Sep 292022

Fourth Circuit En Banc Vacates Application of Safeco to FCA Cases

Jaime L.M. Jones, Brenna E. Jenny and Matt Bergs
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The Fourth Circuit, evenly divided while sitting en banc, recently unwound a panel decision finding that Safeco’s “reckless disregard” standard applies to the False Claims Act (“FCA”).

In January 2022, a panel of the Fourth Circuit held, joining every other circuit to have considered the issue, that when allegations of false claims are premised on violations of ambiguous laws or regulations, the defendant’s scienter is properly assessed using the standard for “reckless disregard” established by the Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007).  Under Safeco, courts ask whether a defendant’s interpretation of the ambiguous law or regulation at issue was objectively reasonable and whether authoritative guidance might have warned the defendant away from that interpretation.  As discussed here, applying Safeco, the panel affirmed the district court’s dismissal of the case.

In May 2022, at the request of the relator and the urging of the Department of Justice and Taxpayers Against Fraud Education Fund, the Fourth Circuit granted rehearing en banc.  The defendant drug manufacturer argued that the panel’s decision was correct because “when a defendant acts consistent with an objectively reasonable interpretation of an ambiguous legal obligation, and no authoritative guidance warns it away from that conduct, ‘it would defy history and current thinking to treat [that] defendant . . . as a knowing or reckless violator.’”  DOJ filed an amicus brief in support of the relator arguing that the original panel’s decision was wrong because it “means a defendant can actually understand a requirement correctly, choose to violate it, but avoid all liability if its attorney can conjure up a post-hoc alternative interpretation of the requirement that is at least objectively reasonable and not foreclosed by circuit precedent or specific agency guidance.”

Oral argument took place on September 15 and revealed that the en banc court was hotly divided.  Those differences were apparently irreconcilable, because a little over a week after oral argument, the Fourth Circuit issued a 7-7 per curiam opinion vacating the opinion of the original panel but affirming the district court’s dismissal of the relator’s complaint.  As a result of the en banc court’s even split, there is no longer any binding precedent in the Fourth Circuit holding that Safeco provides the proper standard by which to assess a defendant’s scienter for alleged false claims premised on ambiguous legal obligations.  As before the panel’s decision in January 2022, each district court within the Fourth Circuit is now free to apply or reject Safeco in the FCA context.

A recent decision by a panel of the Seventh Circuit to apply Safeco to an FCA case (discussed here), is currently the subject of a pending cert petition, and the Supreme Court recently asked the Solicitor General to provider her views.  The division within the Fourth Circuit regarding the application of Safeco may encourage the Supreme Court to grant that cert petition.

The Fourth Circuit’s en banc decision can be found here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.

Jaime L.M. Jones

Chicago

jaimejones@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

Matt Bergs

Chicago

mbergs@sidley.com

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