The False Claims Knowledge Requirement: One Size Fits All?

As noted in a previous Clark Hill legal alert, the Supreme Court granted certiorari and will hear (in April) oral argument in two important cases (now consolidated) involving interpretation of a critical element of the False Claims Act (FCA).  Those cases are U.S. ex rel. Proctor v. Safeway, Inc. and  U.S. ex rel. Schutte v. SuperValu, Inc. Both involve the central issue of the FCA’s knowledge requirement.  At issue is whether a defendant’s belief in the lawfulness of its conduct is legally relevant to whether it “knowingly” violated the False Claims Act. (The technical legal term for the knowledge requirement sometimes used in the cases is “scienter.”)

The Safeco Standard

The question now before the Court is framed as whether the “objective knowledge standard” articulated by the Court in Safeco Insurance Co. v. Burr regarding violations of the FCRA properly applies to the FCA’s explicit knowledge requirement in circumstances where the purported falsity of a claim turns on an ambiguous legal obligation. The Courts of Appeal disagree on this point.

Differing Statutory Language

In Safeco, the court used long-standing common law principles to determine whether the Fair Credit Reporting Act (FCRA) had been violated. In doing so, the court equated “reckless disregard” with “willfulness.” At the same time, it significantly noted that whether a violation exists at all is a contextually driven matter.

The Safeco case obviously involved a different statute (not the False Claims Act) and statutory construction. While the FCA contains an explicit knowledge requirement, FCRA does not. The matter of a defendant’s knowledge in an FCRA matter arises when it becomes necessary to determine the “willfulness” of a violation. That fact alone may raise serious questions concerning whether Safeco is a relevant precedent in a knowledge determination under the explicit terms of the FCA.

Under the FCRA, it was only in determining Safeco’s knowledge relating to the willfulness of the violation, not to the existence of the violation itself. Regardless of that distinction, Safeco may be marginally helpful regarding a defendant’s subjective understanding or beliefs about the lawfulness of its conduct when determining whether an FCA violation exists in the first place. To that small extent, both the FCA and the FCRA involve the element of knowledge.

Do Enforcement Practices Matter?

Both statutes do touch upon knowledge requirements involved in claims under either. An important difference between the FCA and the FCRA may be found in the way the FCA is most often enforced. As a practical matter, government-initiated FCA enforcement actions generally bring both civil and criminal aspects together charging false claims under several statutes. In this way, the government’s false claims enforcement practices tend to “leverage” the process (and thus encourage defendants to reach a prompt settlement), by charging every available statutory possibility at once, thereby elevating the level of potential sanctions. For example, in cases involving health care that “constellation” of statutes often includes, in addition to the FCA itself: The Health Care Fraud Act, the Anti-Kickback Act, the Patient Access and Medicare Protection Act, and the Civil Monetary Penalties Law.

The cumulative (“stacked”) total of possible sanctions under the statutes charged elevates the outside liability (for both the business and individuals concerned) to truly shocking levels. Of course, most often there is a small practical likelihood of such draconian final outcomes. Nevertheless, even a small possibility tends to concentrate the mind, because it can happen.

State of Mind and Knowledge

Many of the statutes the government uses in FCA cases involve criminal sanctions. Criminal sanctions normally require a “culpable state of mind” (or, mens rea, in technical legal terms) to establish a criminal violation. Sometimes, a mens rea requirement exists even where a given statute may contain no such explicit requirement to support a conviction. The case of United States v. X-Citement Video, Inc. is an example of that.

The FCA has no mens rea requirement, as such. It simply requires “knowledge” of the falsity of the claim – that an alleged false claim is made “knowingly.” It defines “knowingly” as to that falsity as: (1) actual knowledge that the claim is false; (2) deliberate ignorance of falsity; or (3) making the claim with a “reckless disregard.” Whatever else may be said, the FCA’s knowledge requirement arguably seems closer to the less stringent civil requirement than to the more exacting criminal standard; but what is the effect when the FCA violation is charged alongside criminal statutes?

As a practical matter, the Government has applied a somewhat “flexible” standard to the knowledge requirement in the false claims actions it brings, preferring to elide specific discussion of applicable standards whenever that may be helpful to its posture.  The statutes under which it most frequently brings false claims actions make this possible because they do not contain any uniform standard. This circumstance leaves room for a substantial amount of legal argument together with related time, and expense. A great deal of that effort could be saved by some degree of uniformity here. That is where the Safeco standard has been applied in some circuits.

Safeco: A “Uniform Standard” Lacking Uniformity

Where the Safeco standard has been applied, those circuits applying it have not been consistent among themselves in the way they apply it. Imprecision of this sort is unhelpful when a business operates in several circuits. The practical effect is to produce more legal and judicial angst than is resolved. Thus, from a purely operational business perspective, the matter remains frankly something of a muddle and unworkable for both companies and individuals. As a general matter, it is axiomatic that clarity and uniformity always are essential, especially where prohibitions and sanctions are involved. Due Process requires that “fair notice” is given of what is and is not legally acceptable conduct, as the Supreme Court affirmed in its decision in Skilling v. United States.

The decision in these consolidated cases undoubtedly will be important, regardless of its outcome. Hopefully, the court will provide at least a step toward clarity, even if that step is small.

The views and opinions expressed in the article represent the view of the authors and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is it intended to be a substitute for professional legal advice.