Chevron had created a two-step process for judicial review under which courts were required to defer to an agency’s regulatory interpretation of Congressional enactments. When Chevron applied to a particular agency pronouncement, the court would analyze: (1) whether the statute at issue was ambiguous, and (2) if so, whether the agency’s interpretation of the statute was reasonable. This framework gave federal agencies substantial latitude to interpret Congressional enactments, and strengthened the agencies’ ability to defend their interpretation of federal law. But judicial deference to agency interpretation of ambiguous laws had over time come under fire from critics of the so-called administrative state, who believed that Chevron deference improperly gave federal agencies the power to make and interpret law that properly belonged to Congress and the courts.

Chief Justice Roberts reasoned that it was the both the Framers’ intent, and integral to the United States’ balance of powers, for the judiciary to serve as the final arbiter of what the law says. The Court held, consistent with this principle, that the APA requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and that courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. The Court rejected the argument that courts should mechanically defer to an agency’s interpretation of an ambiguous statute solely on the basis of agency subject matter expertise, reasoning that courts may consider agencies’ special expertise without being bound by the agency’s interpretation.

Loper Bright and the implications for enforcement of the Federal False Claims Act

The demise of Chevron deference has important implications for companies or individuals who may want to mount an offensive challenge to what they believe is burdensome or improper agency regulation, regardless of the industry. But it is likely to have particularly significant ramifications for companies and individuals defending against federal criminal and civil enforcement cases.

Defensive challenges to agency regulations often arise in enforcement cases in which an agency contends that a defendant has violated a regulation that has the force of law and whose violation carries civil or criminal penalties. Defendants in enforcement actions can typically argue that they are not liable for violating a regulation because the regulation exceeds the agency’s power under the statute or otherwise violates the APA. Following Loper Bright, courts will now review an agency’s interpretation of the governing statute de novo, not deferentially.  

Federal False Claims Act (FCA) enforcement is one area where this could be especially relevant. In many FCA cases, liability is premised on allegations of “legal falsity,” where a defendant allegedly falsely certifies – either expressly or impliedly – that it complied with a statutory or regulatory requirement that is material to the government’s decision to pay the claim. In recent years, false certification cases under the FCA have given rise to staggeringly large awards of treble damages and penalties under a wide range of federal programs, many of which are implemented largely through regulations interpreting vague or ambiguous statutes.

Express false certification allows FCA liability to be imposed, as the name suggests, on an express certification of compliance with the law. Implied false certification, a theory endorsed by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, allows liability to be imposed on a person who, by presenting a claim for payment to the United States, impliedly certifies compliance with a statute or regulation that is material to the government’s decision to pay.¹

Where the predicate for a false certification is alleged noncompliance with a regulation interpreting an ambiguous or silent statute, FCA defendants can now argue that the regulation they are alleged to have violated is invalid under the plain text of the statute. Following the Supreme Court’s decision in Loper Bright, FCA defendants now have a better chance of winning such arguments.

FCA cases often involve alleged noncompliance with regulations promulgated by federal agencies that have attempted to implement or interpret ambiguous federal-program statutes. For example, claims of Medicare fraud often involve statutes incorporated in the Medicare Act that set forth broad coverage, payment, or reimbursement principles that are interpreted by the Secretary of Health and Human Services in regulations specifying the circumstances under which payment should be allowed. FCA cases alleging underpayment of oil and gas royalties under the Federal Oil and Gas Royalty Management Act of 1982 often turn on complex regulations promulgated by the Department of Interior. And government procurement fraud cases often rely upon regulations promulgated by the Department of Defense, Department of Veterans Affairs, or the General Services Administration.

With Chevron deference overturned, the question of whether the agency’s implementing regulations properly interpret the underlying statute becomes an easier question for FCA defendants to litigate. 

To be clear, every regulatory challenge under the APA is not necessarily a Chevron deference case. Chevron only ever applied when an agency interpreted an ambiguous or silent statute. Moreover, Loper Bright’s de novo review does not apply where Congress expressly delegates the authority to interpret a statutory term to the agency. That means, for example, that the Loper Bright decision may not impact a challenge to the regulatory Safe Harbors promulgated by the Secretary of Health and Human Services under the Anti-kickback Statute, because Congress expressly delegated to the Secretary the authority to create regulatory Safe Harbors.²

Chevron deference also did not apply to an agency’s informal, non-binding guidance, nor to any agency’s interpretation of its own regulations. Non-binding guidance was never given Chevron review, and an agency’s interpretation of its own regulations is still subject to so-called Kisor deference, which carries with it its own set of rules (although it is possible that the Supreme Court will revisit this form of deference in the near future following Loper Bright).³ Moreover, after Loper Bright, courts may still consider agencies’ interpretations and subject matter expertise in interpreting ambiguous statutes, even if there is no formal deference attached. But when an FCA action is based purely on agency guidance, the principles underlying Loper Bright might call into question the legitimacy of an FCA suit based on the guidance. If a court is not obliged to defer to an agency’s interpretation of a statute, it may be difficult for the Department of Justice (DOJ) or a relator to argue that informal agency guidance has much persuasive force, though it might still be used as evidence bearing on the defendant’s state of mind.⁴

Two recent Supreme Court case offer insight into the types of questions that may be litigated following Loper Bright. In United States ex rel. Schutte v. SuperValu Inc., the Supreme Court considered an FCA dispute over the meaning of a requirement that pharmacies bill Medicare and Medicaid for their “usual and customary” drug prices.⁵ The defendants in SuperValu contended that the “usual and customary” price regulations promulgated by the Secretary of Health and Human Services were ambiguous on the question whether certain discount programs should be taken into account in determining “usual and customary” price. Although the Supreme Court’s focus in SuperValu was on the defendants’ scienter (and not whether the Secretary’s regulations properly interpreted the Medicare and Medicaid statutes that authorized payment), the case offers an example of the types of issues that may be affected by Loper Bright. In cases where relators or the DOJ cite evidence of a defendant’s awareness of agency guidance as evidence of the defendant’s subjective interpretation of a statute or regulation, Loper Bright could offer a new response – can a defendant knowingly violate a regulation if the regulation was not a valid interpretation of the governing statute?

Similarly, in Polansky v. Executive Health Resources, Inc., the relator contended that the defendant caused its client hospitals to bill Medicare by designating hospital patient admissions as inpatient rather than outpatient, to take advantage of more favorable reimbursement rates for inpatient services.⁶ During the relevant time period, the Centers for Medicare and Medicaid Services (CMS) had implemented policies for determining inpatient status.⁷ CMS initially published guidance without going through formal notice and comment, but it later promulgated a regulation – the “Two Midnight Rule” – that formalized the agency’s reimbursement policy.⁸ Whether CMS’s regulations correctly interpret the governing statute is the kind of question that is likely to arise following Loper Bright.

One impact of Loper Bright is that the DOJ may in some cases choose to dismiss suits brought under the qui tam provisions of the FCA rather than litigate whether an agency regulation that forms the basis for the suit is the best interpretation of a statute. In other words, a defendant may be able to induce dismissal of a declined qui tam suit by challenging the legitimacy of an underlying agency interpretation because the case could make “bad law” for the agency and DOJ. This is more likely to occur in situations where the statute at issue is ambiguous or the agency’s regulation is not clearly supported by the statutory text.  

Substantive impact

Litigants in FCA cases now have a fresh chance to advocate for their preferred interpretation of ambiguous program statutes, and the courts have an obligation to address litigants’ arguments without deference to the administering agency’s interpretation. This creates an opportunity for regulated entities to carefully examine the text of the statutes that govern their activities, and consider whether the agency’s interpretation of those statutes is consistent with that text. This is likely to result in more unpredictability for both FCA defendants and the government. A court’s interpretation of a statute might sometimes benefit the government or relators, and might sometimes benefit FCA defendants. Overall, however, Loper Bright improves the odds of FCA defendants seeking to fend off lawsuits involving ambiguous statutory requirements.

Hogan Lovells continues to monitor developments relevant to the Loper Bright decision.

Additional insights can be found here:

1. Loper Bright Enterprises v. Raimondo: Decision summary - Hogan Lovells Engage
2. SCOTUS' Corner Post decision opens possibility of new challenges to old laws in some circumstances - Hogan Lovells Engage

Authored by Michael Theis, Katherine Wellington, Jessica Ellsworth, Katy Forsstrom, Laura Knoblach, Danielle Stempel, Susan Cook, and Gejaa Gobena.

References

1 579 U.S. 176 (2016).

2 See 42 U.S.C. 1320a-7b(b)(3)(E).

3 See Kisor v. Wilkie, 139 S. Ct. 2400 (2019) (plurality opinion).

4 Department of Justice policy on whether, and to what extent, DOJ may use or rely upon published agency guidance documents in enforcement proceedings has evolved over recent years. See Memorandum from the Attorney General, Issuance and Use of Guidance Documents by the Department of Justice (July 1, 2021); see also Justice Manual § 1-19.000. But the Department generally recognizes that an agency guidance document by itself “never forms ‘the basis for an enforcement action’” because such documents cannot “impose any ‘legally binding requirements’ on private parties.” See Kisor, 139 S. Ct. at 2420 (citation omitted); see also United States ex rel. Perales v. St. Margaret’s Hosp., 243 F.Supp.2d 843, 849 (C.D. Ill. 2003) (opinion letter from Office of Inspector General lacks the force of law and is not entitled to Chevron-style deference in FCA suit based on alleged violation of Anti-Kickback Statute).

5 United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739, 743, (2023). The Court, focusing only on the FCA’s scienter element, held that the scienter element “refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed,” and facial ambiguity alone in statutory language “is not sufficient to preclude a finding that respondents knew their claims were false.” Id.

6 United States ex rel. Polansky v. Exec. Health Res., Inc., 599 U.S. 419, 428 (2023).

7 Polansky v. Exec. Health Res., Inc., 422 F. Supp. 3d 916, 932 (E.D. Pa. 2019).

8 Id. at 933. Polansky made its way to the Supreme Court after the Department of Justice moved to dismiss the case rather than contending with costly and burdensome discovery and privilege issues involving the agency’s policymaking decisions. The Court affirmed the trial court’s dismissal of the case, holding that the Department of Justice need only meet the relatively modest requirements of Rule 41 of the Federal Rules of Civil Procedure to justify its motion to dismiss.