The U.S. Supreme Court Clarifies the Scienter Standard for False Claims Act Cases
The U.S. Supreme Court clarified the standard for a defendant's state of mind in False Claims Act ("FCA") cases, holding that a defendant acts "knowingly"—which the FCA defines also to include deliberate ignorance and reckless disregard—if it actually knows its conduct is illegal, knows of a substantial risk of unlawfulness and avoids learning about the conduct's illegality, or ignores a substantial and unjustifiable risk of illegality.
On June 1, 2023, the U.S. Supreme Court addressed a key issue in FCA cases: What does it mean for a defendant to act "knowingly" as required for FCA liability? U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway, Inc. both presented the question whether a defendant whose conduct comported with an objectively reasonable interpretation of an underlying statutory or regulatory rule can nonetheless have "knowingly" submitted claims that falsely certified compliance with that rule in violation of the FCA. (We previously analyzed the holding in Schutte as well as the Supreme Court's decision to hear both cases.) The Court answered yes. The FCA defines "knowingly" to include actual knowledge, deliberate ignorance, or reckless disregard. The Court held that—regardless of whether a defendant's conduct aligned with a reasonable understanding of the law—a defendant can be liable if it either (i) "actually knew" that its conduct was unlawful, (ii) was "aware of a substantial risk" of unlawfulness "and intentionally avoided learning" about its conduct's legality, or (iii) was "aware of such a substantial and unjustifiable risk but submitted the claims anyway."
Notably, the ruling still leaves a key, longstanding defense intact: A defendant who operates in good faith does not violate the FCA—even if its interpretation of the law is incorrect. Importantly, the Court did not resolve what should happen when a defendant lacks "subjective awareness of the claim's falsity or an unjustifiable risk of such falsity"—that is, when the defendant lacks sufficient notice that its conduct may be unlawful. This issue, as well as what suffices to give a defendant adequate notice of unlawfulness, may become a significant battleground in FCA cases.
Going forward, FCA relators will likely try to create issues of fact on scienter by seeking extensive discovery regarding a defendant's subjective knowledge. But exactly what evidence is enough to meet Schutte's knowledge standard is likely to be another area of focus in future litigation.