EnforceMintz — 2022 Teed Up Two False Claims Act Issues That the Supreme Court Is Poised to Answer in 2023
Over the last year, a few important questions related to False Claims Act (FCA) cases have garnered significant attention. Two of those questions ultimately made their way to the Supreme Court. In one case, which has already been argued, the Court addresses whether the government has authority to dismiss an FCA case brought by a private citizen on the government’s behalf (a qui tam action) after originally declining to intervene and, if so, the applicable standard of judicial review. More recently, the Court has agreed to hear two cases that address whether a defendant’s “objectively reasonable” interpretation of ambiguous statutory language presents a cognizable defense to “knowledge” under the FCA. We cover both of these issues in more detail below.
Supreme Court Hears Argument on the Government’s Dismissal Authority Under Section 3730(c)(2)(A)
The FCA empowers the government to “dismiss [a qui tam] action notwithstanding the objections of the person initiating the action if the person has been notified by the government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” In early December, the Supreme Court heard oral argument in U.S. ex rel. Jesse Polansky v. Executive Health Resources, Inc., which presents the question of “whether the government has authority to dismiss an FCA suit [under section 3730(c)(2)(A)] after initially declining to proceed with the action, and what standard applies if the government has that authority.”
The high court previously declined to address the scope of the government’s dismissal authority under this provision on at least two recent occasions when it denied petitions for writs of certiorari in U.S. rel. Schneider v. JPMorgan Chase Bank NA in April 2020 and in CIMZNHCA LLC v. United States in June 2021, but courts of appeal continued to grapple with this question. For example, in January 2022, the First Circuit answered a similar question in Borzilleri v. Bayer AG, 24 F. 4th 32 (1st Cir. 2022) and adopted a deferential standard of review with respect to government decisions to dismiss (we covered this case in depth here). Then, in June 2022, the high court finally agreed to hear this question after the Third Circuit affirmed the lower court’s dismissal of the relator’s suit in Polansky.
Dr. Jesse Polansky filed suit in July 2012 against Executive Health Resources, Inc., accusing the health care billing certification company of helping hospitals overbill federal health care programs by certifying inpatient services that should have been performed on an outpatient basis. The government initially declined to intervene in June 2014, but then in 2019, sought dismissal under Section 3730(c)(2)(A), citing as grounds for its motion litigation expense and the low likelihood of success. The district court granted dismissal in November 2019 and, in October 2021, the Third Circuit affirmed. The Third Circuit rejected Dr. Polansky’s argument that, by declining to intervene, the government had given up its right to seek dismissal of his suit. Instead, the Court of Appeals found that Section 3730(c)(2)(A) of the FCA permits dismissal by the government notwithstanding its initial declination to intervene, if (1) the government intervenes before moving to dismiss, and (2) the government’s motion to dismiss meets the standards of Federal Rule of Civil Procedure 41(a).
Dr. Polansky filed a petition for a writ of certiorari from the Supreme Court on January 26, 2022, presenting the question of “[w]hether the government has authority to dismiss an FCA suit after initially declining to proceed with the action, and what standard applies if the government has that authority.” The high court granted Dr. Polansky’s petition and heard oral arguments on December 6, 2022.
Although the Court has not yet rendered its decision, the Justices’ questions during oral argument have led many to believe that the Justices are not inclined to agree with Polansky’s view that the government foregoes its right to dismiss under Section 3730(c)(2)(A) by declining to intervene. A likely outcome will be a decision upholding the government’s right to seek dismissal after an initial declination, but establishing some deferential standard of review by the trial court before the dismissal can take effect. The unanswered question appears to be precisely what that deferential standard will be.
Regardless of where the high court lands, Department of Justice (DOJ) Deputy Assistant Attorney General for the Civil Division Michael Granston noted in his recent comments at the January 2023 ACI Advanced Forum on False Claims Act and Qui Tam Enforcement (January 2023 ACI Conference) that the Court’s decision in Polansky will likely have little practical impact, given that DOJ rarely exercises its authority to affirmatively dismiss cases under Section 3730(c)(2)(A) - having done so in only 58 qui tam FCA cases out of 3,000 filed in the last five years - and that DOJ will likely continue to use this authority “sparingly and transparently.
The Supreme Court Also Will Consider Whether an “Objectively Reasonable” Interpretation of Ambiguous Statutory Language Is a Defense to “Knowledge” Under the FCA
The Supreme Court also received petitions for a writ of certiorari in four cases that ask the Court to consider whether, in short, a defendant’s “objectively reasonable” interpretation of ambiguous statutory language presents a cognizable defense to “knowledge” under the FCA. See U.S. ex rel. Tracy Schutte v. SuperValu Inc. (originating from the Seventh Circuit Court of Appeals, cert petition filed April 1, 2022); U.S. ex rel. Thomas Proctor v. Safeway, Inc. (also from the Seventh Circuit, cert petition filed August 3, 2022); Troy Olhausen v. Arriva Medical LLC (originating from the Eleventh Circuit, cert petition filed October 18, 2022); and U.S. ex rel. Deborah Sheldon v. Allergan Sales, LLC (originating from the Fourth Circuit, cert petition filed December 22, 2022).
After months of waiting to see whether the Court would take up this issue, stakeholders across the FCA landscape received their answer on January 13, 2023, when the Court granted certiorari in the SuperValu and Safeway cases (which had been consolidated for briefing and oral arguments). As of the date of this publication, the petitions in Arriva and Allergan remain pending.
Over the last year, these cases – especially SuperValu – have attracted increasing attention, including from DOJ, because they recognize a so-called “ambiguity” defense to FCA liability. In the government’s view, these decisions, if upheld, would potentially permit defendants to escape liability for conduct they in fact know to violate the FCA, so long as they can demonstrate an “objectively reasonable” interpretation of the requirement they are accused of violating, even if that interpretation was not held at the time of the conduct.
In SuperValu, relators alleged that the grocery store chain had violated the FCA by misrepresenting its usual and customary price for generic drugs to insurers, including Medicare and Medicaid. Although the district court found that SuperValu’s understanding of “usual and customary” pricing was incorrect, the court decided that the company had adopted an objectively reasonable interpretation of this term (on which there was no guidance) and thus the relators had failed to allege “knowledge” as required to state a claim under the FCA. On appeal, a majority of a divided Seventh Circuit panel agreed with the district court, finding that SuperValu’s interpretation of the regulations was “objectively reasonable” – even if SuperValu had not actually believed that its interpretation was correct – and that SuperValu’s subjective intent was irrelevant.
At the June 2022 ACI Advanced Forum on False Claims Act and Qui Tam Enforcement, Granston noted that the SuperValu case (and cases like it) was of concern to DOJ because it imported an ambiguity defense into the FCA that, in DOJ’s view, undermines the FCA “knowledge” standard, particularly the “deliberate ignorance” and “actual knowledge” prongs of this requirement. He also expressed concern that courts addressing this issue were adopting an unduly narrow view of sources that can warn a defendant away from conduct by requiring that such warnings come from an “authoritative government source,” effectively excluding attorneys, compliance officers, and whistleblowers from recognized sources of such warnings. (Left unstated in Granston’s articulation of the government’s position is the implication that the existence of non-authoritative guidance that counsels against a contemplated course of action will establish “knowledge” of wrongdoing even in the face of objectively reasonable guidance to the contrary from other non-governmental sources.)
In his comments at the January 2023 ACI Conference, Granston reiterated DOJ’s concerns about the precedent set by SuperValu, adding that the Department welcomed the Supreme Court’s decision to grant SuperValu’s petition for certiorari and was looking forward to a resolution of the issues raised by this and related cases.
DOJ is not alone in its concerns about SuperValu. Senator Chuck Grassley, a longtime advocate for vigorous FCA enforcement, filed an amicus brief in this matter, arguing that the Seventh Circuit’s decision ignored the FCA’s text and structure and held that “that a defendant who correctly knows an act is unlawful is immunized from FCA liability if its lawyer, years later, can cook up an interpretation of the law under which the act was arguably permissible — even if that interpretation is wrong and the defendant did not have that interpretation at the time.”Senator Grassley described the Seventh Circuit’s decision as “mak[ing] a hash of the law of fraud, which focuses on what a defendant understood at the time it undertook a fraudulent act” and “collaps[ing] the three separate routes to [FCA] liability that Congress laid out [in the FCA knowledge standard] into one, finding that such an after-the-fact excuse prevents not only a finding of recklessness, but also “actual knowledge” and “deliberate ignorance.”
Perhaps unsurprisingly, the Taxpayers Against Fraud Education Fund (TAFEF) also filed an amicus brief in this case urging the Court to overturn the decision below and arguing that the Seventh Circuit’s decision has far-reaching potential consequences for FCA enforcement. Specifically, TAFEF argues that the Seventh Circuit’s decision (1) undermines the plain text of the “knowledge” standard by precluding evidence of subjective intent and limiting sources that might warn a defendant away from a given interpretation to authoritative sources of guidance of sufficient specificity, (2) undermines the application of the FCA to contexts where no authoritative guidance exists (because the government cannot anticipate every circumstance in which such guidance might be needed), and (3) misapplies the SafeCo standard and contradicts the Court’s decision in Universal Health Servs. v. United States ex rel. Escobar. With respect to Escobar, TAFEF argues that because Escobar clarifies that FCA liability for material misrepresentations of compliance with an underlying statutory, regulatory, or legal requirement includes consideration of evidence of whether the defendant knew or had reason to know that the recipient of the representation attached importance to that requirement in determining their choice of action. According to TAFEF, the Seventh Circuit’s SuperValu decision would thus render impermissible the same evidence that would establish knowledge under Escobar that a defendant was making material misrepresentations.
Upon request from the Supreme Court, the U.S. Solicitor General filed a brief expressing the views of the United States in early December. Like TAFEF, the Solicitor General argues against the Seventh Circuit standard and seeks reversal of the decision below.
Unlike the Polansky case, the SuperValu decision will likely result in appreciable changes in FCA litigation. For example, some FCA attorneys expect that if the Supreme Court upholds the Seventh Circuit’s decision, “knowledge” may become an issue that is more frequently addressed in FCA cases at the motion to dismiss stage, which in turn might lead relators to spend more time focusing in their complaints on the question of whether the underlying legal requirement alleged to have been violated is in any way ambiguous, and if so, whether the defendant’s interpretation was reasonable. A contrary decision could greatly diminish the viability of a knowledge defense where regulatory guidance is ambiguous, while at the same time putting greater pressure on legal and compliance guidance to steer clients through uncharted regulatory waters.
 Granston’s aside that DOJ would be using its dismissal authority “sparingly and transparently” provides an ironic coda to the eponymous 2018 “Granston Memo,” which many observers then read to signal an increased willingness on the government’s part to intervene to dismiss weak and meritless qui tam actions. Whether for institutional or political reasons (or both), greater openness to dismissing qui tam actions is not currently DOJ policy. Five years after issuance of the Granston Memo, government intervention to dismiss qui tam actions continues to be an infrequent case outcome.
 The circuit court reached this decision by interpreting the FCA’s knowledge requirement in accordance with the Supreme Court’s 2007 decision in Safeco Insurance Co. of America v. Burr, which interpreted the Fair Credit Reporting Act (which has a knowledge requirement similar to the FCA) and applying the SafeCo two-step analysis to the FCA's “reckless disregard” standard: (1) whether the defendant’s interpretation was objectively reasonable, and (2) whether “authoritative guidance might have warned defendant away from that reading.