The Significance of the FCA’s Scienter Requirement
An FCA action requires a showing of “(1) a false statement or fraudulent course of conduct, (2) made with scienter [or knowledge], (3) that was material, (4) causing the government to pay out money or forfeit moneys due.” The “objectively reasonable interpretation” defense at issue in SuperValu asserts that, where a hospital or other healthcare provider has an objectively reasonable interpretation of an ambiguous statute or regulation, the provider should not be held liable under the FCA for following that objectively reasonable interpretation even if that interpretation ultimately proves to be wrong (unless the provider has been “warned away” from that interpretation by “authoritative guidance,” as discussed further below). Over the last several years, many courts have begun to apply this common sense defense in FCA cases. However, the U.S. Department of Justice and relators’ counsel in qui tam (or “whistleblower”) actions have been pushing back on this defense, and the ultimate parameters of its application remain in doubt.
Petition for Certiorari Granted in SuperValu
On April 1, 2022, the relator in United States ex rel. Schutte v. SuperValu Inc. filed a petition for certiorari to the U.S. Supreme Court, asking the Supreme Court to take up the question of the applicability of the “objectively reasonable interpretation” defense. Since 2015, the application of this defense has been evaluated by multiple circuit courts of appeals without rejection. Although no court of appeals has explicitly rejected the defense, there are nevertheless slight differences in how it’s been applied. Based on these variances in application, the relator in SuperValu argued that a circuit split exists on the defense.
On August 22, 2022, the Supreme Court invited the U.S. Solicitor General to file a “brief in [SuperValu] expressing the views of the United States,” even though the United States had originally declined to intervene in the case. Shortly before the Solicitor General weighed in, the Fourth Circuit also considered the “objectively reasonable interpretation” defense in a rehearing en banc in United States ex rel. Sheldon v. Allergan Sales, as set forth further below. The Fourth Circuit justices split evenly on the issue. In hindsight, the Fourth Circuit’s inability to reach a majority view on whether the defense applies may have created a sufficient overall circuit split on the issue to make it ripe for Supreme Court review.
On December 6, 2022, the Solicitor General filed a brief in SuperValu asserting that the Supreme Court should grant certiorari given that “the question presented has generated disagreement in the courts of appeals and is important to efforts to fight fraud involving the public fisc.”
Several weeks later, on January 13, 2023, the Supreme Court granted certiorari, and, in doing so, consolidated SuperValu with a similar Seventh Circuit case also involving the “objectively reasonable interpretation” defense, United States ex rel. Proctor v. Safeway, Inc.
There is a substantial similarity between Safeway and SuperValu. In each, the defendant has argued that it had an objectively reasonable interpretation of the same drug-pricing regulation. Likewise, the Seventh Circuit issued its decision in Safeway mere months after SuperValu, with the same judge issuing the majority opinion (and the same judge dissenting) in each. Also of note, the procedural history of each case is similar. Specifically, the Seventh Circuit affirmed the district court granting the defendants’ motions for summary judgment, and the same counsel represents the relators in each case, further bolstering the Supreme Court’s decision for consolidation.
History of the “Objectively Reasonable Interpretation” Defense
In 2007, in the case of Safeco Ins. Co. of America v. Burr, the U.S. Supreme Court set out the parameters of the “objectively reasonable interpretation” defense. Safeco was not an FCA case, but rather, it interpreted what “reckless disregard” meant in the context of the Fair Credit Reporting Act (FCRA). The Supreme Court set up a two-step test to determine whether a defendant acted in “reckless disregard” of the meaning of a statute: (1) did the defendant have a “reading of the statute, albeit erroneous, [that] was not objectively unreasonable,” and, if so, (2) did the defendant lack “the benefit of guidance from the court of appeals or [the relevant agency] that might have warned it away from the view it took”? Therefore, under Safeco, if these two steps are met, a defendant will not have a reckless disregard for the meaning of the statute and will not face FCRA liability.
Eight years after the Safeco decision, the Safeco “reckless disregard” standard was extended by the Court of Appeals for the D.C. Circuit in United States ex rel. Purcell v. MWI Corp. and applied to the FCA context for the first time. The D.C. Circuit held that “[u]nder the FCA’s knowledge element, then, the court’s focus is on the objective reasonableness of the defendant’s interpretation of an ambiguous term and whether there is any evidence that the agency warned the defendant away from that interpretation.” However, the D.C. Circuit articulated a three-step test (instead of a two-step test) for this defense, adding the predicate requirement that the statute or regulation must actually be ambiguous.
Following the D.C. Circuit’s decision in Purcell, the Third, Seventh, Ninth, and Eleventh Circuit Courts of Appeal have also utilized Safeco’s test (with some slight modifications and variations) in the FCA context and explicitly approved the “objectively reasonable interpretation” defense.
As mentioned above, one of the most significant decisions in this line of cases is the Seventh Circuit’s decision in United States ex rel. Schutte v. SuperValu Inc. Although SuperValu cited to Purcell, it explicitly adopted Safeco’s two-step test, rather than Purcell’s three-step test. The court held that (1) the defendant’s interpretation of Medicare and Medicaid’s “‘usual and customary price’ was objectively reasonable [although ultimately erroneous] under Safeco[,]” and (2) there was no “authoritative guidance” from the Centers for Medicare and Medicaid Services that “warned defendants away from their erroneous interpretation[,]” which precluded the defendant from acting “knowingly” as prescribed by the FCA. Although SuperValu delineates a slightly different test than some of the other cases cited above, the most important elements of this defense—a defendant’s objectively reasonable, though erroneous, interpretation and a lack of authoritative guidance to notify the defendant of the erroneous interpretation—are uniform in all of the circuit courts that have expressly considered the defense.
On January 25, 2022, a panel of the Fourth Circuit in United States ex rel. Sheldon v. Allergan Sales adopted Safeco’s two-step test and decided (1) the defendant’s interpretation of the Medicaid Drug Rebate Statute’s “Best Price” “was at the very least objectively reasonable” even if erroneous, and since (2) the defendant “was not warned away from that [interpretation] by authoritative guidance,” the defendant could not have acted “knowingly” as outlined by the FCA. The court declared that it could not “accept the idea that a defendant acts ‘knowingly’ when its reading of a statute is both objectively reasonable and in fact the best interpretation; when the agency’s regulation mirrors, rather than repudiates, that interpretation; when the agency resists attempts to get it to clarify its view; and when the agency explicitly invites regulated parties to make reasonable assumptions.”
As described above, however, the Fourth Circuit panel’s decision in Sheldon was vacated by a later decision by the Fourth Circuit, sitting en banc. On September 23, 2022, after rehearing the case en banc, the Fourth Circuit issued an order stating that the court was equally divided on whether to uphold the panel’s decision, which resulted in the panel’s decision being vacated and the district court’s ruling thereby reinstated. Since the district court had ruled in favor of the defendant and had applied the Safeco standard for the “objectively reasonable interpretation” defense, the case remained dismissed, but the earlier, Fourth Circuit panel opinion in the Sheldon case has no precedential authority. The applicability of the “objectively reasonable interpretation” defense therefore remains somewhat uncertain in the Fourth Circuit, so healthcare providers and other regulated industries in the Fourth Circuit should tread carefully with interpreting regulations and take steps to mitigate FCA risks as set forth further below.
An Ongoing Issue to Keep an Eye On: What Constitutes “Authoritative Guidance”?
One issue that courts have continued to struggle with in applying this “objectively reasonable interpretation” defense is determining what constitutes “authoritative guidance” that would warn a provider away from its objectively reasonable interpretation. Specifically, can sub-regulatory guidance constitute “authoritative guidance?” In Azar v. Allina Health Services, the Supreme Court indicated that under certain circumstances, the government must go through official “notice and comment” procedures in order for guidance to be authoritative. It is still unclear, however, what, if any, sub-regulatory guidance is sufficient to “warn away” a provider from an incorrect interpretation of a statute or regulation sufficiently to deny the provider the benefits of the “objectively reasonable interpretation” defense. For example, is a Local Coverage Determination (LCD) by a Medicare Administrative Contractor (MAC) authoritative? If it is not authoritative, and if a provider disagrees that the LCD is the proper interpretation of the statute or regulation, and if it has an objectively reasonable interpretation that contradicts it, can the provider ignore the LCD?
The Most Significant Criticism of the Defense: Post Hoc Rationalization
One of the biggest issues for the judges who dissented in both the SuperValu and the Sheldon cases is the issue of whether a healthcare provider or other defendant can simply use this defense as a post hoc rationalization for an otherwise knowing violation of a statute or regulation. In the Sheldon dissent, Judge Wynn called the application of the defense “absurd” in certain circumstances: “For example, under the majority opinion’s test, a defendant could know they are committing fraud, be told by a court that they are doing so, and nevertheless escape liability because (1) they advance a post hoc explanation that, while wrong, is still ‘reasonable,’ and (2) neither the Government nor the court had said anything ‘authoritative’ at the time of the fraud.” Likewise, in the dissent in the SuperValu case, Judge Hamilton said that “this case creates a safe harbor for fraudsters who claim taxpayer funds in bad faith, but whose barely-straight-faced lawyers offer an innocent explanation for their conduct. The majority even says it is irrelevant whether SuperValu actually believed and/or relied upon the post hoc justifications offered in litigation.” It is almost certain that the Supreme Court will address this significant criticism of the defense. The Supreme Court might, for example, accept the defense in general, but require that in order to take advantage of it, the defendant must prove that it actually believed the objectively reasonable interpretation at the time it submitted the claims. As a practical matter, this would create a significant procedural hurdle, because cases could not be dismissed through filing a motion to dismiss. Instead, a party would need to file a motion for summary judgment after completing discovery on the facts dealing with this defense.
Conclusion and Practical Guidance
In anticipation of the Supreme Court’s forthcoming consideration of this “objectively reasonable interpretation” defense and in the midst of current uncertainties regarding its applicability, how can a healthcare provider (or government contractor) mitigate FCA risks? The best practices for healthcare providers are to: (1) ensure that they keep abreast of both regulatory and sub-regulatory guidance; (2) document their rationale for interpreting ambiguous regulations to make clear they are acting in good faith; (3) seriously consider following all administrative guidance and sub-regulatory guidance, even if such sub-regulatory guidance is not “authoritative”; and (4) if the provider determines that the sub-regulatory guidance is not authoritative and decides to not follow it, consider explaining in advance to the MAC why the provider does not believe the guidance is authoritative and why the provider is interpreting the regulation the way it is. If a provider is upfront with the MAC about any issues regarding regulatory interpretation, this could go a long way in rebutting any allegation of fraud or bad faith.