DOJ to Join Oral Argument in En Banc Rehearing of Fourth Circuit Case on ‘Objectively Reasonable’ Defense

September 8, 2022Articles

Next week, the full Fourth Circuit will hear oral argument in US ex rel. Sheldon v. Allergan Sales, LLC to determine whether a defendant’s “objectively reasonable interpretation” of an ambiguous statute or regulation is sufficient to preclude a finding of intent under the FCA. Defendants and the entire FCA bar will be watching the case closely.

The Fourth Circuit will consider a critical issue for False Claims Act (FCA) defendants—whether an objectively reasonable interpretation of a statute or regulation, even if erroneous, is a defense under the FCA. In United States ex rel. Sheldon v. Allergan Sales, LLC,[1]  a split panel aligned with “every other circuit to consider the issue”[2] and held that the defendant drug manufacturer “did not act ‘knowingly’” because its reading of the relevant statute was “objectively reasonable” and no U.S. circuit court case or other “authoritative guidance” warned it otherwise.[3] In May, the Fourth Circuit granted rehearing en banc, and next week, it will hear oral argument with the Department of Justice (DOJ) participating.[4] The FCA bar will be watching the argument closely for signs of whether the full Fourth Circuit will follow other circuits in applying an objective test for intent.

Background and District Court Dismissal

The relator (or qui tam plaintiff) alleged the defendant violated the Medicaid Drug Rebate Statute by improper price reporting and sought single damages of over $680 million.[5] The statute requires manufacturers to report pricing data to the Centers for Medicare and Medicaid Services (CMS) for each prescription drug they make.[6] That includes reporting the “Best Price” at which the manufacturer sells the product “to any purchaser in the United States,” including “prices to wholesalers, retailers, [nonprofits], or governmental entities” and net of rebates and other discounts.[7] The defendant read “Best Price” to mean the lowest price charged for a drug to any one customer, net of discounts to that customer;[8] the relator contended that the calculation must aggregate all discounts given to different customers—and that not doing so made the manufacturer’s invoices to Medicaid false claims under the FCA.[9]

The district court focused its analysis mainly on scienter—the FCA’s knowledge element,[10] which can be satisfied by (i) actual knowledge, (ii) deliberate ignorance, or (iii) reckless disregard.[11] The court found the Rebate Statute ambiguous,[12] and then applied a two-step test.[13] In the first step, the court found defendant’s interpretation of the statute “not . . . objectively unreasonable,”[14] and in the second step found defendant was not “warn[ed] . . . away” from that interpretation by CMS.[15] Accordingly, the court found falsity and scienter defeated, and granted the motion to dismiss.[16]

Fourth Circuit Decision

A divided Fourth Circuit panel affirmed, relying largely on Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), a case in which the Supreme Court endorsed an “objectively reasonable interpretation” test for intent under the Fair Credit Reporting Act (FCRA).[17] In particular, the majority drew on Safeco’s treatment of the FCRA’s “willfulness” requirement, which the Supreme Court interpreted to include not just “knowing” misconduct but also “reckless disregard.”[18] Therefore, under both the FCA and the FCRA, “reckless disregard” is the lowest level of culpability that is actionable.[19] Defendant’s interpretation of the statute, the majority found, was reasonable at the very least,[20] thus satisfying the first Safeco prong. The second prong was met by the lack of any contrary “authoritative guidance” from CMS, despite defendant’s requests for clarification from the agency.[21] The majority pointed to the punitive nature of the FCA, with its treble damages regime, as making clear notice particularly vital: “If the government wants to hold people liable for violating labyrinthine reporting requirements,” it must “indicate a way through the maze.”[22]

A strongly worded dissent charged the majority with “effectively neuter[ing] the False Claims Act” by “eliminating” the knowledge and deliberate ignorance scienter standards and so distorting the remaining standard that “fraudsters [can] escape any liability so long as they can come up with a post hoc legal rationale that passes the smell test.”[23] However, it is not apparent that Safeco actually gives FCA defendants such an all-purpose liability escape hatch. Safeco, as the majority cautioned, is not a “blank check” but instead requires a defendant’s reading of a statute to be both “objectively reasonable”[24] and not contrary to circuit court precedent or agency guidance.[25]

In addition, the dissent questioned the majority’s assertion of unanimity across the circuits that have considered Safeco’s applicability to FCA scienter.[26] In particular, the dissent cited the Eleventh Circuit in Phalp as “declin[ing] to import” into the FCA “the recklessness standard recognized in Safeco.” [27] Phalp, however, does not reject or even mention Safeco; what it declines to adopt is a rule permitting reasonable interpretation of an ambiguous statute, without more, to defeat scienter.[28] The dissent therefore cited no circuit court opinion expressly rejecting Safeco‘s applicability to FCA scienter.

Government Arguments

Despite declining intervention, the government has taken an active role as amicus in the appeal, and will participate in oral argument before the en banc court.[29] The government asserted that “the district court erred in holding that defendant could defeat plausible allegations of both falsity and knowledge simply by identifying an ambiguity in the relevant requirement.”[30] Not unlike the Allergan dissent, this characterization overlooks both relevant prongs of the Safeco test: the defendant’s interpretation of the ambiguity must be objectively reasonable, and there must be no authoritative judicial or administrative guidance warning the defendant that its interpretation, though reasonable, is incorrect.[31] Those prongs give effect to the meaning of “reckless disregard” by providing a clear test to determine whether the defendant’s action entailed “'an unjustifiably high risk of harm that is either known or so obvious that it should be known.”[32]

The government also suggested narrower grounds for reversal, arguing that the relator had adequately pleaded that the defendant was warned away from its interpretation by CMS guidance and that other sources (like lawyers) could also provide sufficient basis to warn a defendant away from an interpretation.[33] The majority’s approach, however, does not disregard these concerns.  Requiring the government to provide clear and authoritative guidance is necessary to address due process, and other considerations—like warnings from attorneys or industry practice—are relevant to the first prong of the Safeco test (objective reasonableness).[34]

Overview and Outlook

With the majority’s now-vacated holding in Allergan, the roster of circuit courts recognizing Safeco “objectively reasonable interpretation” as a defense to FCA scienter stood at four published and two unpublished. If the en banc Fourth Circuit winds up affirming, like the panel majority did, that emerging consensus will be solidified to the benefit of defendants operating in ambiguous statutory or regulatory frameworks. Reversal, on the other hand, and depending on the court’s precise holding, could yield a more uncertain picture—even the possibility of an outright circuit split.

[1] 24 F.4th 340 (4th Cir. 2022). The district court case, differently styled, was United States ex rel. Sheldon v. Forest Labs., LLC, Civ. A. No. ELH-14-2535, 2020 U.S. Dist. LEXIS 249501 (D. Md. Feb. 5, 2021). The government declined to intervene in the qui tam action.

[2] 24 F.4th at 347 (citing, inter alia, United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 459 (7th Cir. 2021)). In addition to the Seventh Circuit’s holding in Schutte, the court also cited the Third, Ninth, Eighth, and D.C. Circuits.  See id. (citing United States ex rel. Streck v. Allergan, Inc., 746 F. App’x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017); United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 290–91 (D.C. Cir. 2015)).

[3] Id. at *343–44, 351.

[4] See United States ex rel. Sheldon v. Allergan Sales, LLC, No. 20-2330 (4th Cir.), Motion of the United States for Leave to Participate in Oral Argument, DE 82 (July 21, 2022) (hereinafter “Motion for Leave to Participate in Oral Argument”).

[5] Allergan, 24 F.4th at 343, 346.

[6] Id. at 345.

[7] Id.

[8] See Forest Labs., 2020 U.S. Dist. LEXIS 249501, at *19–21, 50; Allergan, 24 F.4th at 351–54.

[9] See Forest Labs., 2020 U.S. Dist. LEXIS 249501, at *3.

[10] Id. at *46 (citing United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 700 (4th Cir. 2014)) (“(1) [D]efendant made false statements or engaged in a fraudulent course of conduct; (2) with the requisite knowledge; (3) the statements or conduct were material; and (4) caused the government to pay out money or to forfeit monies due on a claim.”) (internal quotation marks omitted).

[11] Id. at *47 (citing 31 U.S.C. § 3729(b)(1)(A)).

[12] Id. at *50–59.

[13] The court relied on the Third Circuit’s approach in United States ex rel. Streck v. Allergan, Inc., 746 F. App’x 101 (3d Cir. 2018).  Under that test, a court asks (1) whether defendant’s interpretation of the ambiguity “was objectively []reasonable” and (2) even if it was, whether defendant “was warned away from that interpretation by available administrative [or] judicial guidance.” See Forest Labs., 2020 U.S. Dist. LEXIS 249501, at *48 (citing Streck, 746 F. App’x at 106) (alteration added); see also Streck, 746 F. App’x at 106 (citing Safeco, 551 U.S. at 68–70) (noting the Supreme Court’s recognition in Safeco of similar erroneous-but-reasonable-defense-of-ambiguous-statute defense under the FCRA, “which also requires showing of reckless disregard”).

[14] Forest Labs., 2020 U.S. Dist. LEXIS 249501, at *59.

[15] Id. at *61–62; see also id. (observing that CMS, recognizing “the complexity of the Rebate Statute and price reporting requirements, . . . encourages manufacturers to make reasonable assumptions in calculating Best Price”) (internal quotation marks omitted).

[16] Id. at *62

[17] The majority deemed the FCRA’s scienter provision analogous to the equivalent FCA provision. See Allergan, 24 F.4th at 347 (citing Safeco, 551 U.S. 47 (2007)). The Allergan majority’s reliance on Safeco was not novel in the FCA context; indeed, although the district court did not cite Safeco, it cited opinions from other circuit courts that relied on Safeco in their own scienter analysis. See, e.g., Forest Labs., 2020 U.S. Dist. LEXIS 249501, at *47–48 (citing United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 287–88 (D.C. Cir. 2015)).

[18] See Allergan, 24 F.4th at 347–48 (citing Safeco, 551 U.S. at 57).

[19] Compare Safeco, 551 U.S. at 56–57, 69 (applying the common law meaning of “willful” under the FCRA to include both knowledge and recklessness) with United States v. Basin Elec. Power Coop., 248 F.3d 781, 792 (8th Cir. 2001) (“The lowest level of intentionality that satisfies the [FCA] is acting in reckless disregard of the truth or falsity of the information.”).

[20] Allergan, 24 F.4th at 351–53. The court actually went further in finding defendant’s interpretation was the one that “best” comported with the statute’s “plain and natural” meaning. Id. at 353.

[21] Id. at 353–54.  In fact, CMS instructed manufacturers, “in the absence of specific guidance,” to calculate Best Price using “reasonable assumptions.” Id. at 355.

[22] Id. at 350 (citing Gates & Fox Co. v. OSHRC, 790 F.2d 154, 156 (D.C. Cir. 1986)).

[23] Id. at 357 (Wynn, J., dissenting); see also id. (“[T]he majority opinion’s legal hand-waving cannot cover the stench here.”).

[24] Id. at 350.

[25] Id. at 347 (citing Safeco, 551 U.S. at 69-70), 350–51. In the fact pattern at issue, the dissent itself acknowledged the majority’s recognition that the “reasonable assumptions” CMS invited drug manufacturers to make in their price reporting had to be “consistent with the general requirements and the intent” of the Rebate Statute and federal regulations. Id. at 376 n.8 (Wynn, J., dissenting).

[26] See id. at 363–64 (Wynn, J., dissenting). In addition, the dissent noted that two of the five opinions invoked by the majority were unpublished. See id. at 364 (Wynn, J., dissenting); see also supra n.2 and accompanying text; United States ex rel. Streck v. Allergan, Inc., 746 F. App’x 101 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551 (9th Cir. 2017).

[27] See id. at 363–64 (Wynn, J., dissenting) (citing United States ex rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148 (11th Cir. 2017)).

[28] See Phalp, 857 F.3d at 1155 (citing United States ex rel. Minn. Ass’n of Nurse Anesthetists v. Allina Health Sys. Corp., 276 F.3d 1032, 1053–54 (8th Cir. 2002)) (scienter established where defendant knowingly disregards proper interpretation of ambiguous regulation). The dissent also placed significant stock in Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93 (2016), where the Supreme Court declined to apply Safeco in the Patent Act context. See Allergan, 24 F.4th at 363, 364–65 (Wynn, J., dissenting). The majority, however, considered Halo inapposite because the Patent Act provision at issue there, unlike the FCA and the FCRA, contains no explicit scienter standard. Id. at 348–49.

[29] The government filed an amicus brief and participated in oral argument at the panel stage, and also filed an amicus brief in support of the relator’s petition for rehearing en banc.

[30] Motion for Leave to Participate in Oral Argument, at ¶ 2 (emphasis added).

[31] Allergan, 24 F.4th at 347 (citing Safeco, 551 U.S. at 69-70).

[32] Id. (quoting Safeco, 551 U.S. at 68) (internal quotation omitted).

[33] Allergan, No. 20-2330, Brief for the United States of America as Amicus Curiae Supporting Appellant, DE 24, at 9, 19, 22, 26, 27; Brief for the United States of America as Amicus Curiae Supporting Appellant’s Petition for Rehearing En Banc, DE 68, at 7.

[34] Allergan, 24 F. 4th at 350-51.