Background on Safeco and FCA scienter
The FCA prohibits only the “knowing” misconduct involving submission of false claims to the government.4 Time and again, Congress, courts, and the Justice Department point to this element as the critical factor separating mere regulatory non-compliance from misconduct punishable under the FCA.5 The statute defines “knowing” and “knowingly” with three sub-divisions, to mean “actual knowledge of the [falsity,]” “act[ing] in deliberate ignorance of the truth or falsity of the information,” “or” “act[ing] in reckless disregard of the truth or falsity of the information[.]”
The Supreme Court’s decision in Safeco involved the Fair Credit Reporting Act, rather than the FCA. That statute imposes liability when the defendant “willfully fails to comply” with its requirements. The Supreme Court agreed that “willful” acts could be those made with a “reckless disregard” for the statute, but held that a defendant does not act with recklessness when operating under an interpretation of the statute that is not “objectively unreasonable.” Because the FCA also includes “reckless disregard” in its statutory definition of “knowing”, several circuits courts have applied Safeco to the “reckless disregard” prong of FCA scienter.6
Supervalu and the Seventh Circuit’s view of Safeco
On August 12, 2021, the Seventh Circuit issued its decision in Supervalu, becoming the fifth circuit to expressly apply Safeco to the FCA. At issue in Supervalu was the defendant’s interpretation of “usual and customary charges[.]” Affirming the district court’s grant of summary judgment, the Seventh Circuit agreed that Supervalu had put forth an objectively reasonable interpretation of the applicable authority under Safeco.
The Seventh Circuit decision lays out a two-part test for determining whether Safeco precludes a finding of “knowing” misconduct in the context of an ambiguous regulation: “whether the defendant has a permissible interpretation of the relevant provision and whether authoritative guidance nevertheless warned it away from that reading.” In doing so, the Seventh Circuit took a broad approach to whether the proffered interpretation was permissible, noting that the Safeco standard “tethered the objectively reasonable inquiry to the legal text, not its underlying policy,” and rejected an argument that a “clear purpose” for a statute or regulation foreclosed any finding of ambiguity permitting an alternative, permissible interpretation.
In an unusually combative back and forth, the Supervalu majority dueled with a dissent over the time at which the defendant became aware of the alternative, objectively reasonable interpretation. The dissent sought to impose a limitation that, in order to foreclose any finding that it had acted “recklessly,” the defendant must show that it held the objectively reasonable interpretation “at the time it submitted its false claim,” expressing a concern that defendants would rely on an alternative interpretation that was manufactured post hoc as a way to avoid liability. In such a case, the dissent posited, the defendant would have acted with subjective bad faith, which is “central” to common law fraud, and applicable to the “actual knowledge” prong of FCA scienter. The dissent expressed concern that the standard articulated presented far too narrow a view of the FCA’s scienter requirement, and that the majority’s “bottom line” was that “only objectively reckless disregard matters, and subjective bad faith does not[.]”
The Supervalu majority engaged with these points, ultimately holding that FCA liability is foreclosed when the Safeco standard is not met. The Supervalu majority’s rejoinder to the dissent characterizes it as a distinction between what the defendant “knows” versus what it “believes.” As the majority’s argument goes, if there is an objectively reasonable alternative interpretation of the applicable authority, even one not held by the defendant at the time the claim was submitted, then the defendant might “believe” that it was submitting a false claim, but it could not “know” it was doing so. In this way, the Supervalu majority supported its view that an objectively reasonable interpretation of the statute precluded a finding of FCA scienter under any of the additional textual prongs.
This broad “safe harbor” for FCA liability prompted an immediate challenge. Both the Department of Justice and the organized Relators’ bar, through the Taxpayers Against Fraud Education Fund, filed amicus briefs in support of the relators’ petition for the Seventh Circuit’s en banc review of Supervalu. The government argued that a defendant’s subjective and correct “belief” that it was violating the statute is sufficient to establish that they acted “knowingly” even when they later identified an alternative, reasonable interpretation consistent with their conduct.7 Echoing the Supervalu dissent, the government argued that the Supervalu majority erred by focusing only on whether an alternative interpretation was “objectively reasonable[,]” in disregard of the alternative scienter prongs and their roots in common law fraud8. Although the Seventh Circuit denied the petition for en banc review on December 3, 2021,9 the controversy seems unlikely to end without the relator seeking further review on petition for certiorari before the Supreme Court.
The alternative approach in Norton
The recent Norton10 decision by Judge Contreras of the U.S. District Court for the District of Columbia reflects the dueling application of Safeco to FCA scienter. Although Norton involved no dispute over whether Safeco’s objectively reasonable standard applied, it focused on the timing issue that surfaced in Supervalu. Judge Contreras considered the extent to which an objectively reasonable belief, not held contemporaneous with the submission of the claim, could preclude a finding that the defendant acted “knowingly” under the FCA. Judge Contreras held that neither Safeco nor related authority in the D.C. Circuit established that an identification and adoption of a reasonable interpretation after the fact could foreclose a finding of liability.11
A particularly noteworthy aspect of the court’s analysis in Norton is its reconciliation of precedent that stated “subjective intent – including bad faith – is irrelevant when a defendant seeks to defeat a finding of knowledge based on its [objectively] reasonable interpretation of a regulatory term,” with its own holding that a reasonable interpretation, discovered post hoc and not held at the time of the allegedly false claim, was also irrelevant to that finding. The opinion suggests that a defendant who adopts an objectively reasonable interpretation of an ambiguous regulation contemporaneous with the submission of a claim, and “hews” to that interpretation through the period covered by that claim, can avoid liability, even if that defendant also suspected the agency receiving the claim might not agree. Under the Norton standard, the questions are limited to the objective reasonableness of the defendant’s proffered exculpatory interpretation and whether it was held at the time the claim was submitted. In this way, the Norton case appears to be in conflict with the Supervalu decision. To the Supervalu court, scienter is akin to a legal impossibility when a defendant’s claims are in accord with an objectively reasonable interpretation of an ambiguous provision; to the District Court in Norton (as well as the Supervalu dissent and DOJ), an additional factual inquiry is necessary to determine if the defendant actually held that objectively reasonable belief at the time the claim was submitted. In Norton, the question of when the defendant adopted an objectively reasonable view of the regulation was found to be a question for the jury.12
Conclusion
The practical implications of the analytical debate visible in the opinions in Supervalu and Norton are of great significance to individuals and corporations who operate every day in the context of complex and ambiguous government regulations. Under either view of the timing element, where the government fails to issue guidance clarifying an ambiguous provision, putative FCA defendants who identify and then act on objectively reasonable interpretations of such provisions can seek “safe harbor” under Safeco. But a decade after Safeco, other questions remain open, including who bears the burden of proof, what types of evidence show that a defendant held an objectively reasonable belief at a particular point in time, and whether invoking the safe harbor triggers a waiver of the attorney-client privilege.
References
1. Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 47 (2007).
2. United States ex rel. Schutte v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021).
3. United States ex rel. Morsell v. NortonLifeLock, Inc., No. CV 12-800 (RC), --- F. Supp. 3d ----, 2021 WL 3363446 (D.D.C. Aug. 3, 2021)(reconsideration of previous order denying defendant’s motion for summary judgment).
4. 31 USCA § 3729.
5. See, e.g., Universal Health Servs., Inc. v. United States ex rel. Escobar (Escobar), 579 U.S. 176, 191-92 (2016).
6. See also United States ex rel. Streck v. Allergan, Inc., 746 F. App’x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017); United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015). Since the Seventh Circuit’s decision in Supervalu, the Fourth Circuit has joined in holding that Safeco’s objectively reasonable standard applies to the FCA. See U.S. ex rel. Sheldon v. Allergan Sales, LLC, --- F.4th ---- (2022), 2022 WL 211172 at *1 (4th Cir. Jan. 25, 2022)
7. United States ex rel. Schutte v. Supervalu Inc., No. 20-2241, (7th Cir. Sep. 30, 2021), ECF No. 68.
8. The government also took issue with the majority’s discussion of the second prong under the Safeco standard: whether the defendant was “warned away” from the otherwise permissible alternative interpretation. The government argued that Supervalu was incorrect that only governmental authority was relevant to this analysis.
9. Order Denying En Banc Petition, United States ex rel. Schutte v. Supervalu Inc., No. 20-2241, (7th Cir. Dec. 3, 2021), ECF No. 79.
10. NortonLifeLock, 2021 WL 3363446.
11. Id. at *9 (quoting Halo Elecs., Inc. v. Pulse Elecs., Inc., ––– U.S. ––––, 136 S. Ct. 1923, 1933 (2016), “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.”).
12. Judge Contreras's opinion is doubly noteworthy because of his familiarity with FCA litigation from his prior work as the Chief of the Civil Division of the United States Attorney’s Office of the District of Columbia.