This is the third blog in a series on the False Claims Act (FCA), 31 USC §§ 3729, et seq., which targets any person that knowingly submits false claims for payment or false statements material to false claims to the US government.
You can check out our previous posts here and here.
To prove a false claim under the FCA, the government must establish three elements:
- Falsity;
- Knowledge; and
- Materiality
In this blog post, we will explore the knowledge element. Despite being a fraud statute, the FCA does not require specific intent to defraud the government to impose liability. Instead, the FCA defines culpable “knowing,” and “knowingly” as encompassing three different states of mind: actual knowledge, deliberate ignorance of truth or falsity, and reckless disregard of truth or falsity.
The Supreme Court recently clarified these standards in United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023) as follows:
- Actual Knowledge – when a defendant actually knows its claim is false
- Deliberate Ignorance – when a defendant is aware of a substantial risk that its statements or claims are false, but intentionally avoids taking steps to confirm the statements’ truth or falsity
- Reckless Disregard – when the defendant is conscious of a substantial and unjustifiable risk that its claim is false, but submits the claim anyway
The Supreme Court also clarified in SuperValu that FCA knowledge is a subjective standard—i.e., the key question is what the defendant’s actual state of mind was at the time the claim was submitted. In doing so, SuperValu significantly narrowed a popular defense to the FCA’s knowledge element. The defense goes that, if faced with an ambiguous law or contract clause, defendants may avoid FCA liability by proving that their actions comported with an objectively reasonable interpretation of the ambiguous law or contract clause, so long as they were not warned away from that interpretation by authoritative agency guidance. The reasoning is that if a contract clause or law is subject to multiple reasonable interpretations, it is unjust to punish a company based on the single interpretation held by the government, where the government did not make that interpretation known to the defendant prior to the alleged FCA violation.
Prior to SuperValu, some Circuits (including the 7th Circuit where SuperValu originated) held that defendants’ subjective states of mind did not matter in these situations of ambiguous legal requirements. In other words, even if a defendant subjectively suspected or believed that it was violating an ambiguous law or contract clause, if the defendant’s actions comported with a reasonable interpretation of the requirement, there could be no finding of knowledge, and thus no liability under the FCA. Courts did not pull this holding out of thin air—it came from a very powerful footnote in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), which interpreted the knowledge standard under the Fair Credit Reporting Act:
Respondent-plaintiffs argue that evidence of subjective bad faith must be taken into account in determining whether a company acted knowingly or recklessly for purposes of §1681n(a). To the extent that they argue that evidence of subjective bad faith can support a willfulness finding even when the company’s reading of the statute is objectively reasonable, their argument is unsound. Where, as here, 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.
In SuperValu, the Supreme Court rejected the footnote in its Safeco decision as creating any kind of safe harbor for defendants based on “what an objectively reasonable person may have known or believed.” Instead, assuming other elements of the FCA are met, if a defendant subjectively believed that its claim was false, SuperValu holds that the defendant will be liable under the FCA. To be clear, the objectively reasonable interpretation defense is still generally available to FCA defendants, but only if they actually held the objectively reasonable interpretation at the time of the allegedly false claims.
This holding makes sense for the first two standards of FCA knowledge —actual knowledge and deliberate ignorance. If a company knows for certain that a claim is false, or it actively avoids learning that the claim is false, there is perhaps some affirmative culpable state of mind. However, reckless disregard may catch some companies by surprise. Under SuperValu, companies can be held liable under the reckless disregard standard for submitting false claims that they could have, or maybe should have, known were false. When you take into account the myriad ways a claim can be “false” under the FCA (e.g., a claim is impliedly false if the contractor is non-compliant with any contract requirement), avoiding recklessness becomes a much heavier burden. Essentially, the reckless disregard standard as articulated in SuperValu imposes a duty on recipients of federal funds not only to ensure they are complying with contract requirements (perhaps through audits or compliance reviews), but also to confirm their understanding of every ambiguous contract or legal requirements with their government counterparts. Even if the company has adopted a reasonable interpretation of a statute, if a few executives in the company question whether that interpretation is correct, those questions could later be evidence of knowledge under the FCA.
Thus, an important step in avoiding FCA liability is to take seriously those contract and regulatory interpretation questions from employees or executives, consult inside or outside counsel about the appropriate interpretation of the requirements under the protection of attorney-client privilege, and make the company’s official interpretation known to employees and any government officials administering the contract at issue.
Our next blog will examine the third FCA element – materiality.