FCA where the defendant had an objectively reasonable reading of the statute or regulation and there was no authoritative guidance warning against its view.10 In vacating and remanding these holdings, the Supreme Court relied heavily on the FCA’s text and common law roots in finding that the relevant inquiry is the defendant’s knowledge and subjective belief under the FCA’s scienter element, rather than what an “objectively reasonable” person may have concluded.11 In other words, the focus is on what a defendant thought when submitting a claim—not what a defendant may have thought after submitting it.12
In reaching this holding, the Supreme Court analyzed the text of the FCA’s scienter element,13 pursuant to which a defendant’s knowledge can established in three ways—actual knowledge, “acting in deliberate ignorance,” or “acting in reckless disregard.”14 Actual knowledge is “subjective knowledge,” while deliberate ignorance is “the kind of willful blindness from which subjective intent can be inferred” and reckless disregard is “an extension of gross negligence, or gross-negligence-plus.”15 The Supreme Court noted that these forms of scienter track the common law of fraud, which generally focuses on the defendant’s lack of an honest belief in the statement’s truth.16
Background
This case consolidated two Seventh Circuit decisions in which it was alleged that the respondents—SuperValu and Safeway—defrauded two federal benefits programs, Medicaid and Medicare, both of which offer prescription drug coverage to their beneficiaries.17 Pursuant to these programs, reimbursements for the sale of these drugs are capped at the pharmacy’s “usual and customary” charge to the public.18 However, SuperValu and Safeway had been offering discounted prices to their customers, while at the same time seeking reimbursement for their higher retail prices.19
The Seventh Circuit affirmed the district court’s grant of summary judgment, finding that there is no scienter under the FCA where the defendant had an objectively reasonable reading of the statute or regulation and there was no authoritative guidance warning against its view.20 In reaching this holding, the Seventh Circuit found that the Supreme Court’s scienter standard as analyzed in Safeco Ins. Co. of Am. v. Burr21 applied with equal force to the FCA’s scienter requirement.22 Applying Safeco, the Seventh Circuit also held that it was objectively reasonable for SuperValu and Safeway to charge Medicare and Medicaid their retail cash prices as their usual and customary prices for drugs rather than prices offered through competitor price-match discount programs.23 Notably, the Seventh Circuit found that the defendant’s subjective intent was irrelevant to the scienter inquiry because “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.”24 The Seventh Circuit reached these holdings despite petitioners’ presentation of evidence allegedly showing that the two companies thought their claims were inaccurate yet submitted them anyway.25
Holding
Justice Thomas summarized the question presented as “whether respondents could have the scienter required by the FCA if they correctly understood [the relevant legal] standard and thought that their claims were inaccurate.”26 In answering “yes” to that question, he stated that “[w]hat matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”27
The Supreme Court found unpersuasive the respondents’ three primary arguments. First, respondents’ argument that the phrase “usual and customary” is facially ambiguous did not preclude a finding of scienter under the FCA because the respondents could have learned its true meaning.28 Moreover, petitioners posited evidence that the companies were placed on notice that this phrase referred to their discounted prices, and despite such notice attempted to conceal the same.29
The Supreme Court relied on an analogy involving a hypothetical driver who sees a road sign saying “Drive Only Reasonable Speeds,” which the Court conceded on its face is ambiguous.30 However, it is relevant whether that driver had been previously informed that speeds over 50 mph are unreasonable, and simultaneously witnessed other drivers driving 48 mph.31 The Court stated that such a driver “might be aware of an unjustifiably high risk that anything over 50 mph is unreasonable” and would be hard pressed to argue that another third party would interpret the sign to allow driving at 80 mph.32
The Supreme Court was also unconvinced that application of the Safeco standard was appropriate in an FCA case.33 Every circuit court that had confronted this issue turned to the Supreme Court’s scienter analysis in Safeco, which, in interpreting the scienter requirement under the Fair Credit Reporting Act (“FCRA”), requires a finding that a defendant acted “willfully” to support a violation of the statute.34 The Safeco Supreme Court then determined that “willfully” under the FCRA includes both (1) knowing and (2) reckless violations of the statute.35 The Safeco Supreme Court defined “recklessness” as “conduct violating an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known,’” and notably determined that a defendant’s subjective intent was irrelevant—in essence, subjective bad faith could not defeat a defendant’s objectively reasonable reading of a statute.36 Here, the Supreme Court rejected the Seventh Circuit’s reliance on Safeco’s interpretation of the common law definitions of “knowing” and “reckless” because Safeco was decided under a different statute and Safeco did not intend to provide a safe harbor for a defendant to point to an objective interpretation while ignoring what a defendant knew or had reason to know at the time of action.37
Last, the Supreme Court rejected the respondents’ contention that their conduct constitutes misrepresentation of law which is not actionable under common law fraud incorporated by the FCA.38 The Supreme Court held that the respondents’ conduct does not constitute a pure misrepresentation of law, but rather involves states of implied facts about their usual and customary prices.39
United States, ex rel. Polansky v. Exec. Health Res., Inc., 143 S. Ct. 1720 (2023):
The Supreme Court Affirms the Government’s Broad Dismissal Authority in Qui Tam Cases.
On June 16, 2023, the Supreme Court issued its opinion in United States ex rel. Polansky v. Executive Health Resources,40 affirming that the government may seek dismissal of FCA qui tam actions so long as it intervenes in the litigation at any point.41 The Supreme Court held that such a motion to dismiss would be subject to FRCP Rule 41(a) “in all but the most exceptional cases.”42
Writing for the 8–1 majority, Justice Kagan affirmed the Third Circuit’s holding that the government may move to dismiss an FCA qui tam action after intervening—regardless of whether it intervened during the initial seal period or sometime after, and even if it initially declined to intervene.43 In establishing the application of the Rule 41(a) voluntary dismissal standard to a government’s motion to dismiss, Justice Kagan included requirements that (1) district courts hold a hearing on the dismissal request, and (2) that district courts should consider the relator’s interests in doing so, including relator’s resources invested in the action.44 And yet, even after those two considerations are accounted for, the Supreme Court noted that the Government’s motion to dismiss “will satisfy Rule 41 in all but the most exceptional cases.”45
Background
This case arose out of qui tam relator Jesse Polansky’s action alleging that his employer, Executive Health Resources, enabled its hospital clients to charge inpatient rates for what should have been outpatient services, and subsequently billed those services to Medicare.46 The government declined to intervene during the seal period.47 Following years of discovery, the government decided that the burdens of the suit outweighed its potential value, and therefore filed a motion to dismiss the action pursuant to 31 U.S.C. § 3730(c)(2)(A) over Polansky’s objection.48 The district court granted the request, finding that the government had “thoroughly investigated the costs and benefits of allowing [Polansky’s] case to proceed and ha[d] come to a valid conclusion based on the results of its investigation.”49
The U.S. Court of Appeals for the Third Circuit affirmed, finding that the government has the authority to dismiss an action under § 3730(c)(2)(A) as long as it intervened in the lawsuit at some point, and here it had effectively intervened when it filed its motion to dismiss.50 In addition, the Third Circuit held that Rule 41(a) was the proper standard to apply to the motion to dismiss as this rule governs voluntary dismissals in ordinary civil litigation.51
The Supreme Court then granted certiorari to resolve: (1) whether the government has the authority to dismiss a qui tam action under § 3730(c)(2)(A) if it declined to intervene in the suit during the seal period; and (2) what standard should apply to a § 3730(c)(2)(A) motion to dismiss.52
Holding
In assessing the government’s dismissal authority under § 3730(c)(2)(A), the Supreme Court rejected the government’s position that it may move to dismiss even if it has never intervened in the case, and, absent intervention, the government cannot file a motion to dismiss.53 The Supreme Court also rejected Polansky’s position that the government may only move to dismiss when it intervenes during the seal period, noting that under § 3730(c)(3), the government can intervene either during the seal period or “at a later date upon a showing of good cause.”54 The Supreme Court held that once the government intervenes and becomes a party, whether during the seal period or sometime later, it obtains dismissal power under § 3730(c)(2)(A) over a relator’s objection.55 In reaching this conclusion, the Supreme Court noted that the government is always an interested party in a qui tam action, even where it declines to intervene, and that the language of § 3730(c)(2)(A) and surrounding provisions presuppose that the government has intervened where moving to dismiss a qui tam suit.56 Thus, a motion to dismiss under § 3730(c)(2)(A) is permissible only where the government has intervened in the suit.57
In assessing the proper standard to be applied to a motion dismiss a quit tam action after the government has properly intervened, the Supreme Court affirmed the Third Circuit’s application of Rule 41(a) to § 3730(c)(2)(A) motions to dismiss.58 The Rule 41(a) voluntary dismissal standard hinges on the cases’ procedural posture—where a defendant has not answered or moved for summary judgment, a plaintiff need only file a notice of dismissal.59 But once that threshold has been crossed, “dismissal requires a ‘court order, or terms that the court considers proper.’”60 The Supreme Court noted that application of Rule 41(a) in the FCA context differs from the norm in two ways.61 First, a district court is required to provide notice and an opportunity for a hearing prior to dismissal pursuant to § 3730(c)(2)(A).62 Second, a district court needs to conduct Rule 41(a)(2)’s “proper terms” analysis prior to dismissal, which in the FCA context focuses on the relator’s interests—whether their commitment of substantial resources militates against dismissal.63 However, the Supreme Court sided with the Third Circuit in holding that § 3730(c)(2)(A) motions will satisfy Rule 41 in all but the most exceptional cases.64
Conclusion
Although the two opinions are a mixed bag for FCA whistleblowers and defendants, both decisions can be considered a victory for the government. On one hand, the Supreme Court diluted a key defense in cases involving ambiguous statutes or regulations, while on the other hand, the Supreme Court blessed the government’s near unfettered dismissal authority—a victory for defendants hoping to curtail FCA litigation.
Of the two cases, Schutte will undeniably have the greatest impact on the FCA litigation and compliance. In the wake of an increasingly complex regulatory—and subregulatory—environment, defendants, particularly in heavily regulated industries such as health care, had become increasingly reliant on the “objective reasonableness” defense in FCA litigation.65 Post-Schutte, it will likely be much harder for many defendants to obtain a dismissal or summary judgment on the issue of scienter. The onus is now on companies to be more proactive when encountering ambiguous statutes or regulations. In many instances, this will involve communicating with the government about the ambiguity, including seeking clarification or simply making the government aware of the interpretation. Documenting a good faith, subjective interpretation of the statute or regulation may also become critical as lower courts flesh out the proper application of the FCA’s scienter element following this decision.
With respect to Polansky, although the government’s exercise of its dismissal authority remains relatively rare when compared to the number of qui tam cases filed each year, it is possible that Polansky will spur greater use of this tool.66 From the relator’s standpoint, the case may be viewed as a loss, but it is unlikely to have a significant impact on the whistleblower bar’s ability to bring a meritorious case. Statistically, relators are far less likely to win an FCA suit when the government declines to intervene in the matter—even in the absence of a dismissal.67 Thus, one can imagine the likelihood of recovery in a matter that has been targeted by the government for dismissal. Polansky simply blesses the government’s broad dismissal authority—consistent with its role as the true party of interest in an FCA case. More importantly, the Supreme Court made clear that although it is broad, the government’s dismissal authority is not limitless—retaining a narrow avenue of judicial review for relators.
As typical in FCA cases that reach the Supreme Court, the full impact of both matters will not be known until the FCA bar begins to litigate cases in the wake of these two decisions. For now, however, we can expect that the relevant stakeholders—i.e., government, whistleblowers, and defendants—are actively adapting to this new FCA landscape.
Jessica Tillipman is the Associate Dean for Government Procurement Law Studies and Government Contracts Advisory Council Professorial Lecturer in Government Contracts Law, Practice & Policy at The George Washington University Law School and an internationally recognized expert in government procurement integrity and compliance issues. Her teaching and scholarship focus on the intersection of government procurement, anti-corruption law, ethics, and compliance.
Edward V. (“Teddie”) Arnold is a partner in the Government Contracts practice group at Seyfarth Shaw LLP in Washington, D.C. His practice encompasses all areas of government procurement, where he regularly represents contractors in litigation before the Government Accountability Office, the Boards of Contract Appeals, the U.S. Court of Federal Claims, and state and federal courts across the country. He is co-chair of the firm’s False Claims Act Investigations & Defense group. He also serves as the coordinator for the Defense Industry Initiative on Business Ethics and Conduct and holds several positions with the ABA Section of Public Contract Law.
The authors would like to thank Rebecca Van Vliet (J.D. 2025, The George Washington University Law School) for her excellent research assistance.
Recommended Citation
Jessica Tillipman & Teddie Arnold, Response, United States ex rel. Schutte v. SuperValu, Inc. & United States ex rel. Polansky v. Exec. Health Res., Inc., Geo. Wash. L. Rev. On the Docket (August 18, 2023), https://gwlr.org/schutte-polansky-shifting-the-landscape-of-false-claims-act-litigation-compliance.
