US Supreme Court to Decide Whether the Government Can Prove Knowledge When the Defendant’s Regulatory Interpretation Is “Objectively Reasonable”

January 24, 2023 | Insights

By Jennifer Freel, Laura M. Kidd Cordova, & Bethany Pickett Shah

The United States Supreme Court recently granted certiorari in a pair of cases out of the Seventh Circuit that will finally resolve a longstanding circuit split on the question of “scienter” under the False Claims Act (FCA)—namely, whether a defendant can “knowingly” violate the FCA if the relevant legal requirement is ambiguous and the defendant’s conduct is otherwise “objectively reasonable.” How the Court answers that question in United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc. could significantly impact businesses and individuals potentially subject to FCA investigations or litigation.

A defendant can only violate the FCA if the defendant acted “knowingly.” The statute itself states that this knowledge requirement can be met with actual knowledge, deliberate ignorance, or reckless disregard; it is not necessary for the defendant to have the specific intent to defraud the government. However, due to the sheer complexity of federal statutes and regulations, it is common for defendants to argue that their interpretation of the governing law is reasonable and thus their actions cannot meet the statutory knowledge requirement. The question presenting courts, then, is whether defendants can knowingly violate the FCA if their conduct was “objectively reasonable” in light of prevailing law, regardless of their subjective intent.

In Supervalu and Safeway, divided panels of the Seventh Circuit adopted the objective reasonableness standard, holding that subjective intent is irrelevant so long as the defendant’s conduct was objectively reasonable—even if the defendant’s interpretation of the law is ultimately found to be incorrect—and there was no “authoritative guidance” from a circuit court or agency that would have put the defendant on notice that their interpretation was incorrect. Both the Eighth and D.C. Circuits have adopted positions similar to the Seventh Circuit.

By contrast, the Sixth, Ninth, Tenth, and Eleventh Circuits have held that a court must inquire whether a defendant subjectively knew or should have known that its conduct violated a law or regulation.

The government, for its part in these two cases, is arguing against the adoption of an objective reasonableness standard. Its position is that subjective intent should be relevant: a defendant should not be able to escape FCA liability by identifying an objectively reasonable (but incorrect) interpretation of governing rules if the defendant did not hold that interpretation at the time of the relevant conduct.

Whichever of these interpretations the Court accepts, it will have a significant impact on how defendants approach FCA cases—whether litigation focuses on objective arguments about how the law should be interpreted or on fact-intensive inquiries into the defendant’s subjective state of mind. Businesses and corporations defending themselves from FCA liability must be nimble in responding to the Court’s decision. The Jackson Walker team stands at the ready to advise clients in how to address these critical questions.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For questions related to the False Claims Act, please contact Jennifer Freel, Laura M. Kidd Cordova, Bethany Pickett Shah, or a member of the Investigations & White Collar Defense practice.

Jennifer FreelMeet Jennifer

Jennifer S. Freel is a former Assistant U.S. Attorney in the Western District of Texas. She advises businesses and individuals under investigation by the government and conducts internal investigations for companies seeking an independent party. She also represents clients in civil disputes at the pre-trial, trial, and appellate levels in state and federal court. She is an elected Fellow of the Texas Bar Foundation, a member of the Texas Supreme Court Historical Society’s Board of Trustees, a past chair of the Criminal Law Section of the Federal Bar Association, and a past president of the Austin Chapter of the Federal Bar Association.​​​​ She has been ranked among the top Texas attorneys for Litigation: White-Collar Crime & Government Investigations by Chambers USA: America’s Leading Lawyers for Business since 2021, and was named among The Best Lawyers in America for Criminal Defense: White Collar (Austin) in 2022.

Laura M. Kidd CordovaMeet Laura

Laura M. Kidd Cordova is a former assistant chief in the Fraud Section of the U.S. Department of Justice’s Criminal Division. She handles sensitive internal investigations, navigates high-stakes government investigations, and defends clients in complex criminal and civil litigation. She has broad experience representing clients across the healthcare industry in criminal and civil False Claims Act matters involving allegations of healthcare fraud, Anti-Kickback Statute violations, and procurement fraud. Laura has been recognized among The Best Lawyers in America for Commercial Litigation (2023) and the Lawdragon 500 Leading Litigators in America (2022).

Bethany PickettMeet Bethany

Bethany Pickett has tried four federal jury trials to verdict and presented oral argument before the U.S. Court of Appeals for the Fifth Circuit. Prior to joining the firm, Bethany served as a Special Assistant United States Attorney in the Eastern District of Texas, representing the United States in criminal prosecutions and complex civil litigation. Before becoming a federal prosecutor, Bethany worked at the White House as Deputy Associate Counsel to the President and at the Department of Justice as a Counsel in the Civil Rights Division and in the Office of Legal Policy. In 2019, she received the Attorney General’s Award for Distinguished Service for her work at the U.S. Department of Justice.