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Supreme Court to Weigh in on Fraud Standard under False Claims Act

| Michael R. Christensen

In a move that may substantially increase healthtech companies’ exposure to monetary damages, the U.S. Supreme Court agreed to weigh in on the key standard for fraud lawsuits under the False Claims Act (“FCA”).  On January 13, 2023, the Supreme Court granted petitions for writs of certiorari in two now-combined 7th Circuit Court whistleblower fraud lawsuits that address the fraud standard– Schutte v. Supervalu Inc. and Proctor v. Safeway.

The FCA imposes monetary damages on persons and companies that defraud the government by “knowingly” submitting to the government false claims for payment, or “knowingly” making false statements in support of such claims.  Lawsuits under the FCA may be filed by the government or by a private party, such as a whistleblower.

In the underlying cases, the 7th Circuit held that a company  can shield itself from fraud lawsuits if the company’s lawyers can show that the company’s conduct was consistent with an erroneous but “objectively reasonable” interpretation of the law, regardless of the company’s subjective beliefs.  However, some judges and commentators have opined that “subjective bad faith” can establish the necessary intent.

The Supreme Court will now hopefully resolve this issue of whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it “knowingly” violated the FCA.

The total annual amount of recovery under the FCA is substantial and may likely to continue to increase, especially if the Supreme Court removes the “objectively reasonable” shield.  According to the Department of Justice (“DOJ”) website, the DOJ obtained more than $5.6 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, 2021, which was the second largest annual total in history.  Numbers for the 2022 fiscal year should be released shortly.

Of the $5.6 billion in recovery in the 2021 fiscal year, over $5 billion relates to matters that involved the health care industry.  For example, as recently reported in a prior Knobbe Medical blog post, a medical device developer Advanced Bionics LLC stated that it will pay about $12 million to resolve allegations that it misled federal health care programs.