‘Objectively reasonable’ interpretation undoes FCA knowledge in 4th Circuit | Blogs | Health law today
The Fourth Circuit Court of Appeals is now the latest in a growing number of courts to say that an objectively reasonable interpretation of applicable law defeats the element of intent or “scientific” required in under the False Claims Act (FCA). Because FCA violations must be known, detention is very helpful to defendants seeking to dismiss claims or obtain summary judgment.
In United States ex rel. Sheldon vs. Allergan Sales, LLC, the Fourth Circuit – like the other five Circuits that have considered the issue – found that the scientific framework originally set out by the Supreme Court with respect to the Fair Credit Reporting Act (FCRA) also applies to the FCA. 24 F.4th 340 (4th Cir. 2022), applying Safeco Insurance Co. of America vs. Burr, 551 US 47 (2007). Under this standard, a defendant cannot be held liable under the FCA if (1) its reading of the applicable statutory or regulatory requirements was objectively reasonable and (2) no authoritative guidance has warned it against such interpretation.
the Sheldon relator claimed that the defendant manufacturer engaged in an allegedly fraudulent price reporting scheme under the Medicaid Drug Rebate Act. Under the Rebate Statute, drugmakers who want their drugs covered by Medicaid must enter into rebate agreements whereby they offer quarterly rebates to states on sales of Medicaid-covered drugs. The manufacturer reports the “manufacturer’s average price” (AMP) and “best price” for the covered drugs to the Center for Medicare & Medicaid Services (CMS), and the CMS then calculates the rebate amount based on the greater of (1) the legal price minimum discount percentage or (2) the difference between the AMP and the best price. In Sheldon, the parent alleged that the defendant failed to aggregate discounts given to separate customers for the purposes of reporting the “best price” for use in drug reimbursement calculations and appealed after his complaint was dismissed by the district court. 24 F.4e at 345-46.
While the District Court dismissed the rapporteur’s complaint for failing to plead both falsity and science, the Fourth Circuit only addressed the science. At the outset, the Court noted its obligation to strictly enforce the FCA’s “rigorous” scientific requirement under Escobaras well as the Seventh Circuit’s recent adoption of objective reasonableness Safeco standard in United States ex rel. Schutte. Identifier. at 344 (citing Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989, 2002 (2016); Schutte v. Supervalu Inc., 9 F.4e 455 (7th Cir. 2021)). The Fourth Circuit took the same approach as “every circuit” given the applicability of the Safeco standard at CAF, judging that there was no reason for Safeco The scientific standard for violations of the FCRA committed knowingly or with reckless recklessness should not apply to the same common law terms used in the FCA. Identifier. at 348.
the Sheldon The court went on to rule that under the FCA a defendant cannot act “knowingly” if their actions are based on an objectively reasonable interpretation of a relevant statute or regulation when not cautions against this interpretation by authoritative guidance. Identifier. The court further held that the drugmaker’s interpretation of the reimbursement law was not only objectively reasonable, but also the most natural reading of the law – since the law defined “best price” as the ” lowest price offered by the manufacturer during the reimbursement period to any wholesaler, retailer, supplier, health maintenance organization, non-profit entity or government entity[,]the plain language indicated that the “best price” was that offered to a single entity. Identifier. at 345 (citing 42 USC § 1396r-8(c)(1)(C)(i)). Further, no authoritative guidance – whether circuit court precedent or agency recommendation – had put defendant on notice of his interpretation of this language, that is, i.e. CMS never made it clear that aggregation of discounts to different entities was necessary. Identifier. at 353-54.
The Court clarified that this scientific standard does not apply to factually false claims, where the law is clear; rather, the defense of objective reasonableness is “narrowly limited to false legal claims” involves contested statutory and regulatory requirements. Identifier. at 350. This, however, is still a boon for FCA defendants struggling with the seemingly impossible task of navigating complex regulatory landscapes. ID. (“If the government wants to hold people accountable for violating maze-like reporting requirements, it must at least point a way through the maze.”) (internal quote omitted). The same goes for the fourth circuit that, to function as a warning, authoritative guidelines require “both the right source and sufficient specificity”. Identifier. at 353. Not only must the advice come from circuit court precedent or an appropriate body, but it must also consider the matter with sufficient precision to function as a warning. A putative parent cannot simply point to vague or conflicting regulations to establish their CAF record.
Key points to remember
the Sheldon The decision is notable as the latest in a trend where defendants in six circuits have defeated the scientific element of an FCA claim by showing that their interpretation of the law (whether correct or not) was objectively reasonable. Given its impact on FCA claims, it would not be surprising if the applicability of the objective standard of reasonableness were taken up by other circuit courts. Even if all the circuits are currently in agreement, it remains to be seen whether other circuits will take a different approach, which would then potentially require Supreme Court review. We are monitoring ongoing developments.