The developing circuit split over objective falsity following SuperValu

SuperValu limited to scienter, but raises questions about falsity

In SuperValu, the Supreme Court held that scienter – another element of FCA liability – is based on the defendant’s subjective state of mind. Thus, if a defendant’s actions were objectively reasonable, but the defendant nevertheless subjectively believed that it submitted a false claim to the government, the FCA’s scienter requirement is met.

SuperValu did not address the issue of falsity. But following SuperValu, courts have wrestled with the question of whether a reasonable statement can ever be “untrue” or “false,” creating FCA liability. This is a crucial question because it impacts whether a defendant can defeat FCA liability on the ground that a supposedly “false” statement identified by the government or a relator is reasonable, regardless of whether it is true.

At the oral argument in SuperValu, Justice Kavanaugh hinted at his views on this question, describing Congress’s decision to punish “false” claims under the FCA, rather than “incorrect” claims. As Justice Kavanaugh explained, “if you say it’s $20 and, in fact, you’re charging everyone [$]10, okay, false, I got that. But if it’s based on a legal understanding, it’s a little hard for me to say your legal view is false. . . . Normally, we’d say your view of the law is incorrect or your view of the law is so incorrect as to be completely unreasonable. We don’t usually say your view of the law is false.”^[2] Justice Kavanaugh’s perceptive questions suggest that he may be willing to adopt an objective falsity standard and rule that a reasonable statement is not false, even if it is proven untrue. 

Many courts continue to embrace objective falsity after SuperValu

Prior to SuperValu, courts were divided over whether to apply an objective falsity standard. Some courts held that “imprecise statements or differences in interpretation growing out of a disputed legal question are not false under the FCA.”^[3] These cases stood for the proposition that a defendant’s objectively reasonable interpretation of an ambiguous contract, statute, or regulation may preclude a finding of falsity. Other courts held that the objective reasonableness of a regulatory interpretation has no bearing on the falsity inquiry. For example, in United States ex rel. Oliver v. The Parsons Co. (Parsons), the Ninth Circuit held that “the question of ‘falsity’ itself is determined by whether [the defendant’s] representations were accurate in light of applicable law.”^[4] Cases like Parsons suggested that the element of falsity turns solely on whether a defendant’s interpretation of a contract, statute, or regulation, regardless of its objective reasonableness, contravened a court’s interpretation.^[5]

Following SuperValu, most courts that have reached the issue have continued to apply an objective falsity standard. In a closely watched case, the District of Maryland ruled in Sheldon v. Forest Laboratories (Sheldon) that “to satisfy the falsity element of an FCA claim, the statement or conduct alleged must represent an objective falsehood.”^[6] In other words, for FCA liability to attach, a statement must be more than untrue; it must be objectively false. In that case, a relator contended that Forest Laboratories, a prescription drug manufacturer, had violated the FCA by fraudulently reporting the Best Price (the lowest price available from the manufacturer, as defined under the Medicaid Drug Rebate Program) of its product. The court concluded that neither “party’s preferred interpretation” of the governing law for Best Price reporting was “clearly established by the unambiguous language,” and that “in such a circumstance,” the court is “constrained to conclude that” the defendant “did not act in violation” of federal law – and that as a result, the FCA’s “falsity” requirement was not met. Sheldon is currently on appeal to the Fourth Circuit, where the relator contends that the district court erred by applying an objective falsity standard.

Other district courts agree. The Northern District of Indiana in United States v. Wagoner held that “differences in interpretation growing out of a disputed legal question are … not false under the FCA.”^[7] The District of New Mexico concurred in United States v. United Behavioral Health, affirming that “imprecise statements or differences in interpretation growing out of a disputed legal question are not false under the FCA.”^[8] The District Court for the District of Columbia likewise held in Fuchs v. John Hopkins University that the “falsity” element of FCA liability “requires an objective falsehood, and imprecise statements, differences in interpretation, or subject statements do not qualify.”^[9] And although the Fifth Circuit declined to directly address objective falsity in United States v. Corporate Management, it nevertheless held that “expressions of opinion or scientific judgments about which reasonable minds may differ cannot be false.”^[10]

Following SuperValu, the Seventh Circuit in Streck v. Eli Lilly & Co (Streck) appears to have staked out the opposite position.^[11] In that case, a relator brought an FCA suit against Eli Lilly & Co (Lilly), alleging that it had falsely reported its Average Manufacturer Prices for drugs covered by Medicaid. Lilly raised an objective falsity defense, claiming that its interpretation of the relevant statute and regulations was reasonable, even if it was incorrect. The Seventh Circuit concluded, however, that “the logic of SuperValu” has essentially foreclosed Lilly’s arguments. According to Streck, the reasoning of SuperValu “implies that the Supreme Court sees falsity as a black-and-white, objective issue and considers state-of-mind at the scienter phase.”^[12] The Seventh Circuit ultimately concluded that Lilly’s interpretation of the relevant statute and regulations was “objectively unreasonable” and “reject[ed] all variants of Lilly’s falsity argument,” upholding the district court’s falsity finding because the statute and regulations “were clear” and cut against Lilly’s position.^[13] Lilly is likely to seek certiorari to the Supreme Court, potentially teeing up the question of objective falsity for Supreme Court review.

At least one other court appears to agree with the Seventh Circuit’s position post-SuperValu. In Olhausen v. Arriva Medical (Olhausen), the Southern District of Florida rejected the defendant’s argument that “even if its interpretation of [Centers for Medicare & Medicaid Services] regulatory requirements were incorrect,” there is no false claim because the defendant’s view “was not objectively false.”^[14] The Olhausen court observed that the Eleventh Circuit has not historically applied an objective falsity standard. Although the Eleventh Circuit does not appear to have addressed this issue following SuperValu, the Olhausen decision indicates that a deeper post-SuperValu circuit split is possible.