DEVELOPMENTS REGARDING KNOWLEDGE AND SCIENTER To establish an FCA violation, a relator or the government must plead and prove that the defendant acted with actual knowledge, deliberate ignorance or reckless disregard of the conduct that caused the submission of false claims. Recent cases have considered whether defendants were alleged to have had an objectively reasonable interpretation of the regulatory provision at issue. Where courts have reached that conclusion, relators have faced a significant obstacle in pleading and proving scienter under the FCA. For example, in U.S. ex rel. Schutte v. SuperValu, Inc. , the Seventh Circuit became the latest appellate court to hold that, based on the Supreme Court’s opinion in Safeco Ins. Co. v. Burr , the FCA requires an objective scienter standard, under which defendants do not act “knowingly” if: (1) their interpretation of the relevant statute or regulation was objectively reasonable, even if mistaken; and (2) “authoritative guidance” did not warn them away from their interpretation. 121 In Schutte , the relators alleged that the defendants’ pharmacies falsely reported their “usual and customary” (U&C) prices to Medicare and Medicaid by improperly listing their retail cash prices as their U&C price, rather than lower prices provided to customers requesting a match of a competitor’s price. Applying the
In U.S. ex rel. Skibo v. Greer Labs., Inc. , the Fourth Circuit also affirmed summary judgment for the defendants based on the relators’ failure to demonstrate scienter in a case involving an ambiguous regulatory provision. There, the relators alleged that a manufacturer of allergenic extracts for physicians violated FDA regulations by not obtaining independent licenses for custom mixes of its licensed extracts. While the Fourth Circuit did not expressly apply the objective scienter standard, it found persuasive the “strong evidence” of industry understanding of the regulation and defendants’ “openly act[ing] according to that understanding” based on its advertising and interactions with the FDA. 122 Courts also grappled with applying the objective scienter standard at the motion to dismiss stage. In Lupinetti v. Exeltis USA, Inc. , the relator alleged that the defendants falsely labeled and identified their prenatal vitamins as requiring prescriptions – with “Rx” or “prescription only” on the product – in order to prevent state Medicaid programs from excluding them from coverage. 123 In granting the defendants’ motion to dismiss in part for failure to plead scienter, the district court held, relying on Schutte , that the defendants had an objectively reasonable belief that they were legally permitted to describe their prenatal vitamins as “prescription only,” and that there was no “authoritative guidance” to the contrary. The district court reasoned that the relator cited no statute or regulation preventing the defendants from labeling their prenatal vitamins as “prescription only,” disagreeing with the relator’s interpretation of FDA statutes in the process, and that publicly available CMS guidance “expressly anticipates that some prenatal vitamins will be prescription only.” By contrast, in U.S. ex rel. Kuzma v. N. Arizona Healthcare Corp. , the district court denied the defendants’ motion to dismiss and rejected the defendants’ arguments that they had an “objectively reasonable interpretation” and a “good faith interpretation” of the applicable statute and regulations. 124 The relator alleged that a hospital and health system engaged in a scheme to receive federal-share Medicaid funds in violation of Medicaid regulations on non-bona fide provider-related donations. The defendants interpreted the statue and regulations at issue to have a sequential timing requirement in order for a donation to be considered non-bona fide. In finding that the defendants’ interpretation was not objectively reasonable, the court noted that the defendants’ “narrow” timing reading was “contrary to the clear intent of the statute and regulations” and not supported by any “authoritative sources.” As to whether the defendants had a good-faith interpretation, the district court explained that was a “factual issue” that could not be resolved on a motion to dismiss. Beyond the objective scienter standard, the Supreme Court has said that the scienter requirement is “rigorous” and must be “strictly enforced.” But Rule 9(b) says that plaintiffs may allege knowledge “generally.” Courts continued to reach varying results in trying to square these requirements when evaluating the sufficiency of the allegations in FCA complaints.
objective scienter standard, the Seventh Circuit affirmed summary judgment in favor of the defendants, finding that their interpretation of the regulatory definition of U&C price – to include their retail cash prices but exclude price matches that “depended upon the prices charged by local competitors” and were provided upon customer request – was objectively reasonable and that no authoritative guidance during the relevant period warned defendants away from their interpretation. In discussing the objective scienter standard, the Seventh Circuit held that a defendant’s subjective intent is “irrelevant” because “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its
To establish an FCA violation, a relator or the government must plead and prove that the defendant acted with actual knowledge, deliberate ignorance or reckless disregard of the conduct that caused the submission of false claims.
claim is false if the requirements for that claim are unknown.” The Seventh Circuit stressed that this standard “does not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong,” given the second prong of Safeco’s standard. On that point, the Seventh Circuit explained that “authoritative guidance,” at a minimum, “must come from a governmental source – either circuit court precedent or guidance from the relevant agency” and “must have a high level of specificity to control an issue.”
122 841 F. App’x 527, 529 (4th Cir. 2021). 123 2021 WL 5407424 (N.D. Ill. Nov. 19, 2021). 124 2021 WL 75827 (D. Ariz. Jan. 8, 2021).
121 9 F.4th 455 (7th Cir. 2021) (relying on Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007)).
FALSE CLAIMS ACT UPDATE BASS, BERRY & SIMS | 20
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