Amicus Curiae Brief — United States, et al., ex rel. Tracy Schutte, et al., Petitioners v. SuperValu Inc., et al.
Supreme Court briefFeb 24, 2023
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Nos. 21-1326, 22-111
IN THE
UNITED STATES OF AMERICA, ET AL.,
EX REL. TRACY SCHUTTE & MICHAEL YARBERRY,
Petitioners,
v.
SUPERVALU, INC., ET AL.,
Respondents.
UNITED STATES, EX REL. THOMAS PROCTOR,
Petitioner,
v.
SAFEWAY, INC.,
Respondent.
On Writ of Certiorari
to the United States Court of Appeals
for the Seventh Circuit
BRIEF OF AMICUS CURIAE TAXPAYERS AGAINST FRAUD
IN SUPPORT OF PETITIONERS
Samuel J. Buffone, Jr.
Counsel of Record
BLACK & BUFFONE PLLC
1400 Eye Street, NW
Suite 200
Washington, DC 20005
(202) 997-8562
sam@blackandbuffone.com
David Jochnowitz
OUTTEN & GOLDEN LLP
685 Third Avenue, 25th Floor
New York, NY 10017
(212) 245-1000
djochnowitz@outtengolden.com
Jacklyn DeMar
TAXPAYERS AGAINST FRAUD
1220 19th St. NW Suite 501
Washington, DC 20036
(202) 445-1399
jdemar@taf.org
i
TABLE OF CONTENTS
Table of Contents ................................................................................. i
Table of Authorities ..........................................................................iii
Interest of the Amicus ...................................................................... 1
Summary of the Argument ............................................................. 2
Argument ............................................................................................... 5
I.
Under the FCA’s plain language, evidence of
subjective knowledge is always relevant to
scienter. .................................................................................. 5
II.
The Seventh Circuit’s evidentiary limitations on
what authoritative guidance is relevant to
determining whether a company was “warned
away” from an erroneous interpretation of a
statute or regulation does not reflect how the
United States expects contractors to handle
uncertainty when seeking and receiving taxpayer
funds. ....................................................................................... 6
A. Congress and federal agencies have provided
many ways for service providers and contractors
to clarify any uncertainty in laws, regulations, or
contractual requirements, and the Seventh
Circuit’s narrow rule could potentially
undermine many of them. ............................................. 9
B. The Seventh Circuit’s evidentiary limitations
would turn fraud enforcement into a multibillion-dollar game of Whack-A-Mole. ................... 11
III. Adopting the Seventh Circuit’s rule, which
requires courts to ignore a defendant’s subjective
knowledge of falsity, would expose the United
States to extensive fraud, while faithfully applying
the FCA’s text allows for “rigorous” application of
the False Claims Act’s scienter standard. ................ 15
ii
A. United States ex rel. Walker v. R & F Props. of Lake
County, Inc., 04-15283 (11th Cir.) ........................... 16
B. United States ex rel. Bahnsen et al. v. Boston
Scientific, 11-cv-1210 (D.N.J.) ................................... 19
C.
United States ex rel. Ross v. Independent Health
Corp. et al., 12-cv-00299 (W.D.N.Y.) ....................... 22
D. United States ex rel. Kamal Mustafa Al-Sultan v.
Agility Public Warehousing Co., K.S.C. et al., No.
1:05-cv-2968-GET (N.D. Ga.) ..................................... 25
E.
United States ex rel. Morsell v. Symantec Corp.,
12-cv-800 (D.D.C.) ......................................................... 28
Conclusion .......................................................................................... 31
iii
TABLE OF AUTHORITIES
Cases
Christensen v. Harris Cnty.,
529 U.S. 576 (2000) .................................................................... 11
Cook Cty. v. United States ex rel. Chandler,
538 U.S. 119 (2003) ....................................................................... 6
Halo Elecs., Inc. v. Pulse Elecs., Inc.,
579 U.S. 93 (2016) ......................................................................... 7
Leveski v. ITT Educ. Servs.,
719 F.3d 818 (7th Cir. 2013)............................................ 15, 16
Rock Island, AR & LA R.R. v. United States,
254 U.S. 141 (1920) ............................................................... 4, 37
Safeco Ins. Co of America v. Burr,
551 U.S. 47 (2007) ........................................................ 2, 7, 8, 21
United States ex rel. Bahnsen et al. v. Bos. Sci.
Neuromodulation Corp.,
Civil Action No. 11-1210, 2017 U.S. Dist. LEXIS
206512 (D.N.J. Dec. 15, 2017)........................... 22, 23, 24, 25
United States ex rel. Graves v. ITT Educ. Servs.,
284 F. Supp. 2d 487 (S.D. Tex. 2003) ................................... 15
United States ex rel. Kamal Mustafa Al-Sultan v. Agility
Public Warehousing Co., K.S.C. et al.,
242 F. Supp. 3d 1351 (N.D. Ga. 2017) ............ 30, 31, 32, 33
United States ex rel. Morsell v. Symantec Corp.,
Civil Action No. 12-800 (RC), 2020 U.S. Dist. LEXIS
54847 (D.D.C. Mar. 30, 2020) .................................. 34, 35, 36
United States ex rel. Proctor v. Safeway Inc.,
30 F.4th 649 (7th Cir. 2022)........................................... 1, 7, 17
United States ex rel. Ross v. Independent Health Corp.,
Civil Action No. 12-00299, 2023 U.S. Dist. Lexis
390 (W.D.N.Y. Jan 3, 2023) ................................. 26, 27, 28, 29
iv
United States ex rel. Schutte v. SuperValu Inc.,
9 F.4th 455 (7th Cir. 2021) ...................................................... 1, 7
United States ex rel. Walker v. R & F Props. of Lake
City, Inc.,
No. 5:02-cv-131-Oc-10GRJ, 2008 U.S. Dist. LEXIS
29174 (M.D. Fla. Apr. 9, 2008) ............................................... 21
United States ex rel. Walker v. R & F Props. of Lake
County, Inc.,
433 F.3d 1349 (11th Cir. 2005) ...................................... 19, 21
United States v. Neifert-White Co.,
390 U.S. 228 (1968) ....................................................................... 6
Universal Health Services, Inc. v. United States ex rel.
Escobar,
579 U.S. 176 (2016) ............................................................... 4, 16
Statutes
12 U.S.C. § 1708(d)(3) .................................................................... 12
15 U.S.C. § 1681 .................................................................................... 8
31 U.S.C. § 3729(a)(1)(A) ................................................................. 5
31 U.S.C. § 3729(b)(1)(A) ................................................................. 5
42 U.S.C. § 1320a-7d(b) ................................................................. 10
42 U.S.C. § 1395m(a)(11)(b)(i) ................................................... 23
Higher Education Act, Pub. L. 89-329, Nov. 8, 1965,
79 Stat. 1219 ( 20 U.S.C. 1001 et seq.) ................................. 15
v
Other Authorities
Press Release, U.S. Dept. of Educ., Education
Department approves $3.9 billion group discharge
for 208,000 borrowers who attended ITT Technical
Institute (Aug. 16, 2022),
https://www.ed.gov/news/pressreleases/education-department-approves-39billion-group-discharge-208000-borrowers-whoattended-itt-technical-institute ............................................. 16
Press Release, U.S. Dept. of Justice, Off. of Pub. Affairs,
Defense Contractor Resolves Criminal, Civil and
Administrative Liability Related to Food Contracts
(May 26, 2017),
https://www.justice.gov/opa/pr/defensecontractor-resolves-criminal-civil-andadministrative-liability-related-food ................................... 31
Press Release, U.S. Dept. of Justice, Off. of Pub. Affairs,
False Claims Act Settlements and Judgments Exceed
$2 Billion in Fiscal Year 2022 (Feb. 7, 2023),
https://www.justice.gov/opa/pr/false-claims-actsettlements-and-judgments-exceed-2-billionfiscal-year-2022 .............................................................................. 2
Press Release, U.S. Dept. of Justice, Off. of Pub. Affairs,
Justice Department Takes Action Against COVID-19
Fraud (Mar. 16, 2021),
https://www.justice.gov/opa/pr/justicedepartment-takes-action-against-covid-19-fraud.......... 14
Press Release. U.S. Attorney's Off., E.D. Cal., Eastern
District of California Obtains Nation’s First Civil
Settlement for Fraud on Cares Act Paycheck
Protection Program (Jan. 12, 2021),
https://www.justice.gov/usao-edca/pr/easterndistrict-california-obtains-nation-s-first-civilsettlement-fraud-cares-act ...................................................... 13
vi
S.Rep. No. 99-345 (1986) ................................................................. 6
Stacey Cowley, 15% of Paycheck Protection Program
Loans Could be Fraudulent, Study Shows, The New
York Times, (Aug. 17, 2021),
https://www.nytimes.com/2021/08/17/business
/ppp-fraud-covid.html .............................................................. 13
Ty Wright, ITT Education Services Files for
Bankruptcy After Aid Crackdown, The New York
Times (Sept. 17, 2016),
https://www.nytimes.com/2016/09/18/business
/itt-educational-services-files-for-bankruptcyafter-aid-crackdown.html ........................................................ 16
U.S. Dept. of Health and Human Services, Advisory
Opinions, (last visited Feb. 23, 2023),
https://oig.hhs.gov/compliance/advisory-opinions/. ..... 10
U.S. Dept. of Hous. and Urban Dev., Housing
Handbooks, (Jan. 18, 2023),
https://www.hud.gov/program_offices/administr
ation/hudclips/handbooks/hsgh.......................................... 12
U.S. Gov’t. Accountability Off., A Snapshot of
Government-wide Contracting for FY 2021 (Aug. 25,
2022), https://www.gao.gov/blog/snapshotgovernment-wide-contracting-fy-2021interactive-dashboard ............................................................... 29
Regulations
42 C.F.R. § 414.200........................................................................... 23
48 C.F.R. § 15.201(a)-(b) ............................................................... 11
48 C.F.R. § 552.238-75 .................................................................... 34
1
INTEREST OF THE AMICUS1
Amicus curiae Taxpayers Against Fraud Education Fund (“TAFEF”) is a nonprofit public interest organization dedicated to combating fraud against the
government and protecting public resources through
public-private partnerships. TAFEF is committed to
preserving effective anti-fraud legislation at the federal and state levels. The organization has worked to
publicize the qui tam provisions of the False Claims
Act (“FCA”), regularly participates in litigation as amicus curiae, and has provided testimony to Congress
about ways to improve the FCA. TAFEF is supported
by whistleblowers and their counsel, by membership
dues and fees, and by private donations. TAFEF is the
501(c)(3) arm of Taxpayers Against Fraud, which was
founded in 1986.
TAFEF has a strong interest in ensuring proper
interpretation and application of the FCA. It files this
brief to explain how the Seventh Circuit’s rule limiting
consideration of a defendant’s subjective knowledge
would severely hinder government antifraud efforts,
and to show how the rule’s stark evidentiary limitations are inconsistent with how the United States deals
with contractors who act on its behalf or provide it
goods and services in the marketplace.
1 No counsel for a party authored this brief in whole or in part
and no counsel or party made a monetary contribution intended
to fund the preparation or submission of the brief.
2
SUMMARY OF THE ARGUMENT
In United States ex rel. Schutte v. SuperValu and
United States ex rel. Proctor v. Safeway, the Seventh
Circuit held that a defendant does not knowingly violate the FCA, even if it believes it is submitting false
claims, as long as its conduct is consistent with an incorrect-but-textually-possible interpretation of a legal
requirement, unless the defendant was warned away
from that interpretation by specific binding guidance
from the relevant government agency or a court of appeals. The Seventh Circuit imported that rule from
Safeco Ins. Co of America v. Burr, 551 U.S. 47 (2007),
where this Court interpreted a different word in a different statute in an entirely different context.
As Petitioners argue, this rote application of
Safeco ignores the FCA’s text and purpose. The FCA is
the government’s primary civil anti-fraud tool, and it
has been wildly successful, with more than $72 billion
recovered on behalf of taxpayers since the statute was
revamped in 1986.2 The Seventh Circuit’s rule threatens this success by giving defendants with subjective
knowledge of their own wrongdoing a get-out-of-liability-free card, which they or their lawyers can play at
any time. If adopted by this Court, the rule would not
only rewrite the FCA’s knowledge standard, but would
also severely hamstring the United States’ ability to
protect taxpayer dollars from fraud. The Court should
reverse and reaffirm the FCA’s text, which acknowledges that a defendant’s contemporaneous subjective
2 See False Claims Act Settlements and Judgments Exceed
$2 Billion in Fiscal Year 2022, available at https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-2-billion-fiscal-year-2022.
3
knowledge matters. In addition, the Court should reject the Seventh Circuit’s narrow view of interpretative
guidance and hold that relevant guidance in FCA cases
is a context-specific factual question.
TAFEF will not repeat Petitioners’ well-reasoned arguments. Instead, this brief will show how the
Seventh Circuit’s rule ignores the text and context of
the FCA. It will also illustrate the practical negative
implications of the rule by showing how it would have
undermined significant rulings that faithfully applied
the FCA’s text and purpose. These illustrations show
the absurdity of the court’s rule and why it cannot be
allowed to stand.
Section I explains that, contrary to the Seventh
Circuit’s holding, the FCA’s plain language provides
for consideration of a defendant’s subjective
knowledge.
Section II then shows that the Seventh Circuit
was wrong to have limited so-called “authoritative”
guidance to binding agency rules or court of appeals
opinions. Instead, the scope of relevant guidance in
FCA cases should be a context-specific question that
considers how the United States and its contractors
iron out potential legal uncertainties. Simply put,
when the United States pays for lifesaving services or
enters the market to purchase commercial goods, it interacts with companies in ways that any normal market participant does—beyond notice-and-comment
rulemaking or agency adjudications—and that provide
defendants adequate notice that they may be (or are)
committing fraud. The Seventh Circuit’s rule would ignore the reality of government-as-market-participant
and impose limitations that would cripple the United
4
States’ ability to flexibly tackle the nation’s complex
challenges while also protecting taxpayers from fraud.
Section III then demonstrates, through cases
that were decided using the FCA’s textual knowledge
standard and with reference to appropriate guidance,
why the Seventh Circuit’s rule is incorrect. The examples all concerned laws, regulations, and contracts with
multiple possible interpretations, but also included evidence that suggested that defendants subjectively
knew at the time they submitted claims that they were
not complying with their legal requirements or were
otherwise committing fraud. The cases held defendants
accountable for their knowing misconduct, while also
addressing any potential “concerns about fair notice
and open-ended liability … through strict enforcement”
of the FCA’s “rigorous” scienter requirements. See Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176, 192 (2016).
This court has recognized that companies must
“turn square corners when they deal with the government,” Rock Island, AR & LA R.R. v. United States, 254
U.S. 141, 143 (1920). The Seventh Circuit rule turns
that on its head in a way that will result in harm to the
federal Treasury and undermine federal programs. It
would allow government contractors to avoid liability
for knowing fraud through manufactured ambiguity,
free from any duty to clarify that ambiguity and confident that they can later hire attorneys to shield themselves. This Court should reverse.
5
ARGUMENT
I. Under the FCA’s plain language, evidence
of subjective knowledge is always relevant
to scienter.
The FCA imposes liability on any person who
“knowingly presents, or causes to be presented, a false
or fraudulent claim for payment or approval.” 31
U.S.C. § 3729(a)(1)(A). A defendant acts knowingly if it
“(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.” Id. § 3729(b)(1)(A).
The FCA’s definition of knowingly, which includes “actual knowledge,” allows courts to consider a
defendant’s subjective intent at the time it submits
false claims for payment. As Petitioners’ brief articulates, the common law of fraud has long considered a
defendants’ subjective intent at the time of its false
statement. Pet. Br. 23-31. Thus, a defendant that subjectively believes that a claim for payment is false but
submits that claim anyway commits fraud under the
FCA’s “actual knowledge” standard.
The other two prongs of the FCA’s knowledge
standard also incorporate subjective intent and make
it clear that belief in falsity is not necessary if there is
a sufficiently high risk of falsity. Thus, when a defendant submits a false claim, it knowingly violates the
FCA if it fails to make further inquiry into the truth of
its claims when either (1) it subjectively knows that its
claims are probably false or (2) a reasonable person in
defendant’s position would recognize that a claim is
likely false. Pet. Br. at 33-38.
6
This Court has long understood the FCA “to
reach all types of fraud, without qualification, that
might result in financial loss to the Government.” Cook
Cty. v. United States ex rel. Chandler, 538 U.S. 119, 129
(2003) (quoting United States v. Neifert-White Co., 390
U.S. 228, 232 (1968)). While the concept of fraud implies a subjective intent, Congress added a definition of
knowingly in 1986 to make clear that the FCA is
broader than common law fraud and that no specific
intent to defraud was required, and that other forms of
subjective intent were relevant. S.Rep. No. 99-345 at 9
(1986); see also Pet Br. at 23 n.6. The Seventh Circuit’s
rule runs counter not only to the plain text adopted in
1986, but to the very purpose of the statute.
II. The
Seventh
Circuit’s
evidentiary
limitations on what authoritative guidance
is relevant to determining whether a
company was “warned away” from an
erroneous interpretation of a statute or
regulation does not reflect how the United
States expects contractors to handle
uncertainty when seeking and receiving
taxpayer funds.
This Court made clear that application of the
Safeco scienter rule interpreting “willfully” depends on
context. See Safeco, 551 U.S. at 57 (“willfully is a word
of many meanings whose construction is often dependent on the context in which it appears.”) (cleaned up);
see also Halo Elecs., Inc. v. Pulse Elecs., Inc., 579 U.S.
93, 106 n.* (2016) (rejecting application of Safeco rule
because subjective bad faith is relevant in the context
of patent infringement damages). Referring to Safeco,
the Seventh Circuit held that the only evidence relevant to whether a defendant was “warned away” from
7
an erroneous interpretation of a legal requirement is
“authoritative” government guidance or decisions from
courts of appeals. United States ex rel. Schutte v. Supervalu, 9 F.4th 455, 470-71 (7th Cir. 2021); United
States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649,
661-62 (7th Cir. 2022). 3 The Seventh Circuit also
strongly suggested that only “binding” guidance is relevant, and further hinted that only “notice-and-comment rulemaking or binding agency adjudications” constitutes sufficiently authoritative guidance under
Safeco. Proctor, 30 F.4th at 662.
But Safeco interpreted “willfully” in the context
of the Fair Credit Reporting Act (“FCRA”). The difference between the FCA and the FCRA reveals why the
Seventh Circuit’s was incorrect to categorically exclude
from the knowledge analysis broad swaths of evidence
relevant to whether a defendant was warned away
from an incorrect interpretation of its legal requirements. The FCRA is a consumer protection statute that
regulates the conduct of third parties—that is, companies and consumers. The FCA, by contrast, is only implicated when the United States spends taxpayer dollars, either to fund critical programs or to procure necessary goods and services—situations that involve direct give-and-take between the United States (or its
3 The Seventh Circuit made clear in both Schutte and Proctor
that it was only analyzing the federal Medicaid regulations; thus,
the relevant guidance it considered was only federal guidance. See
Schutte, 9 F.4th at 469 n.9 (assuming without deciding that relevant state regulations were consistent with analogous federal regulations); Proctor, 30 F.4th at 660 n.12 (rejecting relevance of
state Medicaid regulations from states that were not named plaintiffs). The Proctor majority erroneously failed to consider the relevance of the state Medicaid regulations, as there were numerous
state Medicaid plaintiffs at involved.
8
designated intermediaries) and its service providers
and suppliers. In the FCA context, then, whether a defendant was “warned away” should be determined with
reference to that dialogue and the context surrounding
it.
Indeed, the Seventh Circuit’s rule kneecaps the
United States’ ability to clarify its expectations for how
taxpayer money is spent, potentially limiting it to the
years-long process of notice-and-comment rulemaking,
agency adjudication, or appellate court decision making. At the same time, the rule ignores the many avenues that Congress and administrative agencies have
opened to private parties participating in government
programs or interacting with the United States in the
marketplace to work to ensure mutual understanding
of legal requirements for the expenditure of taxpayer
money. In fact, the Seventh Circuit’s rule creates real
disincentives for companies to engage with the United
States in good faith to iron out ambiguities in those obligations. And finally, it ignores the reality that fraud
is often innovative, and flexible solutions are needed to
keep it in check.
In short, the Seventh Circuit rule disregards
context and converts a rule meant to ensure fair and
adequate notice to third-party market participants into
one that severely diminishes the United States’ ability
to participate in the marketplace itself, obviates established mechanisms for ensuring responsible stewardship of taxpayer money, and creates an open season for
fraud.
9
A. Congress and federal agencies have
provided many ways for service providers
and contractors to clarify any uncertainty
in laws, regulations, or contractual
requirements, and the Seventh Circuit’s
narrow rule could potentially undermine
many of them.
The Seventh Circuit’s narrow rule would severely undermine the procedures that Congress and
administrative agencies have put in place to clarify any
uncertainty in the meaning of rules, regulations, and
contractual terms.
For example, Congress authorized the Department of Health and Human Services (“HHS”) to issue
advisory opinions on certain matters relating to the
Anti-Kickback Statute (“AKS”). See 42 U.S.C. § 1320a7d(b). The AKS prohibits offering, providing, or receiving remuneration in exchange for referrals of business
reimbursable by federal healthcare programs, unless
an express safe harbor applies. Under the HHS advisory opinion program, companies can ask HHS
whether an innovative healthcare payment system
might constitute illegal remuneration under the AKS,
or whether it falls within one of the AKS’s safe harbors.
See id. These opinions are binding on HHS and the requesting party, and are available to the public through
HHS’s website. See id.; see also Advisory Opinions,
available at https://oig.hhs.gov/compliance/advisory-opinions/.
The Seventh Circuit’s rule would undermine
this procedure in two ways. First, if a provider thinks
that the AKS’s application to a particular business idea
is unclear, the Seventh Circuit’s rule could discourage
10
that provider from seeking a binding legal determination, instead incentivizing an unscrupulous provider to
take a “heads-I-win” (if the agreement is legally permissible) / “tails-you-lose” (if the agreement is impermissible but the application of the AKS is ambiguous)
approach to AKS compliance. Second, it would render
the publication of these opinions irrelevant. Although
HHS’s published advisory opinions would normally be
“entitled to respect” based on their “power to persuade,” see Christensen v. Harris Cnty., 529 U.S. 576,
587 (2000), under the Seventh Circuit’s rule, these explicitly non-binding opinions would be entirely irrelevant to determining whether a non-requesting defendant had been warned away from a questionable interpretation of the AKS, rather than being considered as
one piece in a holistic factual inquiry. The Seventh Circuit’s rule would thus undermine an important Congressionally designed mechanism for clarifying how
the United States interprets a law meant to shield
medical decision making from corrupt influences.
As another example, Federal Acquisition Regulations (“FAR”) encourage “[e]xchanges of information
among all interested parties, from the earliest identification of a requirement through receipt of proposals”
in order “to improve the understanding of Government
requirements and industry capabilities, thereby allowing potential offerors to judge whether or how they can
satisfy the Government’s requirements…” Federal Acquisition Regulation § 15.201(a)-(b). But under the
Seventh Circuit’s rule, these exchanges of information—which the FAR expressly anticipates would
influence both the United States and potential offerors’
understandings of government contractual requirements—would be entirely irrelevant to whether a de-
11
fendant knowingly committed fraud, even if the exchanges shed clear light on the parties’ understandings
of the relevant contract terms.
These rules are just two among many that reflect Congressional and agency appreciation for the
fact that not every rule or contract is crystal clear, and
the presumption that private companies and the
United States will work together to clarify uncertainty.4 The Seventh Circuit’s rule would severely undermine these procedures and others like them.
B. The
Seventh
Circuit’s
evidentiary
limitations would turn fraud enforcement
into a multi-billion-dollar game of WhackA-Mole.
Furthermore, the Seventh Circuit’s rule, which
also requires that guidance be sufficiently “specific,” ignores the unfortunate reality that persons contracting
with the government can iterate on fraud much faster
than formal agency or judicial decision making can address it. The rule would make it impossible for the government to keep ahead of the innovative ways that people cheat the taxpayers by requiring it to anticipate
4 Congress also regularly grants agencies the ability to pro-
vide guidance when government programs require evolving standards to protect taxpayer dollars. See, e.g., 12 U.S.C. § 1708(d)(3)
(granting the Secretary of the United States Department of Housing and Urban Development the authority to implement the Federal Housing Administration home loan program through rulemaking as well as mortgagee letters and interim final regulations). FHA rules that govern the origination, underwriting, and
servicing of FHA loans are put out through HUD handbooks and
mortgagee letters. See Housing Handbooks, available at
https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh.
12
every loophole and address each one with “sufficiently
specific” guidance.
As just one example, the nearly $1 trillion
Paycheck Protection Program spent hundreds of billions of dollars in 2020 and may have been subject to
fraud rates as high as 15% (i.e., tens of billions of dollars).5 Yet even the relatively fast-moving Department
of Justice did not settle its first FCA Paycheck Protection Program case until January 12, 2021,6 and by
March 26, 2021, had filed charges accounting for only
about half a billion dollars.7 Hundreds of millions of
dollars is better than nothing, but it is a drop in the
bucket in the context of this fast-moving and potentially fraud-riddled program. The Seventh Circuit’s
rule would invite defendants to argue the PPP program
and other programs quickly put together to address the
economic fallout from the COVID-19 pandemic are
vague, and that any interpretive guidance is irrelevant
to their liability under the FCA. It would further encourage defendants to argue that any such guidance is
insufficiently specific because the United States did
not anticipate every manner of fraud that could apply
to these programs to mitigate the impact of the pandemic. This would in turn require the United States,
5 15% of Paycheck Protection Program Loans Could be
Fraudulent, Study Shows, available at https://www.nytimes.com/2021/08/17/business/ppp-fraud-covid.html.
6 Eastern District of California Obtains Nation’s First Civil
Settlement for Fraud on Cares Act Paycheck Protection Program,
available at https://www.justice.gov/usao-edca/pr/eastern-district-california-obtains-nation-s-first-civil-settlement-fraudcares-act.
7 Justice Department Takes Action Against COVID-19
Fraud, https://www.justice.gov/opa/pr/justice-department-takesaction-against-covid-19-fraud
13
when faced with similar crises in the future, to either
not respond in a timely fashion so as to have enough
time to engage in laborious notice-and-comment rulemaking and to anticipate any and all permutations of
fraud, or subject itself to unscrupulous actors who use
“reasonable interpretations” as a sword and shield to
swindle the government.
As another example, consider how alleged violations of the Higher Education Act (“HEA”) evolved in
response to government enforcement efforts. The HEA
prohibits schools from paying recruiters and admissions personnel based on the number of students enrolled or the amount of student financial assistance obtained. Two successive FCA cases against ITT Education Services (“ITT”), first United States ex rel. Graves
v. ITT Educ. Servs., 284 F. Supp. 2d 487 (S.D. Tex.
2003) and later Leveski v. ITT Educ. Servs., 719 F.3d
818 (7th Cir. 2013), show how the United States may
be one step behind, and how the Seventh Circuit’s rule
would limit access to valuable scienter evidence. In the
earlier case, the Graves relator alleged that ITT paid
bonuses of 5-10% of “earned revenue,” which allegedly
took into account factors prohibited by the HEA.
Graves, 284 F. Supp. 2d at 490. The district court dismissed the case against ITT because it determined that
compliance with the HEA’s incentive compensation
ban was not a “condition of payment” for government
funds. Id. at 502.8 Nevertheless, several years later,
the relator in Leveski alleged a “much more sophisticated—and harder to detect—violation” of HEA rules
in which ITT allegedly compensated her through employee job evaluations that the relator alleged were a
8 This narrow focus on conditions of payment was rejected
thirteen years later in Escobar, 579 U.S. at 181
14
“sham” meant to hide the only true metric: “the number of applications, enrollments, and starts.” Leveski,
719 F.3d at 830, 821. Although the United States did
not intervene in the Leveski matter, the Department of
Education later barred ITT from enrolling new students receiving federal aid, and ITT declared bankruptcy shortly thereafter.9 The United States ultimately discharged over $3.9 billion in federal loans for
students who had attended ITT.10
The Seventh Circuit’s rule would leave the government ill-equipped to deal with this kind of innovation in at least two ways. First, the proposed rule would
make irrelevant the evidence that a defendant specifically responded to government investigations not by
correcting its prior misconduct, but by trying to hide
that misconduct in layers of sham paperwork. Second,
any rule that the United States passed to address the
first fraud might not be sufficiently “specific,” in the
Seventh Circuit’s formulation, to cover the follow-on
fraud. See Proctor, 30 F.4th at 660 (finding that a CMS
example in the Medicare manual was sufficiently specific to warn Safeway away from its interpretation of
one type of price match program, but not the other,
even though both were designed for the same essential
purpose). The Seventh Circuit’s rule would allow unscrupulous actors to constantly change their fraud to
9 ITT Education Services Files for Bankruptcy After Aid
Crackdown,
available
at
https://www.nytimes.com/2016/09/18/business/itt-educational-services-files-forbankruptcy-after-aid-crackdown.html.
10 Education Department approves $3.9 billion group discharge for 208,000 borrowers who attended ITT Technical Institute, available at https://www.ed.gov/news/press-releases/education-department-approves-39-billion-group-discharge-208000borrowers-who-attended-itt-technical-institute.
15
fall outside of any “specific” guidance and take taxpayer money they are not entitled to so long as their
attorneys can find some daylight between the guidance
and the wrongdoing.
III.
Adopting the Seventh Circuit’s rule,
which requires courts to ignore a
defendant’s subjective knowledge of
falsity, would expose the United States to
extensive fraud, while faithfully applying
the FCA’s text allows for “rigorous”
application of the False Claims Act’s
scienter standard.
To illustrate how the Seventh Circuit’s rule runs
counter to the text and purpose of the FCA, we have
included five examples of the many cases in which enforcement would have been hampered had the rule
been in place. In each of these cases, defendants argued
that a legal requirement was ambiguous, but courts
properly considered the defendants’ contemporaneous
subjective knowledge of falsity.
The first three cases illustrate how a decision
adopting the Seventh Circuit’s rule could dramatically
undermine programs that provide healthcare to the elderly and disabled by allowing defendants to pilfer tens
of millions of taxpayer dollars. The fourth case illustrates the same concern in non-healthcare government
procurement. The last case, by contrast, demonstrates
how the correct application of the FCA definition of
knowingly adequately protects defendants that lack
actionable knowledge from FCA liability.
Two important threads run through each of
these cases. First, in each case there was evidence that
defendants knew that they were, at best, wading into
16
uncertain waters and adopting tenuous interpretations
of their legal requirements. Second, each matter involves critical government programs with substantial
amounts of taxpayer money at stake. The integrity of
these programs is essential to carrying out these important and often lifesaving governmental functions—
whether providing healthcare to government-insured
patients, procuring critical IT software, or feeding soldiers deployed overseas. Affirming the Seventh Circuit’s scienter rule would severely limit the United
States’ ability to protect federal programs from fraud
that undermines them.
A. United States ex rel. Walker v. R & F Props. of
Lake County, Inc., 04-15283 (11th Cir.)
Given the broad mandate of the Medicare program—to provide beneficiaries with reasonable and
necessary health care services—Medicare statutes and
regulations allow for flexibility as the practice of medicine and delivery of care changes over time. This flexibility occasionally results in rules that do not specifically address every nuance of the practice of medicine.
But facial ambiguities in Medicare statutes or regulations can often be resolved by reference to government
and industry guidance, which is widely available to
care providers. In United States ex rel. Walker v. R & F
Props. of Lake County, Inc. the Eleventh Circuit recognized that such guidance is relevant to the FCA scienter inquiry.
The dispute in Walker turned on whether defendant had fraudulently billed the United States for
nurse and physician assistant services as “incident to
the service of a physician” under Medicare rules. Medicare pays 15% more when a nurse or physician assis-
17
tant’s services are “incident to the service of a physician.” United States ex rel. Walker v. R & F Props. of
Lake County, Inc., 433 F.3d 1349, 1352-54 (11th Cir.
2005). The relator contended that a physician had to be
present in the clinic where the nurses and physician
assistants were providing services in order to bill Medicare in this way. Id. The relator alleged that the defendant filed false claims by billing Medicare for services provided by nurse practitioners and physician assistants as “incident to the service of a physician” even
when there was no physician present in the clinic. Id.
at 1353-54. Relator thus argued that the defendant’s
misconduct overcharged the United States by 15%. See
id. at 1352-53.
The defendant argued that the “incident to”
standard was unclear, and the district court agreed
that “the Medicare statutes and regulations in effect
[at the time] did not adequately define the phrase,” and
therefore it was ambiguous. Id. at 1354. Following a
rule very similar to the one adopted by the Seventh Circuit nearly two decades later, the district court held
that the phrase’s ambiguity meant the defendant could
not knowingly have violated the rule, and therefore
granted defendant summary judgment. Id.
While the Eleventh Circuit agreed that the
phrase was ambiguous (at least for the period in question), it disagreed that that was the end of the analysis.
Id. at 1356. Instead, the Court of Appeals noted that
the relator had introduced substantial extra-regulatory evidence that showed that the defendant knew
that the proper interpretation of the “incident to”
phrase required a physician to be present in the office
suite for nurse and physician assistant services to be
18
billed at the higher “incident to” rates. Id. The Eleventh Circuit favorably cited to forms of Medicare guidance later rejected by the Seventh Circuit, such as the
Medicare Carrier’s Manual and Medicare bulletins. Id.
The Court of Appeals also implicitly held that common
industry practice was also relevant guidance, referring
to information that originated outside the government,
including the relator’s evidence of “seminar programs,
expert testimony … [and] two notes written by [defendant’s] employee that paraphrase a billing consultant’s
advice.” Id. The Court therefore reversed and remanded, and the case later resolved for $287,500. See
Walker, et al. v. R & F Properties, 5:02-cv-131(M.D.
Fla), ECF No. 314, Ex. A.
Under the Seventh Circuit’s rule, most or all of
this highly probative evidence would have been discarded. The defendant, who had later cherry-picked an
interpretation of the “incident to” rule that served to
increase its profits at the expense of taxpayers, would
have unjustly pocketed over a quarter of a million taxpayer dollars.
This pre-Safeco opinion recognizes the importance of context in evaluating what guidance is relevant. Medicare conditions of payment are set forth in
statute, implemented by regulations, and clarified
through handbooks and bulletins. Private Medicare
Administrative Contractors process claims, develop
rules, and issue local coverage determinations of what
constitutes reasonable and necessary care. Private
physicians, nurses, and other medical professionals
provide medical care based on medical best practice.
Billers and coders submit claims to CMS using internationally developed standards for reporting diagnoses
and procedures. Medicare statutes and regulations
19
concern the enormous and ever-changing healthcare
industry, and therefore do not always have the Seventh
Circuit’s narrowly defined “authoritative guidance,”
but that uncertainty can be clarified by reference to the
vast sea of official and unofficial guidance. Jettisoning
everything but notice-and-comment rulemaking,
agency adjudications, and court of appeals decisions
would ignore the realities of this and other complex
programs where taxpayer dollars are given to private
entities to support a public purpose.
B. United States ex rel. Bahnsen et al. v.
Boston Scientific, 11-cv-1210 (D.N.J.)
Congress has recognized that there must be a
balance between the certainty of notice-and-comment
regulations and the flexibility to clarify uncertainties
in those regulations. To that end, Medicare statutes expressly contemplate that CMS will issue guidelines
and clarifications through manuals and require CMS
to “publish in the Federal Register, not less frequently
than every 3 months, a list of all manual instructions,
interpretive rules, statements of policy, and guidelines
of general applicability” not published as regulations.
42 U.S.C. § 1395hh. In United States ex rel. Bahnsen et
al. v. Boston Scientific, 11-cv-1210 (D.N.J.), a district
court properly looked to the Medicare Provider Integrity Manual (“PIM”) and the defendant’s subjective understanding of that manual to determine the defendant’s liability under the FCA.
In Bahnsen, the relators alleged that defendant
Boston Scientific Neuromodulation Corporation
(“BSNC”) knowingly submitted false claims for supplies for an implantable medical device characterized
20
as “DMEPOS.”11 The relators alleged, among other
things, that in order to bill Medicare for the supplies,
BSNC needed a detailed physician order for those supplies on file. The rule requiring a detailed written order
comes from statute (42 U.S.C. § 1395m(a)(11)(b)(i)) and
the PIM. Relator alleged that defendants submitted
claims without such an order, and that BSNC concealed defects in the devices, resulting in the use of defective medical devices in patients, the continued concealment of those defects, and marketing of defective
devices to doctors and patients.
BSNC argued in its motion for summary judgment that it could not have knowingly submitted false
claims because the relevant portions of the PIM that
applied to DMEPOS supplies were ambiguous, and
that the PIM could be read to support defendant’s position regarding written orders. United States ex rel.
Bahnsen et al. v. Boston Scientific, 11-cv-1210 (D.N.J.),
ECF No. 299-29 at 35-58. BSNC conceded that some of
its internal documents showed that “the company’s understanding [of the relevant rules] evolved over time,”
id. at 56, but nevertheless urged the district court to
adopt a rule like the Seventh Circuit’s rule precluding
consideration of that “evolving” understanding. In opposition to summary judgment, the relators pointed to
evidence showing that at the time it submitted claims
to the United States BSNC did not subjectively hold
the view argued by its attorneys in its summary judgment motion. That evidence included deposition testimony from BSNC’s corporate representative, internal
11 DMEPOS standards for “Durable Medical Equipment,
Prosthetics, Orthotics and Supplies,” which are covered under
Medicare Part B. See generally 42 C.F.R. § 414.200 et seq.
21
company documents, and descriptions of its own internal audits all suggesting the company knew it was submitting false claims. Bahnsen Docket, ECF No. 313 at
37-43. Pointing to this evidence, the relators contended
that BSNC knew at the time that the PIM required detailed physician orders for DMEPOS supplies, but that
BSNC did an about-face “as soon as it faced a lawsuit
for its rampant fraudulent billing practices.” Id. at 43.
The district court conducted a careful review of
the relevant requirements, and ultimately agreed with
BSNC that the rules regarding DMEPOS supplies
were subject to multiple interpretations. United States
ex rel. Bahnsen et al. v. Boston Scientific, 2017 U.S.
Dist. LEXIS 206512, at *26-33 (D.N.J. Dec. 15, 2017).
But the district court denied BSNC summary judgment, finding that the company provided “no evidence
that it sought outside guidance or legal advice as to the
reasonableness of its interpretation during the time
that it was actually submitting the claims,” while citing favorably to the relators’ evidence showing that
BSNC subjectively knew that it had submitted false
claims. Id. at 33-34.
If the Seventh Circuit’s rule had been in place
when Bahnsen was decided, a defendant who believed
it was submitting false claims and was correct in that
belief would have escaped liability based on the creativity of its lawyers—and not even when it was submitting claims, but at summary judgment.
Bahnsen also demonstrates why the Seventh
Circuit’s rule fails from a practical perspective, as it ignores the context of modern government programs.
Congress expressly authorized CMS to issue guidance
and policy clarifications in manuals; both parties in
Bahnsen agreed that the PIM provided the relevant
22
rules for the supplies at issue; and the district court
fairly considered its impact on the defendant’s
knowledge. Imposing artificial limits on what types of
guidance are relevant ignores how government-funded
programs function and what guidance is available to
government contractors.
C. United States ex rel. Ross v. Independent
Health Corp. et al., 12-cv-00299 (W.D.N.Y.)
Traditional Medicare is a fee-for-service program in which providers submit claims to private Medicare Administrative Contractors, who process those
claims on behalf of the government. Beginning in the
1980s and continuing to today, Congress has experimented with alternative Medicare delivery models, including the use of private insurers to provide coverage
under Medicare Part C. Under Part C, the United
States pays private Medicare Advantage Plans a fixed
monthly amount to insure Medicare beneficiaries, with
the amount adjusted by a risk score for each patient
determined through demographic factors and health
status. United States ex rel. Ross v. Independent Health
Corp., 12-cv-00299, 2023 U.S. Dist. LEXIS 390, at *6
(W.D.N.Y. Jan 3, 2023). Health status is determined
using diagnostic codes from the ICD system, which is
an international standard for medical coding published
by the World Health Organization. See id. Thus, under
Part C, Medicare rules and regulations govern the provision of services by private insurers using an international NGO’s standards. The district court in United
States ex rel. Ross v. Independent Health Corp. properly
looked to defendants’ subjective knowledge by referencing a broad array of government and non-governmental guidance.
23
In Ross, the government intervened in a case
against a Medicare Advantage plan, Independent
Health (“IH”), its subsidiary, DxID, and DxID’s
founder and CEO, Betsy Gaffney. The United States
alleged that the defendants fraudulently obtained
higher monthly Part C payments by making its beneficiaries look less healthy than they actually were by,
among other things, submitting historical diagnoses
that were not confirmed to still exist and by submitting
pre-filled addenda to doctors that encouraged those
doctors to indicate that their patients had certain highvalue diagnosis codes, even when the codes were not
supported by the patients’ medical records. See United
States ex rel. Ross v. Independent Health Corp. et al.,
12-cv-00299 (W.D.N.Y.), ECF No. 142.
Defendants made a host of arguments in their
motion to dismiss, including that the Medicare Advantage program’s diagnostic coding guidance was ambiguous and that the United States was forcing providers to rely only on high-level guidance from ICD coding
criteria that did not provide Medicare Advantage plans
with sufficient notice about proper diagnosis coding.
See Ross Docket, ECF 154-1 at 9. Defendants argued
that submitting historical diagnosis codes and using
addenda to capture codes was one reasonable interpretation of the allegedly ambiguous rules and open-ended
guidance. Id. at 25-47.
The district court rejected this argument, noting
that the reasonableness of the defendants’ interpretations of the coding guidance required further factual
development, and that the United States had alleged
that defendants were warned away from their erroneous interpretations “by administrative guidance, thirdparty audits, internal complaints, and the practices of
24
other health-care organizations.” Ross, 2023 U.S. Dist.
LEXIS 390, at *31. Indeed, the United States’ complaint in intervention was full of evidence of the defendants’ subjective knowledge on the coding issue and
other allegations in the complaint, including:
•
IH ignored warnings about DxID’s and its CEO’s
practices, including concerns from employees
and another insurance company about DxID’s
and its CEO’s coding practices. Ross Docket,
ECF 142 ¶ 111, 124, 263-264.
•
IH hired a third party to audit DxID’s predecessor (Cognisight), which was formerly run by
DxID’s CEO, finding that 9 of 14 HCCs were erroneous (a 68% error rate), with particularly
high error rates for chronic kidney disease
(“CKD”), a particularly lucrative diagnosis code.
IH hired Gaffney to form DxID despite knowing
about these high error rates in her coding practices. Id. ¶¶ 115-118, 121.
•
After IH had worked with DxID for more than
two years, Cognisight notified IH that, while
Gaffney was CEO of Cognisight, it improperly
coded CKD from lab reports only. Although IH
deleted CKD codes for service year 2010 and repaid CMS accordingly, it continued to implement the same coding practices for CKD and did
not inquire into whether erroneous codes were
submitted in other service years or for other conditions. Id. ¶¶ 313-326.
IH knew that Gaffney and DxID implemented
policies that added incorrect conditions on addenda—for example, Gaffney stated that “when
a married couple has any disease, both were assigned to that disease” and that DxID “load[ed]
•
25
•
in renal failure” on to addenda because “it is
worth a ton of money.” IH also knew that providers often relied upon the addenda prompts instead of conducting their own review of the records. Id. ¶¶ 362, 371-377.
Although IH had concerns about the addenda
process and temporarily stopped using DxID for
a few months in 2015, it resumed DxID’s services in 2016. Id. ¶ 378.
This case illustrates the serious practical concerns that the Seventh Circuit’s rule ignores. That rule
would exclude all evidence of what sophisticated private parties actually believed at the time they were
submitting claims, and preclude reliance on relevant
and well-accepted international standards. More fundamentally, the Part C program relies on private
health insurers to administer the program, and the
United States must be able to rely on their honest reporting. The Seventh Circuit’s rule would make it
harder for the United States to prove a defendant was
acting dishonestly (and committing fraud) by excluding
highly probative evidence of that dishonesty.
D. United States ex rel. Kamal Mustafa AlSultan v. Agility Public Warehousing Co.,
K.S.C. et al., No. 1:05-cv-2968-GET (N.D.
Ga.)
The government spends hundreds of billions of
dollars a year on goods and services other than
healthcare12 and its contracting decisions are subject
12 See A Snapshot of Government-wide Contracting for FY
2021, available at https://www.gao.gov/blog/snapshot-government-wide-contracting-fy-2021-interactive-dashboard
(August
25, 2022) (“In fiscal year 2021, the federal government spent about
$637 billion on contracts”).
26
to a substantial body of statutory, regulatory, and
other governmental rules. It has also spawned an expansive roster of non-governmental experts who advise
entities doing business with the United States on how
to comply with the law. Against this backdrop, courts
interpreting contracts that later may be subject to
claims of ambiguity must look at the same evidence
that courts look to for all contracts with imprecise provisions: the intent of the parties. The district court in
U.S. ex rel. Kamal Mustafa Al-Sultan v. Agility Public
Warehousing Co., K.S.C. et al. did just that, and concluded that subjective intent must matter in interpreting government contracts.
The Agility case started in 2005 when a whistleblower filed a qui tam action alleging that the defendants overcharged the United States military on ongoing supply contracts for troops overseas. One of those
contracts was for “Local Market Ready Items,” or
LMRI, including perishable goods. Under the contract,
the military ordered perishable goods from the defendants, who were required to obtain the goods locally and
allowed to bill the government for the invoice price
from the goods’ “manufacturer/supplier,” with an additional charge for distribution costs and profit. See
United States ex rel. Kamal Mustafa Al-Sultan v. Agility Public Warehousing Co., K.S.C. et al., No. 1:05-cv2968-GET (N.D. Ga.), ECF 78.
The United States intervened and alleged that,
instead of charging the invoice price from the goods’
manufacturer/supplier, defendant Agility Public Warehousing Co. (“PWC”) used a middleman, referred to as
TSC, to purchase the goods, grossly inflate the prices,
and issue inflated invoices to PWC. Id. PWC then
charged the United States based on the inflated TSC
27
invoices, hiding the price TSC paid. Id. The United
States alleged that PWC knew that the prices it was
charging the military were not the prices that its intermediary had paid to the manufacturer/suppliers of the
LMRI, and that its middleman was not a manufacturer/supplier. Among other evidence referenced by the
United States in its Amended Complaint in Intervention, it alleged that PWC itself described TSC as a “consolidator or distributor,” not a manufacturer or supplier. Id. ¶ 54. The United States also referenced an
internal PWC communication in which one of the company’s assistant general managers suggested that
PWC should just “submit TSC invoices”—invoices it
knew did not reflect the manufacturer/supplier price—
and “then wait for a request for further documentation.” Id. In other words, the evidence suggested that
PWC knew the rules but chose to gamble that it would
not get caught.
PWC moved to dismiss, arguing that its contract
with the government was ambiguous because it did not
define either “manufacturer” or “supplier,” and that it
reasonably interpreted the terms to allow for the
markup it charged. Agility Docket, ECF No. 163-1 at
46-48. The district court agreed that the evidence in
the complaint could be read to support the defendants’
interpretation of those terms. United States ex rel.
Kamal Mustafa Al-Sultan v. Agility Public Warehousing Co., K.S.C. et al., 2017 U.S. Dist. LEXIS 37643, at
*25-26 (N.D. Ga. Mar. 16, 2017). Rather than stop its
analysis at the first sight of ambiguity, however, the
district court acknowledged that it needed more evidence to determine the meaning of the contract. Id. at
*26. Shortly thereafter, defendant PWC settled the
28
matter for $95 million, and further agreed to forego administrative claims against the government worth
$249 million.13
The Agility case illustrates why the Seventh Circuit’s scienter rule is especially unworkable in the context of government contracting. Agility involved contracts worth nearly $10 billion. Agility Docket, ECF
No. 78 ¶ 10(a). To interpret the agreements and determine their meaning, the court needed to consider evidence other than binding court of appeals precedent or
narrowly defined agency guidance; it needed to look to
communications between the United States and its
suppliers, internal party discussions regarding the
meaning of the relevant terms, industry practices, and
potentially a host of other evidence, much of it originating outside the government. Under the Seventh Circuit’s rule, that same supposedly “non-authoritative”
evidence would be irrelevant and instead, because the
defendant’s attorneys put forward a reasonable alternative interpretation, the defendant would have kept
almost $100 million in taxpayer money that it knew it
was not entitled to receive.
E. United States ex rel. Morsell v. Symantec
Corp., 12-cv-800 (D.D.C.)
Under the Seventh Circuit’s rule, the cases
above would have resulted in defendants that subjectively knew that they were violating the relevant laws,
regulations, and rules keeping taxpayer money despite
their knowing fraud. By contrast, applying the FCA’s
13 See Defense Contractor Resolves Criminal, Civil and Administrative Liability Related to Food Contracts, https://www.justice.gov/opa/pr/defense-contractor-resolves-criminal-civil-and-administrative-liability-related-food (May 26, 2017).
29
text, which contemplates consideration of subjective
knowledge, excuses a defendant who did not have a
subjective belief that their representation was false, as
exemplified in United States ex rel. Morsell v. Symantec
Corp.
In Morsell, the federal government alleged,
among other things, that Symantec knowingly submitted false statements to the General Services Administration (“GSA”) by failing to accurately and completely disclose its commercial sales practices and the
prices that it charged to commercial customers, in violation of government contracting rules. All GSA contracts must include a Price Reduction Clause (“PRC”)
that accounts for changes in a company’s pricing over
time. See 48 C.F.R. § 552.238-75. The GSA PRC ensures that the government is kept apprised of a company’s discounting practices and gives the United
States the opportunity to take advantage of those discounts. The United States alleged that Symantec not
only failed to provide the discounts offered to commercial customers, but also that “Symantec, the fourth
largest software developer in the world in 2013 based
on revenues, neither developed nor implemented any
software in its purchasing system to automatically ensure its pricing to GSA and commercial customers complied with the requirements of its Contract” with the
United States. United States ex rel. Morsell v. Symantec Corp., 12-cv-800 (D.D.C), ECF No. 70 ¶ 9.
Symantec argued in a motion for summary judgment that the PRC in its contract was ambiguous, and
that Symantec reasonably interpreted the PRC not to
include certain types of discounts the company offered
to its commercial customers. Morsell Docket, ECF No.
156-1 at 62-71. The district court agreed that the PRC
30
was ambiguous as applied in the Symantec contract
with the United States, and also agreed that Symantec’s reading of the contract was reasonable. United
States ex rel. Morsell v. Symantec Corp., 471 F. Supp.
3d 257, 293-94, 304-05 (D.D.C. 2020). Nevertheless, the
district court denied summary judgment because the
United States established a dispute of material fact as
to whether Symantec actually held that reasonable interpretation at the time the contract was formed. Id. at
305. The United States pointed to, among other things,
Symantec’s own internal audit, which stated that the
company’s policies “could create a situation whereby
GSA discounts are no longer competitive or in compliance with contractual terms…” Id. Evidence therefore
suggested that the defendant knew the risk that it was
not in compliance with its contract.
With this material factual dispute as to Symantec’s subjective knowledge, the parties headed to a
bench trial. In exhaustive findings of fact and conclusions of law, the district court again emphasized that
“the reasonableness of any given interpretation of [a
contractual phrase] is more than a matter of purely legal statutory or textual interpretation—it involves disputed questions of fact regarding the contract negotiations.” United States ex rel. Morsell v. NortonLifelock,
Inc., Civil Action No. 12-800 (RC), 2023 U.S. Dist.
LEXIS 9526, at *153 (D.D.C. Jan. 19, 2023). In weighing those disputed facts, the court held that some of
Symantec’s interpretations of the contract were not
reasonable, but ultimately concluded that the company
subjectively believed that much of its conduct fell out-
31
side the reporting requirements of the PRC, and therefore lacked knowledge sufficient for liability (at least
on that issue).14 Id. at 159-167.
Morsell illustrates how application of the FCA’s
definition of “knowingly” allows for rigorous application of the scienter requirement by considering what a
defendant actually believed at the time it submitted
claims for payment. In short, the textual interpretation
of the FCA ensures that persons who have a subjective
belief that their representations are false are held accountable while adequately protecting defendants who
do not and who reasonably believe their actions are
consistent with their legal obligations, taking into account the context and available guidance.
CONCLUSION
The decisions below should be reversed, and the
court should adopt a rule that acknowledges that subjective intent always matters for FCA knowledge. This
would properly reaffirm this Court’s long held position
that companies must “turn square corners when they
deal with the government,” Rock Island, 254 U.S. at
143, and that the United States has a full toolbox to
root out and prevent fraud on taxpayers.
Respectfully submitted,
14 The district court found in favor of the United States on
some of its claims, and ultimately awarded roughly $1.2 million
in damages. Morsell Docket, ECF No. 362. The United States has
recently moved to amend or correct the court’s findings pursuant
to Rule 52, 59, or to appoint a special master under Rule 53. Morsell Docket, ECF No. 364.
32
Samuel J. Buffone, Jr.
Counsel of Record
BLACK & BUFFONE PLLC
1400 Eye Street, NW
Suite 200
Washington, DC 20005
(202) 997-8562
sam@blackandbuffone.com
Jacklyn N. DeMar
TAXPAYERS AGAINST FRAUD
EDUCATION FUND
1220 19th Street, N.W.
Washington, DC 20036
David Jochnowitz
OUTTEN & GOLDEN LLP
685 Third Avenue
25th Floor
New York, NY 10017
(212) 245-1000
djochnowitz@outtengolden.c
om
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.