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February 27, 2023

Recent False Claims Act Developments at the Supreme Court

By John Eason

The current prominence of the False Claims Act (FCA) for healthcare fraud enforcement is without dispute. Since 2018, the Department of Justice (DOJ) has recovered nearly $14 billion from FCA settlements and judgments, with more than 80% of those recoveries coming from the healthcare industry each year. For this reason, any potential activity at the U.S. Supreme Court involving the FCA draws the attention of healthcare attorneys and providers. Such was the case over the past year for several certiorari petitions before the Supreme Court that concern significant FCA issues—specifically, (1) the government’s ability to dismiss the qui tam complaint of a whistleblower (or relator), (2) the requisite details for FCA allegations to satisfy Federal Rule of Civil Procedure 9(b) and proceed into discovery, and (3) whether an objective scienter standard applies in FCA actions. Now, at the end of 2022, these petitions are each in different stages. One petition has been granted, briefed on the merits and orally argued, with an opinion expected any day now; several petitions were denied at the end of last year, with the implications still being weighed; and, most recently, two other petitions were granted in January, with an opinion likely to issue at the end of the Court’s term in June. In short, these issues will remain noteworthy during 2023. Each are discussed in turn below.

Court to Address Government’s Authority to Dismiss FCA Cases

In June 2022, in a surprising turn, the Supreme Court granted certiorari in United States ex rel. Polansky v. Executive Health Resources, Inc., indicating its intent to decide on two issues related to the ability of the DOJ to dismiss FCA qui tam actions. In Polansky, the Supreme Court will address (1) whether the government has the authority to dismiss an FCA qui tam case after initially declining to proceed with the action and (2) what standard applies if the government has that authority. The grant of certiorari was unexpected in part considering that the Court had recently declined two similar petitions for review. The Court’s grant was all the more remarkable because, while the applicable standard to review a government’s request for dismissal is the subject of a circuit split, there is no circuit court disagreement on whether the government can seek dismissal after initially declining to intervene in a qui tam action. Though unlikely, should the Court rule that such authority extinguishes upon a government declination, the implications would be profound.

Section 3730(c)(2)(A) and the Circuit Split

Section 3730(c)(2)(A) of the FCA, added during the statute’s 1986 amendments, provides that the DOJ “may dismiss” a qui tam case “notwithstanding the objections” of the relator if (1) the relator “has been notified by the [g]overnment of the filing of the motion” and (2) “the court has provided the person with an opportunity for a hearing on the motion.” The FCA does not provide a specific standard for reviewing the government’s request for dismissal. Given the statute’s silence on this issue, a circuit split developed starting in 2003 as to the appropriate standard for review. That circuit split was slow to emerge, and equally slow in ultimately arriving before the Supreme Court, in part because the government historically employed its dismissal authority only on rare occasions.

However, in January 2018, that trend shifted through DOJ’s issuance of the “Granston Memo,” in which it signaled a policy move toward pursuing more dismissals under Section 3720(c)(2)(A). The Granston Memo described DOJ’s dismissal authority as an “important tool” to further government interests, conserve limited resources, and avoid the creation of unfavorable precedent. It also outlined several factors for DOJ to consider with respect to its dismissal authority. Following the Granston Memo, the government has sought (and likely threatened) such dismissals with increasing frequency.

This change, in turn, highlighted and exacerbated the circuit split on the standard for assessing the government’s request for a Section 3720(c)(2)(A) dismissal. Heading into the Supreme Court’s decision in Polansky, the circuit split on this question now stands as follows:

  • Ninth Circuit (1998) and Tenth Circuit (2005): The government must identify a “valid government purpose” that is rationally related to dismissal. If the government satisfies this burden, the relator then must show that the dismissal would be “fraudulent, arbitrary, and capricious.”
  • D.C. Circuit (2003): The government has an “unfettered” authority to dismiss qui tam actions, and “the function of a hearing when the relator requests one is simply to give the relator a formal opportunity to convince the government not to end the case.”
  • Seventh Circuit (2020) and Third Circuit (2021): Federal Rule of Civil Procedure 41(a) is the standard for assessing a government’s motion to dismiss. If the defendant has not served either an answer or a motion for summary judgment in the qui tam action, the government’s right to dismiss is “absolute” and “automatic.” The relator has the opportunity to be heard before the court, “subject only to the bedrock constitutional bar on arbitrary [g]overnment action.” If an answer or summary judgment motion have been served, the action may only be dismissed “by court order, on terms that the court considers proper.”
  • First Circuit (2022): The government must provide “its reasons for seeking dismissal when it so moves,” but otherwise its motion should be granted unless it “transgresses constitutional limitations” or engages in fraud on the court.

At bottom, what the circuit split concerns is whether (1) the government’s authority to dismiss qui tam actions is unfettered and (2) the procedural posture of a qui tam action impacts the standard of review. And, while this split is clear and academically compelling, the differing standards are all inherently deferential to the government and generally have not impacted lower courts’ decisions on Section 3720(c)(2)(A) motions. It is thus difficult to foresee the Supreme Court’s conclusion on the applicable standard of review significantly impacting FCA practitioners or the healthcare industry.

What to Watch for in Polansky

The Polansky case stems from a qui tam lawsuit filed in 2012 by a former consultant (and former CMS employee) for defendant Executive Health Resources (EHR). Polansky alleged that his then-employer violated the FCA by advising its hospital clients to classify certain hospital stays as “inpatient”—instead of “outpatient”—when submitting claims to Medicare, thus increasing the reimbursement received from the government. Following a two-year investigation, the government declined to intervene in Polansky’s lawsuit. Polansky and EHR then proceeded to litigate the case for five years.

In 2019, the government moved to dismiss Polansky’s qui tam action, citing its concerns with anticipated costs from document requests, deposition preparation, and privilege review issues, as well as concerns with Polansky’s credibility and his prospects for success in the lawsuit. The district court granted the government’s motion, and Polansky appealed to the Third Circuit, calling the dismissal “shocking” after he and his attorneys had invested years and allegedly $20 million in fees and costs into the case.

Polansky’s central argument to the Third Circuit—and now to the Supreme Court—is that after DOJ declines to intervene, it loses its authority to dismiss under Section 3720(c)(2)(A). As support, Polansky cites Section 3730(c)(3) of the FCA, which states that if the government seeks leave to intervene after the lawsuit is underway, it must do so “without limiting the status and rights of the [relator].” In affirming the lower court’s decision, the Third Circuit rejected this argument, explaining that “had Congress intended so draconian a consequence as to strip the [g]overnment of all ability to terminate a case brought in its name, it would not have obscured it in a clause preserving the ‘status and rights of the [relator,]’” i.e., Congress does not “hide elephants in mouseholes.” Like the Sixth and Seventh Circuits, the Third Circuit concluded that the government “must intervene before it can move to dismiss, but it can seek leave to intervene at any point in the litigation upon a showing of good cause.”

Were the Supreme Court to reverse the Third Circuit’s ruling and side with Polansky, the implications would be significant. If the government lost its dismissal authority with a declination decision, the government presumably would invest more time and resources into its investigations of qui tam allegations and seek even more extensions of the FCA’s seal period to prolong those investigations. It might also request more dismissals during the investigation phase, fearing tremendous discovery costs for government agencies or unfavorable precedent potentially arising from a given FCA case. In addition, future relators and their counsel would be able to proceed in a declined case without the prospect of the government threatening or requesting dismissal; in turn, defendants and their counsel would be forced to litigate FCA claims lacking merit for longer periods and at greater cost.

The Supreme Court, though, is unlikely to endorse Polansky’s position, as it runs counter to the FCA’s statutory language, is without support in the circuit courts, and might even raise constitutional concerns by removing the government’s power to control prosecution of a civil action. Thus, the more interesting aspects of the Court’s opinion in Polansky may ultimately arise from the observations the Court makes prior to arriving at its final holdings: for instance, whether it speaks on the meaning of the “good cause” standard that the government must satisfy in order to intervene in a qui tam action after initially declining to do so, or the government’s role as the “real party in interest” even in declined FCA cases. The Court held oral argument on the petition in December, and an opinion is expected in the first half of this year.

Court Again Declines Opportunity to Review Rule 9(b) Standard

On October 17, 2022, the Supreme Court denied three separate certiorari petitions requesting that it address a long-standing divergence among courts on the level of factual detail a relator must plead in a qui tam complaint to satisfy Federal Rule of Civil Procedure 9(b). That the Court declined such an opportunity is not remarkable, as the Court has rejected several similar invitations in recent years. Many commentators thought this time would be different, however, as the Court sought the opinion of the U.S. Solicitor General on two of the pending petitions, signaling some level of interest in the matter. The number of petitions at play (three) and the petitioning parties (both plaintiff-relators and a defendant-healthcare company) further suggested that the time might be ripe for the Court’s intervention. But the end result was the same.

The Standard and Whether a Circuit Split Exists

Because an FCA qui tam complaint alleges that a defendant committed fraud on the government, to survive a motion to dismiss and proceed into discovery, a complaint must meet Rule 9(b)’s heightened pleading standard by “stat[ing] with particularity the circumstances constituting fraud.” Rule 9(b) and the FCA are silent on the requisite level of detail to plead fraud “with particularity,” and courts have taken varying approaches over time in filling that void. The most notable issue, and the one that was the subject of the petitions, is whether a relator must plead specific, representative samples of false claims to satisfy Rule 9(b).

The petitions before the Supreme Court each originated from qui tam actions in which the government declined to intervene—Johnson v. Bethany Hospice and Palliative Care, LLC from the Eleventh Circuit; United States ex rel. Owsley v. Fazzi Associates, Inc. from the Sixth Circuit; and Molina Healthcare of Illinois Inc. v. Prose from the Seventh Circuit. The petitioners in the three cases—two relators and a managed care organization—generally argued that a well-established and growing circuit split exists between those courts that do not require relators to plead specific details about actual claims submitted to the government (Second, Third, Fifth, Seventh, Ninth, Tenth, and D.C. Circuits) and those that demand such details (First, Fourth, Sixth, Eighth, and Eleventh Circuits).

Prior to addressing those petitions, in January 2022 and May 2022, the Supreme Court requested that the Solicitor General provide the view of the United States in two of these cases. This development brought speculation that the Court might finally address the long-simmering divide. Several months later, in briefs submitted to the Court, the Solicitor General disagreed with petitioners, arguing that the Court’s intervention was unnecessary because the circuit courts largely have converged on a single standard—specifically, that the relator must plead either the details regarding a specific false claim or some other sufficiently reliable bases for concluding that such claims were submitted to the government. According to the Solicitor General, any historically stark divide on this pleading requirement has now subsided.

Both relators’ counsel (in Johnson and Owsley) and defendant’s counsel (in Molina Healthcare) rebuffed the government’s contention in supplemental briefing, each applying different reasoning. For instance, counsel to Molina Healthcare argued that the Solicitor General ignored the generally applicable rule in each circuit and instead highlighted “occasional, narrow exceptions” in those circuits that require pleading details of a false claim, in order to proclaim the erosion of any circuit split. The relator in Johnson, meanwhile, asserted that the two purported means of satisfying Rule 9(b) suggested by the Solicitor General “are one and the same” in the Eleventh Circuit, but not other circuits, demonstrating a clear divide.

Court’s Denial and Prospects Moving Forward

On October 17, 2022, the Court denied all three petitions. As is the typical practice, the denials came without further explanation. It is safe to presume that the Solicitor General’s input affected the Court’s decision in some measure. The petitioner in Molina Healthcare noted that, from its review, since 1996, the Solicitor General has recommended denial in 11 of the 12 FCA cases in which the Court requested its position, and that in three of those 11, the Court granted certiorari despite the Solicitor General’s recommendation. Yet, on two prior occasions, in 2010 and 2014, the Court sought the Solicitor General’s view on the Rule 9(b) standard in FCA cases, and, in both cases, the Court denied the petitions following the Solicitor General’s recommendation to do the same. The Court’s decision to grant certiorari in Polansky (discussed above) also may have adjusted its thinking on these petitions, as it would be unusual for the Court to take up multiple FCA cases in a single term.

With this most recent denial, it now seems doubtful that the Court will consider the Rule 9(b) standard in FCA cases in the near future. Perhaps a different administration could alter that landscape, but the more likely catalyst would be additional case law developments from circuit courts, particularly those that only have narrow exceptions for satisfying Rule 9(b) when a complaint lacks specific details about any false claims. Until then, FCA litigants may continue to face differing approaches to Rule 9(b)’s pleading standard depending on the circuit or district in which a relator files a qui tam complaint.

Court to Weigh in on Objective Scienter Standard in FCA Cases

Among the most notable recent FCA developments concerns the objective scienter standard employed in the Supreme Court’s opinion in Safeco Insurance Co. v. Burr and its application to the FCA in determining whether a defendant “knowingly” defrauded the federal government. The issue was at the forefront of two Seventh Circuit cases—U.S. ex rel. Schutte v. SuperValu in 2021 and Proctor v. Safeway in 2022—where the court held that the Safeco standard applies to the FCA, acting as a baseline requirement for satisfying the statute’s scienter requirement, and affirmed summary judgment in favor of defendants. The relators in SuperValu and Safeway (and elsewhere) have since filed certiorari petitions with the Supreme Court seeking its review of this question. On January 13, 2023, the Supreme Court granted the petitions in SuperValu and Safeway, signaling that it will address the FCA’s scienter requirement and the Safeco standard’s bearing on it.

The Safeco Standard and its Application in FCA Cases

The Safeco objective scienter standard derives from a 2007 Supreme Court decision interpreting the scienter provision of the Fair Credit Reporting Act (FCRA). Under the FCRA, plaintiffs must demonstrate that defendants acted “willfully,” which the Supreme Court found to include acting both “knowingly” or with “reckless disregard.” To determine whether defendants acted with reckless disregard, the Supreme Court in Safeco articulated a two-step analysis: defendants do not act with reckless disregard if (1) their interpretation of the relevant statute or regulation was objectively reasonable, even if incorrect, and (2) no “authoritative guidance” warned them away from their interpretation. The plaintiffs in Safeco argued that “evidence of subjective bad faith” must be considered even when defendants’ interpretation is objectively reasonable, but the Court disagreed. It concluded that where “the statutory text and relevant court and agency guidance allow for more than one reasonable interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such interpretation as a knowing or reckless violator…whatever their subjective intent may have been.”

To establish an FCA violation, the government or relator must demonstrate that the defendant acted “knowingly,” which the statute defines to include “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” Following the Safeco decision in 2007, the question put to many lower courts has been whether the two-pronged Safeco standard applies to the FCA’s scienter provision. To date, every circuit court addressing that question has found that it does, with multiple circuit courts having recently done so.

In August 2021 and April 2022, the Seventh Circuit reached this conclusion in SuperValu and Safeway. The Seventh Circuit recognized that the FCA defines “knowing” to include three distinct terms with different meanings, but it reasoned that did not prevent the three terms from “sharing a common requirement” in the Safeco standard. As for defendant’s subjective intent, the Seventh Circuit explained it is “irrelevant” to the objective scienter standard because “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.” The Seventh Circuit cautioned that, with its second prong, the Safeco standard “does not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong.” Regarding the “authoritative guidance” that could warn a defendant, the Seventh Circuit held, consistent with several other circuit courts, that it must “at a minimum” originate “from a governmental source—either circuit court precedent or guidance from the relevant agency.”

SuperValu and Safeway centered on defendant pharmacy chains’ interpretation of the regulatory definition of usual and customary (U&C) price. In applying Safeco’s standard, the Seventh Circuit found that the U&C price definition “is open to multiple interpretations,” that the defendants’ interpretation of the term—to include their retail cash prices but exclude competitor price matches or discount club prices—was objectively reasonable, and that no authoritative guidance during the relevant time period warned them away from their interpretation.

Two other cases from this year further spotlighted Safeco’s place in FCA jurisprudence. In Olhausen v. Arriva Medical, LLC, the Eleventh Circuit relied on it in dismissing FCA allegations at the pleading stage. The relator in Arriva Medical alleged that defendant failed to comply with Medicare regulations relating to obtaining beneficiary signatures for the assignment of benefits and to the enrollment of locations used to furnish Medicare-covered testing supplies. As to both issues, the Eleventh Circuit found that even if defendant’s interpretations of the regulations were wrong, they were objectively reasonable, negating the scienter element of the FCA. The Fourth Circuit initially arrived at a similar conclusion in United States ex rel. Sheldon v. Allergan Sales, LLC. But, in May, the full Fourth Circuit vacated its opinion in Allergan in granting rehearing en banc. Following that rehearing in September, the Fourth Circuit issued a one-sentence order, noting that an “equally divided court” affirmed the lower court’s dismissal of the relator’s complaint.

Relators Seek and Will Receive Supreme Court Review

Over the past year, the relators in SuperValu, Safeway, Arriva Medical, and Allergan all filed certiorari petitions before the Supreme Court. Although some of those petitions remain pending, in January, the Court granted the petitions in SuperValu and Safeway and consolidated those two matters for briefing on the merits and oral argument. The Court’s decision to accept these two cases for review follows from the Solicitor General filing a brief in December, upon invitation from the Court, recommending that the SuperValu petition be granted. While awaiting developments in these cases later this year, there is some worthwhile context to consider.

Since the time of Safeco, the composition of the Court has changed significantly, with only three justices still remaining (Justices Alito, Roberts, and Thomas). All three of those Justices joined in the relevant aspects of that decision, which lower courts subsequently have applied in FCA jurisprudence. Those same justices (and Justices Kagan and Sotomayor) were also part of the Court’s unanimous FCA opinion from 2016 in Universal Health Services., Inc. v. United States ex. rel. Escobar, where the Court observed that the FCA’s scienter requirement is “rigorous” and that “concerns about fair notice and open-ended liability can be effectively addressed through strict enforcement” of that requirement. Similar “concerns about fair notice and open-ended liability” in the face of ambiguous regulations underlie the objective scienter standard outlined in Safeco.

Among the newer members of the Court, Justice Kavanaugh is no stranger to the Safeco standard or applying it in an FCA case. In 2015, while a member of the D.C. Circuit, he joined an opinion that relied on Safeco at multiple turns and held that the FCA does not “reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations” unless that defendant had been warned away from the view by interpretative guidance, which the D.C. Circuit defined as guidance from courts of appeal or the relevant government agency. Justice Barrett, on the other hand, appears to have never made a public statement about the FCA, much less reached a decision in an FCA lawsuit. But she was a member of the Seventh Circuit for multiple years with Judge Amy St. Eve, who authored both the SuperValu and Safeway opinions, as the two judges joined the Seventh Circuit around the same time after being appointed by President Trump in 2017 and 2018.

With all that said, of course, no crystal ball exists to ascertain how this Court will ultimately rule. That will have to wait until at least June 2023, when the Court’s opinion currently is expected to be issued. Until then, though, it certainly will be one of the most anticipated matters in 2023 for FCA practitioners and the healthcare industry. 

    John Eason

    Bass, Berry & Sims, Nashville, TN

    John C. Eason is a member at Bass, Berry & Sims PLC in Nashville, TN. He represents healthcare clients in government enforcement actions, investigations, and related litigation, particularly involving the False Claims Act. He also assists healthcare providers with internal investigations and assessments regarding regulatory and compliance issues. Mr. Eason can be reached at [email protected]

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