Last week the Supreme Court issued its highly anticipated ruling in United States ex rel. Schutte v. SuperValu Inc., and it was even better than some of us had predicted after the very positive oral argument. Here are five things to love about it:
- The Supreme Court got it right. The False Claims Act clearly creates a subjective test for liability: did the defendant act with actual knowledge, deliberate ignorance, or reckless disregard? All three of those standards require examination of the defendant’s subjective mental state, including what it knew and what its subjective intent was. But in SuperValu and its companion case, United States ex rel. Proctor v. Safeway, the Seventh Circuit held that a court could dismiss a case even where the defendant had actual knowledge that it was behaving illegally, as long as somebody could come up with a reasonable (but wrong) after-the-fact excuse that had nothing to do with what the defendant actually believed at the time. One can imagine this standard creating a cottage industry of defense lawyers getting paid immense sums to concoct wrong-but-just-reasonable-enough arguments to get their clients off the hook. The Supreme Court, thankfully, put an end to that and restored the knowledge standard that Congress enacted.
- The Supreme Court rejected a parallel ‘falsity’ argument. Defendants frequently raise an argument similar to their SuperValu position, but aimed at a different element of the False Claims Act, “falsity.” According to that argument, a claim made in violation of an ambiguous law or regulation can never be “false.” While most appellate courts rejected that argument, some lower courts, and seemingly all defense lawyers, continued to embrace it. The Supreme Court, however, has now explicitly and unambiguously rejected it: “The facial ambiguity of [a] phrase thus does not by itself preclude a finding of scienter under the FCA.”
- The decision clarified the meaning of the FCA’s scienter standard. Prior to the Seventh Circuit’s SuperValu opinion, courts had a strong grasp of what “actual knowledge” meant. They were less consistent in their application of the FCA’s “deliberate ignorance” and “reckless disregard” language. But SuperValu now supplies a clear definition of those standards, both triggered by the defendant’s consciousness of a “substantial” risk that their claims are false, coupled with either intentional avoidance of efforts to determine the truth or falsity of the claims or submission of the claims despite an unjustifiable risk of falsity. This clarity will help courts resolve FCA cases, but more importantly, it puts companies on notice of their responsibilities when they become aware of a substantial risk that their conduct might be illegal.
- The decision was unanimous. Before the oral argument, predictions ranged everywhere from “six justices are likely to affirm the Seventh Circuit and constrict the False Claims Act” to, most optimistically, “there are six or maybe seven ‘gettable’ justices.” After a one-sided oral argument, predictions swung toward a guess of 6-3 or 7-2 for reversal. Few, if any, predicted a unanimous court. That unanimity sent a strong signal to lower courts that none of the Supreme Court justices is eager to narrow False Claims Act enforcement, and that lower courts must apply that law just as Congress wrote it.
- The decision is a win for taxpayers. The False Claims Act is the government’s strongest tool for preventing and redressing fraud by government contractors. The lower court opinion in SuperValu threatened to weaken the FCA in a way that Congress clearly did not intend, and the Supreme Court prevented that. At a time of acute budgetary need, who can be opposed to less fraud and more taxpayer recoveries?