Two important decisions, one by the United States Supreme Court and one by the General Counsel for the National Labor Relations Board (“NLRB”), were issued this week and may be of interest to government contractors and employers. The United States Supreme Court clarified that the knowledge element for False Claims Act (FCA) claims is based on the actual or subjective knowledge or belief of the defendant, and not what an objectively reasonable person may have known or believed. The General Counsel of the NLRB issued a memo finding that almost all post-employment non-compete agreements violate the National Labor Relations Act (“NLRA”). Discussion below.

Supreme Court Affirms Knowledge Standard for False Claims Act Cases

In United States ex. rel. Schutte, et. al. v. SuperValu, Inc. et. al., the United States Supreme Court held that the knowledge element of a False Claims Act claim refers to a defendant’s knowledge and subjective belief as to the falsity of their claim—not to what an objectively reasonable person may have known or believed. The primary takeaway from this case is that post-hoc legal justifications for why a claim complies with the law are not a defense if the defendant subjectively or actually believed that the claim was false. Put another way, clever lawyering will not immunize a contractor’s subjective or actual belief that a claim was false or not in compliance with the law.

In SuperValu, a False Claims Act claim was brought against SuperValu and Safeway for defrauding Medicare and Medicaid. Under those programs, SuperValu and Safeway were reimbursed for prescription drugs provided to program participants at the company’s “usual and customary” charge to the public. The claim alleged that both companies had a practice of reporting to Medicare and Medicaid their retail charges for purposes of reimbursement, even though both companies offered discount programs to their customers.

Two essential elements of a claim under the False Claims Act are (1) the falsity of the defendant’s claim to the government and (2) the defendant’s knowledge of that claim’s falsity. The Seventh Circuit dismissed the False Act Claims on the rational that SuperValu and Safeway could not have acted “knowingly” if their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary,” even if there was proof  that they subjectively believed their claims to be inaccurate or false. That is, the Seventh Circuit concluded that SuperValu and Safeway were entitled to summary judgment even if they actually thought that their discounted prices were their “usual and customary” prices, because an objectively reasonable person would have considered their retail prices the “usual and customary prices.”

The Supreme Court characterized the issue before it as follows:

If respondents’ claims were false and they actually thought that their claims were false—because they believed that their reported prices were not actually their “usual and customary” prices—then would they have “knowingly” submitted a false claim within the FCA’s meaning? Or is the Seventh Circuit correct—that respondents could not have “knowingly” submitted a false claim unless no hypothetical, reasonable person could have thought that their reported prices were their “usual and customary” prices?

The Supreme Court reversed the Seventh Circuit, finding that the knowledge element of a False Claims Act case refers to a defendant’s knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.

Justice Thomas authored the unanimous opinion of the Court, concluding that:

On their face and at common law, the FCA’s standards focus primarily on what respondents thought and believed. First, the term “actual knowledge” refers to whether a person is “aware of” information… Second, the term “deliberate ignorance” encompasses defendants who are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement’s truth or falsity…. And, third, the term “reckless disregard” similarly captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.

Rejecting SuperValu and Safeway’s argument that the phrase “usual and customary” was vague such that they could not have “known” what that phrase meant, Justice Thomas affirmed that a defendant’s subjective knowledge or belief as to what their compliance obligations are is relevant evidence in a False Claims Act claim:

Respondents first focus on the inherent ambiguity of the phrase at issue here, asserting that they could not have “known” that their claims were inaccurate because they could not have “known” what the phrase “usual and customary” actually meant. The most that is possible, respondents posit, is that they took a (correct) guess. We disagree. Although the terms, in isolation, may have been somewhat ambiguous, that ambiguity does not preclude respondents from having learned their correct meaning—or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning. To illustrate why, consider a hypothetical driver who sees a road sign that says “Drive Only Reasonable Speeds.” That driver, without any more information, might have no way of knowing what speeds are reasonable and what speeds are too fast. But then assume that the same driver was informed earlier in the day by a police officer that speeds over 50 mph are unreasonable and then noticed that all the other cars around him are going only 48 mph. In that case, the driver might know that “Reasonable Speeds” are anything under 50 mph; or, at the least, he might be aware of an unjustifiably high risk that anything over 50 mph is unreasonable. Indeed, if the same police officer later pulled the driver over, we imagine that he would be hard pressed to argue that some other person might have understood the sign to allow driving at 80 mph.

The same analysis applies here. According to petitioners, respondents received notice that the phrase “usual and customary” referred to their discounted prices (in some cases, it seems, from the same entities to which they reported their prices). And, according to petitioners, respondents comprehended those notices and then tried to hide their discounted prices. If that is true, then perhaps respondents actually knew what the phrase meant; or perhaps respondents were aware of an unjustifiably high risk that the phrase referred to their discounted prices. And, if that is true, then respondents may have known that their claims were false. The facial ambiguity of the phrase thus does not by itself preclude a finding of scienter under the FCA. (emphasis added).

Justice Thomas concluded by stating:

Under the FCA, petitioners may establish scienter by showing that respondents (1) actually knew that their reported prices were not their “usual and customary” prices when they reported those prices, (2) were aware of a substantial risk that their higher, retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway. §3729(b)(1)(A). If petitioners can make that showing, then it does not matter whether some other, objectively reasonable interpretation of “usual and customary” would point to respondents’ higher prices. For scienter, it is enough if respondents believed that their claims were not accurate.

(Emphasis added.)

Accordingly, post-hoc legal justifications for why a claim complies with the law are not a defense if the defendant subjectively or actually believed that the claim was false. In evaluating False Claims Act issues, contractors should examine their actual knowledge and subjective beliefs, as opposed to focusing on clever interpretations of ambiguous provisions.

NLRB General Counsel Issues Opinion Stating Non-Compete Agreements for Employees Covered By Section 7 of the NLRA Are Invalid

On May 30, 2023, the National Labor Relations Board (“NLRB”) General Counsel issued a memo stating that the proffer, maintenance, and enforcement of non-compete provisions in employment contracts and severance agreements violate the National Labor Relations Act (“NLRA”) except in limited circumstances. The General Counsel argues that non-compete agreements violate the NLRA because, in her view, non-compete agreements interfere with employees’ exercise of rights under Section 7 of the NLRA. The General Counsel states in her memo that:

Non-compete provisions are overbroad, that is, they reasonably tend to chill employees in the exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work. Generally speaking, this denial of access to employment opportunities chills employees from engaging in Section 7 activity because: employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees’ bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, an employer’s former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships—and the communication and solidarity engendered thereby—to encourage each other to exercise their rights to improve working conditions in their new workplace

The General Counsel also concluded that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense” and that “business interests in retaining employees or protecting special investments in training employees are unlikely to ever justify an overbroad non-compete provision because U.S. law generally protects employee mobility, and employers may protect training investments by less restrictive means, for example, by offering a longevity bonus.”

In the General Counsel’s view, the only acceptable non-compete agreements would be “provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business or independent-contractor relationships. Moreover, there may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.” The General Counsel explained that non-compete agreements in these situations may “not violate the Act because employees could not reasonably construe the agreements to prohibit their acceptance of employment relationships subject to the Act’s protection.”

The General Counsel’s memo is another step in the federal government’s efforts to reduce or eliminate the use of non-compete agreements. The Federal Trade Commission (“FTC”) recently proposed a complete ban on non-compete agreements, and is expected to vote on that ban in early 2024.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.