After Chevron: New Lines of Attack For FCA Defense Bar

The Supreme Court's recent decision in Loper Bright Enterprises v. Raimondo, abolishing the Chevron doctrine, provides the False Act Claims defense bar with a potent new weapon.

Two critical elements of any FCA claim are the falsity of the claim and scienter, which requires proof that the defendant acted knowingly. The government and relators' counsel often rely heavily on regulatory guidance issued by administrative agencies to establish these elements of their FCA claim.

Under the long-standing Chevron doctrine, a reviewing court was required to defer to a federal agency's reasonable interpretation of ambiguity in a statute administered by the agency. That meant that an agency regulation interpreting an ambiguous statutory term could be used to establish the falsity of a claim and, if the regulation was known to the defendant, that the defendant acted knowingly.

Loper changes this landscape. With Chevron no longer in place, agency interpretations of ambiguous statutes are no longer entitled to deference. Such regulations no longer may be relied upon to establish the meaning of an ambiguous statutory term alleged to make a claim "false." And it will be far more difficult to establish that a defendant acted "knowingly" — i.e., he or she knew the falsity of a claim — based upon knowledge of an agency interpretation that the Supreme Court has now held does not, by itself, have the force of law.

Any FCA case involving an arguably ambiguous statutory term — and many do — must now be evaluated in light of this sea change in administrative law.

Background on the FCA's Falsity and Scienter Elements

In general, an FCA claim requires proof of four elements: (1) there was a false statement or fraudulent course of conduct (2) made or carried out with the requisite scienter (3) that was material and (4) that caused the government to pay out money or to forfeit money due — i.e., that involved a "claim."

To satisfy the falsity element of an FCA claim, the statement or conduct alleged must represent an "objective falsehood."

The falsity analysis, which requires the court to reach a definitive interpretation of a statutory provision — e.g., "usual and customary" or "best price," to cite some recent high-profile examples in the healthcare context — naturally proceeded along the lines of Chevron. Namely, if the statute was clear on its face, that would be the end of the matter. But if not, Chevron dictated deference to authoritative administrative guidance on the meaning of the statutory term.

With respect to scienter, the FCA imposes liability only when a person knowingly makes a false claim to the government. "Knowingly" is defined under the FCA to mean that the defendant (1) has actual knowledge of the information, (2) acts in deliberate ignorance of the truth or falsity of the information, or (3) acts in reckless disregard of the truth or falsity of the information.

The Supreme Court's 2023 decision in U.S. v. SuperValu Inc. held that the FCA's scienter requirement refers to a defendant's subjective beliefs — not to what an objectively reasonable person might have known or believed.

The scienter inquiry in FCA cases has, somewhat in parallel with the falsity analysis, typically proceeded in a manner similar to Chevron. That is, courts first determine whether the statutory provision at issue is so objectively clear that any person familiar with the statute would have known its correct meaning, rendering the claim false. If so, scienter would be sufficiently established.

If, on the other hand, the statute was sufficiently ambiguous such that its meaning would not be evident to the reader, the court would turn to whether the defendant was warned away from an incorrect reading by authoritative guidance from the relevant administrative agency. The question, in other words, is whether, despite the statutory ambiguity, the defendant was on sufficient notice — through authoritative agency guidance — that the statute gave rise to a false claim.

This background makes clear that agency guidance as to ambiguous statutory terms often plays a significant role in determining whether the government or a relator's counsel has established falsity or scienter under the FCA.

Abrogation of the Chevron Doctrine Opens Powerful New FCA Defenses

Now that Chevron has been overruled, the defense to FCA claims that are dependent on ambiguous statutory terms should include an attack on any reliance, by the relator or government, upon administrative regulations interpreting the statute — whether as to the falsity of the claims or scienter.

As to falsity, courts may no longer defer to administrative agency interpretations of ambiguous statutory terms. Rather, the court must make an independent determination of the meaning of the statute.

Likewise, as to scienter, the mere fact that an FCA defendant is aware of agency pronouncements interpreting a statute cannot alone establish the defendant's knowledge as to the meaning of the statute. In other words, because, under Loper, the agency's interpretation is entitled to no deference by a court, it is also insufficient to conclusively place the defendant on notice of the correct statutory meaning.

The agency interpretation may, however, be relevant to the extent that it is independently persuasive in its interpretation of the statute.

How the Landscape Has Changed: Two Recent Illustrations

Two recent closely watched FCA cases help to illustrate how the landscape has changed.

In SuperValu, the relators alleged that the defendants, operators of national retail drug pharmacies, violated the FCA by inaccurately reporting their usual and customary drug prices to Medicare and Medicaid for reimbursement. Finding that the statutory phrase "usual and customary" was "somewhat ambiguous," the Supreme Court held that such ambiguity nonetheless did not preclude a finding of scienter — i.e., a finding that the defendants learned the correct meaning of the statute through other means.

To illustrate, the Supreme Court analogized to a hypothetical driver who sees a road sign saying "drive only at reasonable speeds." The driver, without any more information, might have no way of knowing what speeds are reasonable and what speeds are too fast. But, the court noted, if the same driver was informed earlier in the day by a police officer that speeds over 50 mph are unreasonable and then noticed all other cars around him are going only 48 mph, the driver might then know that reasonable speeds are anything under 50mph. By analogy, allegations that the defendants had received some notice that the phrase "usual and customary" refers to their discounted prices might be sufficient to provide knowledge.

Loper requires a focus on the authority of the hypothetical police officer in the SuperValu court's analogy. Although a police officer may well be in a position to provide authoritative guidance on what is a "reasonable" speed to drive on the highway, under Loper, administrative agencies are no longer authorized to provide authoritative guidance, entitled to deference, on the meaning of an ambiguous statutory phrase.

Although agency guidance is not entirely irrelevant to the scienter inquiry — even Loper acknowledged that administrative agencies may have special expertise, i.e., "the power to persuade, if lacking the power to control" — it carries far less weight now that Chevron is no longer in place.

Another helpful illustration is the U.S. Court of Appeals for the Fourth Circuit case, U.S. exrel. Sheldon v. Forest Laboratories LLC. In Sheldon, the relator alleged that a diagnostics laboratory failed to include certain customer price concessions in its calculation of "best price," as that term is used in the statute, and thereby overcharged the government.

On July 23, following a lengthy circuitous appellate process, including a trip to the Supreme Court, which remanded for further consideration under SuperValu, the U.S. District Court for the District of Maryland issued a decision dismissing the complaint on the basis that the allegations did not support a finding of falsity or scienter.

The court began with an objective inquiry into the meaning of the statutory term "best price," reasoning that if the statute was known to the defendants, and its objective meaning was sufficiently clear, a fact-finder could infer scienter.

Finding the statute ambiguous, the court then turned to the relator's argument that a series of regulatory pronouncements by the Centers for Medicare and Medicaid Services cured the ambiguity, just as the hypothetical police officer's instruction in Schutte cured the ambiguous "reasonable" speed requirement. The court found each of these pronouncements equally ambiguous, and therefore a failure to adequately allege scienter.

The court then turned its analysis to the elements of falsity and scienter. On falsity, the court applied Loper and, given the statutory ambiguity, interpreted the statute "for itself." The court expressly rejected the relator's argument that a CMS proposed rule established falsity because, under Loper, "the court would not be bound to accept as authoritative CMS's construction of the rebates statute and rebate agreement."

As to scienter, however, the court rejected Loper's relevance, holding that it had considered regulatory interpretations of the term "best price" "only insofar as they may ... have given rise to a culpable mental state under the FCA." In other words, the court's analysis of the regulatory interpretations was not for a substantive determination of the meaning of the statutory term, but rather for its effect on the defendant.

Although agency interpretations arguably have some relevance to the FCA's knowledge element, the Sheldon court should have made a point to say that, after Loper, those pronouncements carry far less weight given that they are no longer entitled to deference.

Their relevance is merely their "power to persuade." They are not like the police officer in SuperValu, but rather like a citizen bystander — perhaps one who has been driving for a few years.

Nonetheless, the court found the regulations themselves to be sufficiently ambiguous that they could not sustain the allegations of scienter sufficiently to withstand a motion to dismiss.

Conclusion

The abolishment of the Chevron doctrine should provide powerful new avenues for the defense of FCA claims, as to the elements of falsity and scienter. Any FCA claims based upon arguably ambiguous statutory terms can no longer stand solely on agency regulations or guidance to establish the statute's meaning, which is itself necessary to satisfy the FCA's basic requirements.

Republished with permission. This article, "After Chevron: New Lines Of Attack For FCA Defense Bar" was published in Law360 on August 6, 2024.