Post-Argument Review: What Government Contractors Can Do To Ready Themselves for Landmark Supreme Court Decision in FCA Cases

By Brett W. Johnson and Claudia E. Stedman

On April 18, 2023, the U.S. Supreme Court heard oral argument on two high-stakes False Claims Act (“FCA”) cases – SuperValu and Safeway. We recently analyzed the facts, procedural history, and implications of the Court’s decision in our article “Supreme Court's upcoming decision in SuperValu and Safeway: a game changer for False Claims Act enforcement." Here, we discuss the oral argument takeaways and what a Supreme Court decision will mean for government contractors, healthcare providers, and their counsel (collectively, “Contractors”) and what Contractors may want to consider in preparing for the Supreme Court’s decision.

Why is the Court’s decision in these cases so significant?

One of the reasons why the Court’s decision in SuperValu and Safeway is so high stakes is because many felt prior to the oral argument that each side has realistic odds of success. 

The government has asked the Supreme Court to reverse the Seventh Circuit Court of Appeals' decision and preserve the relevance of subjective intent. The government’s view is that if the Supreme Court upholds the Seventh Circuit’s decision, it will undermine enforcement and incentivize bad actors to come up with creative arguments for why a submitted claim was not knowingly false.

The defense side of the FCA bar, on the other hand, has urged the Supreme Court to adopt a clear, objective standard. This would enable Contractors to rely on reasonable interpretations of confusing and complex regulations and potentially argue that they could not have “knowingly” filed a false claim if the requirements of that claim were unknown. The view that most Contractors support is that subjective intent should be irrelevant in an FCA analysis. On this side of the aisle, Contractors feel that the FCA is already stacked against them – particularly in the healthcare space – and that overturning the Seventh Circuit’s decision would make it virtually impossible for defendants to overcome.

What were the key takeaways from the Supreme Court’s oral argument?

As is always the case, Supreme Court oral arguments are a mixed bag and it is difficult to determine where common ground exists. As expected, the Supreme Court concentrated on the scienter or “knowledge” element of the FCA and, at least Justices Gorsuch, Jackson, and Kagan consistently presented that, that knowledge was a fact issue best resolved at summary judgment or by a jury at trial. This presentation would support a leaning to the subjective intent at the time the decision was made to carry out the act that is the basis for the FCA dispute. It would not support the Seventh Circuit ruling related to the objective standard that would be subject to legal review.

In addition, the Supreme Court did not appear persuaded that a potential waiver of the attorney client privilege would somehow prohibit contractors from presenting a fulsome subjective intent defense to the extent the contractor relied on legal advice in taking the action at issue.

What can government contractors do to prepare?

Regardless of what the Supreme Court’s decision is in these two FCA cases, it is clear that the outcome will have a major effect on the defense side of the FCA bar. In the interim, Contractors should consider proactively engaging in dialogue with government programs and agencies with which they contract in order to get a clearer sense of that agency’s interpretation of murky regulations or contract provisions.

Additionally, Contractors may want to assess whether they should hire specific regulatory personnel who are charged with obtaining and documenting detailed regulatory advice from these government entities in situations where there may be ambiguity in the Contractor’s interpretation of guidelines. In addition, Contractors may consider retaining separate counsel that is not involved in the development of the program that may trigger FCA issues to provide an independent review. This could enable Contractors in overcoming an argument made down the line that the Contractor acted “recklessly.”

Further, Contractors will want to review their internal compliance programs and consider where they may be subject to vulnerabilities should the Supreme Court rule in favor with the relator’s bar. In programs that are untested or are relying on interpretations of ambiguous regulations, Contractors may want to consider engaging counsel to assist in evaluating the risk of rolling out these programs prior to the Court’s decision in SuperValu and Safeway.

Finally, based on Senator Chuck Grassley’s amicus brief that was referenced by the Supreme Court, Contractors should begin preparing for another overhaul or clarification of the FCA based on the Supreme Court’s decision. The benefit is that whenever there are proposed changes, other amendments are possible to provide clarity (and fairness) in the statutory framework. For example, an easy fix would be prohibiting inside actors of Contractors who purposefully set up an FCA violation only to become a whistleblower after the act from recovering any settlement or judgment award.

We continue to monitor the status of these two critical cases and will provide updates on the Supreme Court’s decision as developments progress.