In February 2024, the Department of Justice ("DOJ") announced the results of its 2023 False Claims Act ("FCA") enforcement efforts. Through those efforts, it obtained more than $2.6 billion in overall recoveries, and of that amount, $1.8 billion came from health care and life sciences ("HCLS") stakeholders alone.
Jones Day is issuing the third installment of its three-part White Paper: "2023 False Claims Act Enforcement in Health Care and Life Sciences." In Part I of the White Paper, Jones Day provides an overview of DOJ's FCA enforcement in the HCLS industry during 2023, how that enforcement differed from previous years in terms of monetary recoveries, DOJ's case mix, as well as the evolution of DOJ's priorities and judicial decisions impacting this area.
In Part II of the White Paper, we cover the major trends identified in Part I in more detail, discussing 2023 FCA matters involving the Anti-Kickback Statute and Stark Law, Medicare Advantage (Part C), cybersecurity, pandemic fraud, as well as the crescendo of public statements from federal regulators about private equity and corporate ownership in the health care and life sciences space.
Now, in Part III, we provide in-depth discussions of key FCA developments from the bench, including Schutte, Polansky, causation, and other topics.
2023 brought significant FCA developments from the bench. Of particular note, the U.S. Supreme Court weighed in on two high-stakes FCA issues: scienter and the Department of Justice's power to dismiss qui tam complaints over relator objections. In U.S. ex rel. Schutte v. SuperValu Inc., the Supreme Court ruled that a defendant's subjective state of mind can be sufficient to establish scienter, rejecting the view that scienter is never possible when the defendant's actions were "consistent with any objectively reasonable interpretation" of the regulatory requirements underlying an FCA claim.
And in U.S. ex rel. Polansky v. Exec. Health Res., Inc., the Supreme Court confirmed that the government may dismiss an FCA case over the relator's objection even if the government initially declined to intervene. Perhaps more notably, three Justices raised questions about the constitutionality of the FCA's qui tam provisions in separate opinions in Polansky.
Also of particular note, the circuit split over causation in FCA cases based on the Anti-Kickback Statute ("AKS") has widened, while the Supreme Court declined to take up the issue.
These issues, as well as notable decisions on materiality, Rule 9(b), public disclosure, and damages, are discussed in this White Paper.
SCIENTER IN U.S. EX REL. SCHUTTE V. SUPERVALU, INC.
In 2023, the U.S. Supreme Court decided the consolidated cases U.S. ex rel. Schutte v. SuperValu, Inc. and U.S. ex rel. Proctor v. Safeway, Inc., addressing the key question of whether a person can knowingly violate the FCA if (s)he acted according to an "objectively reasonable" interpretation of an ambiguous statute or regulation. The Supreme Court held that scienter under the FCA focuses on a defendant's subjective intent and, as such, mere post-hoc demonstration of a regulation's ambiguity does not preclude a finding that a defendant acted knowingly.
In Schutte and Proctor, the relators alleged that the defendant pharmacies filed false reports of their "usual and customary" drug prices for Medicare and Medicaid reimbursement by failing to account for certain discounts. In both cases, the district courts agreed with this theory of falsity—but granted summary judgment for the defendants on scienter grounds. The courts held that at the time of the alleged conduct, interpreting "usual and customary" prices to exclude the discounts provided in connection with certain retail programs was "objectively reasonable," and thus the defendants could not have acted "recklessly or knowingly." No. 11-3290, 2020 WL 3577996, at *9–11 (C.D. Ill. July 1, 2020); 466 F.Supp.3d 912, 941 (C.D. Ill. 2020).
The Court of Appeals for the Seventh Circuit affirmed, 9 F.4th 455 (2021); 30 F.4th 649 (2022), relying on Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007). Interpreting the term "'willfully'" under the Fair Credit Reporting Act ("FCRA"), id. at 52, Safeco held that evidence of "subjective bad faith" does not support a finding of willfulness where a defendant's conduct comported with an "objectively reasonable" interpretation of an ambiguous statute from which the defendant was not warned away by "authoritative guidance," id. at 70 & n.20. In Schutte and Proctor, the circuit court reasoned that the phrase "usual and customary" was ambiguous and could reasonably have been understood as excluding the discounts at issue—even if that understanding was ultimately wrong. Relying on Safeco, the court further held that "a defendant's subjective intent is irrelevant" to scienter under the FCA when the defendant's interpretation of the law was "objectively reasonable" and did not conflict with any "authoritative guidance." Schutte, 9 F.4th at 469–72, 470; Proctor, 30 F.4th at 659–63.
The Supreme Court granted certiorari and unanimously reversed. The Court noted that the FCA's "three-part test" for scienter—requiring either "actual knowledge," "deliberate ignorance," or "reckless disregard" of the truth or falsity of the information—"largely tracks the traditional common-law scienter requirement for claims of fraud," and "focus[es] primarily on what respondents thought and believed." U.S. ex rel. Schutte v. SuperValu Inc., 598 U.S. 739, 749–51 (2023). Focusing on the present tense of the FCA text ("knowingly presents," etc.), the Court held "the focus is not . . . on post hoc interpretations that might have rendered the[] claims accurate. It is instead on what the defendant knew when presenting the claim." Id. at 752.
The Court rejected the Seventh Circuit's strict application of Safeco on a variety of grounds, including that Safeco addressed a different scienter standard (willfulness) under a different statute (the FCRA). The Court went on to say that the facial ambiguity of a regulation—here, regarding the meaning of "usual and customary"—does not always preclude the possibility that the defendants nonetheless knew their claims were false. In other words, the defendants' subjective beliefs were not irrelevant to their scienter simply "because other people might [have made] an honest mistake" in interpreting the law. Id. at 753 (emphasis in original). For scienter, the Court held "it is enough if [the defendants] believed that their claims were not accurate." Id. at 757.
Importantly, however, Schutte did not eliminate the argument that a defendant lacks scienter due to regulatory ambiguity, and instead made clear that "honest mistakes" about the meaning of a regulation can indeed negate scienter. The Court noted that because the regulation at issue was less than clear, "it might have been a forgivable mistake if respondents had honestly read the phrase as referring to retail prices, not discounted prices," Id. at 753, leaving the door open to rebutting scienter based on a genuinely held, though mistaken, interpretation of an ambiguous regulation.
But Schutte does raise practical considerations, such as how best to establish a company's actual understanding of a regulation (particularly when that understanding may rest on privileged legal opinions). Also, would a single stray email from a low-level employee be enough to create evidence of the company's scienter? How should one determine whether there is an "unjustifiably high risk" that the company's understanding of a regulation is not "correct"? For example, what type of agency guidance should be considered? Formal agency guidance subject to notice and comment? Or informal or other sub-regulatory guidance? What if the agency guidance is not directly on point? Schutte does not address such questions. And the Supreme Court's upcoming decision in Loper Bright Enterprises v. Raimondo on the future of the Chevron doctrine may affect what type of agency guidance can trigger an "unjustifiably high risk" that the company's regulatory interpretation is wrong.
There will be more to come on scienter in the near future. In the wake of its decision in Schutte, the Supreme Court vacated and remanded the decisions in U.S. ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340 (4th Cir. 2022), and U.S. ex rel. Olhausen v. Arriva Medical, LLC, No. 21-10366, 2022 WL 1203023 (11th Cir. Apr. 22, 2022). Both appellate courts had affirmed the dismissal of FCA complaints on grounds that involved the interrelation of scienter and objectively reasonable interpretations of statutory requirements. On remand, the defendants in both cases appear poised to argue that, even under the Supreme Court's ruling in Schutte, the relators have not adequately alleged their scienter. See Defs.' Mot. to Dismiss Am. Compl. at 2–3, Sheldon, No. 1:14-cv-02535 (D. Md. 2023) (ECF No. 1122); Appellee's Notice of Supp. Auth at 1, Olhausen, No. 21-10366 (11th Cir. 2023) (ECF No. 49). We will be monitoring these and other cases for further developments.
U.S. EX REL. POLANSKY V. EXECUTIVE HEALTH RESOURCES
Section 3730(c)(2)(A) of the FCA permits the government to seek dismissal of a qui tam complaint over the relator's objection, but the government did not use this mechanism with much frequency until after the issuance of the "Granston Memo"1 in 2018—which brought new relevance to a longstanding circuit split2 over the standard to be applied to these dismissal motions. In U.S. ex rel. Polansky v. Executive Health Resources, 599 U.S. 419 (2023), the Supreme Court stepped in to resolve this circuit split, and also to address whether the government had the right to seek dismissal if it had initially declined to intervene in the case.
In an 8–1 decision, the Polansky Court held that the government retains its right to dismiss an FCA suit, even if it initially declines to intervene in the action within the seal period.3 The Supreme Court further held that Federal Rule of Civil Procedure 41 (governing voluntary dismissal) applies when the government moves to dismiss a qui tam action. Perhaps of greater significance, three Justices—Justice Thomas in a dissent, and Justices Kavanaugh and Barrett in a concurrence— questioned the constitutionality of the FCA's qui tam provisions, inviting further arguments on that issue (as are already being seen in the lower courts).
Government Intervention and Dismissal
In the lower court proceedings in Polansky, the government elected not to intervene, and the relator chose to proceed with the litigation. However, after years of discovery, which gave rise to extensive discovery demands and privilege disputes involving the government, the government decided the "varied burdens of the suit outweighed its potential value" and moved to dismiss the case over the relator's objection. Id. at 428. The district court granted the request, holding that the government had "'thoroughly investigated the costs and benefits of allowing [the relator's] case to proceed and ha[d] come to a valid conclusion based on the results of its investigation.'" Id. The relator appealed, and argued the government could not dismiss after initially declining to intervene during the seal period. The Third Circuit affirmed, holding the government could dismiss the action even if it declined to intervene during the seal period, as long as it intervened "sometime later." Id. The Court held that Federal Rule of Civil Procedure ("FRCP") 41(a) was the proper standard for evaluating such a dismissal motion.
The Supreme Court affirmed. The Court held that the government could move to dismiss as long as it intervened at some point, i.e., including after the expiration of the seal, noting that "the Government's interest in the suit" is the "predominant one . . . [and] that interest does not diminish in importance because the Government waited to intervene." Id. at 434–35. The Court then held that such motions should be analyzed under the standards generally governing the voluntary dismissal of suits pursuant to FRCP 41. The Court emphasized that a motion to dismiss by the government will satisfy this standard "in all but the most exceptional cases." Id. at 437. The Court reasoned that because an FCA "suit alleges injury to the Government alone[,]" and because "the Government, once it has intervened, assumes primary responsibility for the action[,] . . . a district court should think several times over before denying a motion to dismiss. If the Government offers a reasonable argument for why the burdens of continued litigation outweigh its benefits, the court should grant the motion." Id. at 437–38.
Possible Challenges to the Constitutionality of Qui Tam Suits
Notably, Justice Thomas's dissent in Polansky may be of more immediate interest. Along with Justices Kavanaugh and Barrett's concurrence, it shows that at least three Justices may be open to arguments challenging the constitutionality of the FCA's qui tam provisions.
In his dissent, after disagreeing with the majority's reading of Section 3730(c)(2) and (3), Justice Thomas opined that there are "substantial arguments" that qui tam actions are inconsistent with Article II of the Constitution because they put relators in the position of "conducting civil litigation . . . for vindicating public rights," thereby invading an "executive function" to be carried out only by the President or duly appointed officers. Id. at 449–50 (quoting Buckley v. Valeo, 424 U.S. 1, 138–40 (1976)). Justices Kavanaugh and Barrett concurred with the majority opinion, but also added that they agreed with the dissent's view that there are "substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interests of the United States in litigation"—and that the Court "should consider the competing arguments on the Article II issue in an appropriate case." Id. at 442.
There have been challenges to the constitutionality of the qui tam provision over the years, and those have, to date, been unsuccessful. Polansky, however, has reinvigorated those efforts. See, e.g., U.S. ex rel. Wallace v. Exactech, Inc., No. 7:18- CV-01010, 2023 WL 8027309, at *6 (N.D. Ala. Nov. 20, 2023) (rejecting argument that the FCA's qui tam provisions violated Article II); U.S. ex rel. Zafirov v. Florida Medical Associates LLC, Case No. 8:19-cv-1236-T-KKM-SPF (M.D. Fla.) (currently considering challenge to qui tam provision's constitutionality).
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Footnotes
1. DOJ, "Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A)" (Jan. 10, 2018). This memorandum was authored by Michael Granston, Director of the Civil Fraud Section of the Commercial Litigation Branch.
2. Compare Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003) (gov¬ernment has an "unfettered right" to dismiss a qui tam action under § 3730(c)(2)(A)), with U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998) (requiring evidentiary hearing and a rational relationship between the dismissal and a valid governmental purpose), Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936 (10th Cir. 2005) (same).
3. Under the FCA, qui tam complaints are filed by the relator under seal. 31 U.S.C. § 3730(b)(2). The complaint remains under seal for 60 days, during which time the government may elect to intervene in the action. Id. This 60-day period, and any extensions of that period granted by the court, are referred to as the "seal period."
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