31 August 20215 minute read

Seventh Circuit adopts objective reasonableness standard for False Claims Act liability

The Seventh Circuit Court of Appeals has joined the Third, Eighth, Ninth and DC Circuits in adopting an objective reasonableness scienter standard under the federal False Claims Act.[1]

In U.S. ex rel. Schutte v. SuperValu Inc., decided August 12, 2021, the Seventh Circuit, over a vigorous dissent, adopted the objective reasonableness standard from Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007). Under that standard, the Seventh Circuit held that a defendant does not knowingly submit a false claim “if (a) it has an objectively reasonable reading of the statute or regulation and (b) there was no authoritative guidance warning against its erroneous view.”

Schutte: an objective reasonableness standard for “knowingly” submitting a false claim

In Schutte, the plaintiff-relator alleged that SuperValu knowingly filed false reports of its pharmacies’ “usual and customary” (U&C) drug prices when it sought reimbursement from Medicare and Medicaid. SuperValu used its retail prices as its U&C prices rather than the lower, price-matched amounts that it charged qualifying customers under its discount program. In U.S. ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), a decision that post-dated SuperValu’s program, the Seventh Circuit held that this type of discount program set the U&C price.

The FCA imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1)(A). A qui tam relator thus must prove, among other things, falsity and scienter. Although the Garbe decision established falsity, the Seventh Circuit affirmed that the relator in Schutte failed to establish scienter under the Safeco standard. The FCA defines knowingly to “mean that a person, with respect to information (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1)(A). The Seventh Circuit held that the failure to meet the Safeco standard precluded liability.

In Safeco, the Supreme Court interpreted a similar scienter requirement in the Fair Credit Reporting Act that requires the plaintiff to show that the defendants acted “willfully.” The Supreme Court held that a defendant who acted under an incorrect interpretation of the relevant statute or regulation does not act with “reckless disregard” if (1) the interpretation was objectively reasonable and (2) no authoritative guidance cautioned defendants against it. The defendant’s subjective intent is irrelevant. Further, the failure to meet this standard would also preclude a finding of a knowing violation. The Seventh Circuit adopted this interpretation for the FCA.

Applying the objective reasonableness standard

For the first prong, the Seventh Circuit held that a defendant must have a “permissible interpretation of the relevant provision.” If the “plain language of the statute or regulation precludes the erroneous interpretation,” the defendant cannot meet this burden. But the mere fact that later decisions reject this interpretation does not make that interpretation unreasonable, nor does the subjective suspicion or belief that the interpretation is wrong establish liability.

For the second prong, the court asks whether authoritative guidance warned the defendant away from its proffered interpretation. The Seventh Circuit held that, at minimum, this means “either circuit court precedent or guidance from the relevant agency.” Further, the authoritative guidance must have “a high level of specificity to control an issue.” To be sure, a defendant cannot “turn a blind eye to guidance indicating that their practices are likely wrong.” Nor can a defendant allow “executive decisionmakers . . . to remain ignorant of the company’s claims processes and internal policies.” But, where there is no contrary, authoritative guidance (and the interpretation was objectively reasonable under the first prong), a defendant cannot knowingly submit a false claim.


The Seventh Circuit’s decision in Schutte reaffirms the need to stay abreast of “circuit court precedent or guidance from the relevant agency” that could warn against an erroneous view of statutes or regulations and create potential FCA liability. Because ignorance of such guidance seems to be no defense, any company in a highly regulated industry such as healthcare, financial services or government contracting is encouraged to monitor both case law and regulatory guidance.

Further, although all five circuit courts that have considered the issue have reached similar decisions, this may not be the last word. Schutte is the first decision with an extended discussion of these issues and the first to draw a dissent. The dissent makes a powerful policy argument that post hoc rationalizations should not be able to overcome subjective bad faith in fraud cases.

This case also serves as a further reminder to investigate not only the facts of internal complaints, but also the legal and regulatory context of such complaints. Employers must investigate both whether the claims are legally or factually false and whether there is any authoritative guidance from the circuit courts or relevant regulators that could go against an otherwise reasonable interpretation of a statute or regulation. Simply trusting the text of the statute or regulation is not enough. If such adverse guidance exists, these claims can subject the company to substantial civil fines and penalties in civil qui tam lawsuits as well as criminal prosecution. Prudent companies will work with experienced FCA and regulatory counsel to investigate any allegations that they may be submitting false claims for reimbursement from any government entity.

Read the decision here.  For more information about any of these topics, please contact the authors.

[1] See U.S. ex rel. Streck v. Allergan, Inc., 746 F. App’x 101, 106 (3d Cir. 2018); U.S. ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017); U.S. ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015).