Part II | April 18 Oral Argument: “Knowing” Violations of Unknowable Rules: Is the Supreme Court Poised to Alter the FCA Enforcement Landscape in SuperValu?

For background on this case, please refer to Part I.

On April 18, 2023, the Supreme Court heard oral arguments in United States ex rel. Schutte v. Supervalu Inc., 9 F.4th 455, 459 (7th Cir. 2021) and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022) (consolidated). Much anticipated by False Claims Act practitioners, the argument previewed how the Supreme Court is thinking about the case. 

Petitioners’ counsel argued that the Seventh Circuit’s decision, in practice, would allow the worst FCA violators to “escape liability” even if they admitted they wanted to break the law. That is, in Petitioners’ view, FCA defendants could interpret an ambiguous statute in whatever way would most benefit them, and after they were sued, hire counsel to develop a post-hoc rationalization for the “reasonableness” of the interpretation. Justices Thomas, Alito, and Kavanaugh expressed some resistance to this argument, posing questions and hypotheticals that highlighted the difficulties that may arise when a company is faced with an ambiguous regulation that could be interpreted in multiple, reasonable ways. In response, Petitioners’ counsel suggested that the FCA calls for an expansive rule that would impose liability on a defendant who chooses an aggressive, but defensible, interpretation of an ambiguous statute that is later determined to be incorrect. 

In response, Justices Sotomayor, Kagan, Jackson, and Gorsuch questioned why Petitioner’s counsel was muddying the waters on what they deemed to be an “easy” question – whether intent matters where a defendant knew its conduct was wrong but later developed a post hoc theory that demonstrated its conduct was “reasonable.” The Court need not consider that question, they suggested, because the case came to them on the understanding that Supervalu knew that its interpretation of the statute was wrong. 

Counsel for the United States, as amicus curiae in support of the Petitioners, likewise sought to argue the “hard” case in which there are multiple reasonable interpretations of a regulation, and at the time the statements were made, the defendant opted for the more aggressive or beneficial interpretation, which it believed to be a reasonable but perhaps not the “best” interpretation. Justices Gorsuch, Jackson, and Kagan again resisted considering this question, which they asserted was not the one before them. But Justice Alito disagreed, emphasizing the difference between assertions of law—like the assertions here, about the meaning of a statute—and assertions of fact. The legal issue here was harder than it was being portrayed, he suggested, “unless you think that people have the same certainty about the meaning of the law that they have about the facts.” 

Respondents’ counsel argued the case wasn’t as simple as it appeared because it was not merely a matter of “post hoc lawyer rationalization.” In support, counsel detailed why Respondents’ statutory interpretation was “absolutely correct,” an argument that prompted Justice Gorsuch to note that counsel was propounding an “excellent jury argument,” and perhaps even “a good summary judgment argument.” Justice Gorsuch noted that the FCA’s statutory language made Respondents’ argument that subjective intent is irrelevant in the face of an “objectively reasonable” statutory interpretation “pretty hard,” asking “why wouldn’t we reverse the Seventh Circuit on the narrow question presented because they failed to account for the fact that the statute has some mens rea attached to it?”

Respondents’ counsel continued to argue that the question presented—whether one can knowingly present a false claim when the action taken was objectively reasonable under the law at the time it was taken–-was broader and different than the one framed by Justice Gorsuch (and a majority of the other Justices). In that circumstance, Respondents argued, subjective intent is irrelevant because whether you believed you were right or believed you were wrong, your belief had no meaning because the law was unknowable. Most of the Justices rejected the contention that subjective intent could be irrelevant to scienter.  

What does this mean for FCA enforcement? Of course, nothing is set in stone until the Supreme Court formally issues its opinion, but the Court may be poised to reverse the Seventh Circuit’s decision and hold that subjective intent is relevant to whether a defendant “knowingly” violated the FCA, at least in cases in which knowledge is not based exclusively on the FCA’s “reckless disregard” provision, which some justices appeared to recognize was objective. The ruling may be cabined to the situation in which the defendant understood at the time he presented the claim for payment that it was false but later argued his interpretation was defensible.
    
In short, it appears unlikely the Court will rule subjective intent is irrelevant even when an ambiguous regulatory scheme is the basis for the FCA violation. 

Stay tuned for Part III of this series to hear how the Court comes down on what has the potential to be one of the biggest FCA cases in recent years, even if the Court believes otherwise.