Where a pharmaceutical company’s interpretation of a complex Medicaid statute was “objectively reasonable,” and there was no authoritative guidance from the government that clarified its interpretation of the statute, the relator failed to show the alleged false statements were “knowingly” made.
Troy Sheldon filed a False Claims Act qui tam suit against his employer, Forest Laboratories LLC. He alleged that Forest engaged in a fraudulent price reporting scheme under the Medicaid Drug Rebate Statute by failing to aggregate discounts given to separate customers for purposes of reporting “Best Price.” The district court granted Forest’s motion to dismiss. It found that Sheldon had failed to plead both that the claims at issue were false and that Forest had made them knowingly. Relevant here, it held that Forest had offered “a plausible and objectively reasonable interpretation” of the Rebate Statute.
To plead his FCA claim, Sheldon must plausibly allege that Forest (1) made a false statement; (2) with the requisite scienter (“knowingly”); (3) that was material and (4) that caused the government to pay out money. The FCA defines “knowingly” to mean that a person “(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” Yet it does not further define these terms or signify how they apply in situations where it is unclear if a defendant complied with the law.
In Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), however, the Supreme Court interpreted the Fair Credit Reporting Act’s analogous scienter provision. Like every other circuit to consider the issue, this court holds that Safeco applies with equal force to the FCA’s scienter requirement. Under the FCA, a defendant cannot act “knowingly” if it bases its actions on an objectively reasonable interpretation of the relevant statute when it has not been warned away from that interpretation by authoritative guidance.
Safeco does not apply to all FCA suits. There are two general categories of false claims under the FCA: those that are factually false and those that are legally false. The paradigmatic FCA action targets factually false claims—those in which someone “has submitted an incorrect description of goods or services provided or a request for reimbursement for goods or services never provided.” Of a different vintage are legally false claims, which “generally require knowingly false certification of compliance with a regulation or contractual provision as a condition of payment.” Safeco simply does not reach factually false claims, where the law is clear. Instead, it is narrowly cabined to legally false claims—like the one here—which involve contested statutory and regulatory requirements.
Nor does Safeco write defendants a blank check. To start, Safeco’s first step requires an objectively reasonable reading of the statute. If a defendant bases its actions on an unreasonable view of the law, it runs a considerable litigation risk. And not every objectively reasonable reading will suffice. Safeco’s second step allows the government to issue authoritative guidance that clarifies its interpretation of the law and so warns defendants away from otherwise reasonable interpretations.
Applying Safeco’s test to Forest’s conduct, the court concludes that Forest did not act “knowingly” under the False Claims Act. Forest’s reading of the Rebate Statute was not only objectively reasonable but also the most natural. And Forest was not warned away from its reading by authoritative guidance from the Centers for Medicare & Medicaid Services or CMS. As a result, Sheldon failed to plead scienter as required by the FCA.
(Wynn, J.): Over 30 years ago, Congress grew concerned that years of restrictive court interpretations had artificially narrowed the False Claims Act’s scienter requirement. To remedy this problem, Congress crafted three distinct and expansive scienter standards. Today’s majority opinion undoes that work by making a new law that reads two of those three scienter standards right out of existence. In their place, the majority opinion erects its own threshold scienter test that allows fraudsters to escape any liability so long as they can come up with a post hoc legal rationale that passes the smell test. Because I cannot join in this judicial overhaul of the False Claims Act—an overhaul that will require further congressional correction—I dissent.
United States ex rel. Sheldon v. Allergan Sales Inc. (Lawyers Weekly No. 001-015-22, 72 pp.) (J. Harvie Wilkinson, J.) (James A. Wynn Jr., J., dissenting) Case No. 20-2330. Jan. 25, 2022. From D. Md. at Baltimore (Ellen L. Hollander, S.J.) Joshua Yrion Dos Santos and Joseph M. Callow Jr. for Appellant. John Patrick Elwood for Appellee. 4th Cir.