FCA Scienter After Schutte: Subjective Awareness from Agency Rulemaking and Internal Audits Can Plausibly Plead Reckless Disregard Despite Statutory Ambiguity

1. Introduction

This published Fourth Circuit decision sits at the intersection of two “public fisc” statutes: the False Claims Act (FCA), 31 U.S.C. § 3729, and the Medicaid Drug Rebate framework under 42 U.S.C. § 1396r-8 (the “Medicaid Rebate Statute”). The relator, Troy Sheldon (substituted by Deborah Sheldon as executrix), alleged that his former employer Forest Laboratories, LLC (now Allergan Sales, LLC) underpaid Medicaid rebates by reporting inflated “Best Price” figures to CMS—specifically by failing to “stack” (aggregate) multiple rebates/discounts allegedly given on the same drug unit to different entities in the distribution chain.

The appeal’s core issue was not (yet) the correct meaning of “Best Price.” Instead, the panel addressed whether Sheldon plausibly pleaded FCA scienter after the Supreme Court’s shift to a subjective scienter standard in United States ex rel. Schutte v. SuperValu Inc. The district court had again dismissed on remand, concluding that the allegations could not satisfy scienter even under Schutte. The Fourth Circuit disagreed, holding that allegations tied to CMS rulemaking and Forest’s internal post-rule audit plausibly supported “reckless disregard.”

2. Summary of the Opinion

3. Analysis

3.1 Precedents Cited

A. FCA purpose, structure, and elements

• United States ex rel. Wheeler v. Acadia Healthcare Co., Inc. (4th Cir. 2025): Used for FCA history, whistleblower purpose, and the four-element FCA framework (false statement/conduct, scienter, materiality, causation). It anchors the Fourth Circuit’s framing of the FCA as a primary tool for recouping government losses and deterring fraud.
• Avco Corp. v. U.S. Dep't of Just. (D.C. Cir. 1989): Quoted for the FCA’s role as the government’s “primary litigative tool” to recover fraud losses, reinforcing the statute’s remedial and deterrent aims.
• Harrison v. Westinghouse Savannah River Co. (4th Cir. 1999): Cited for the proposition that “false or fraudulent claim” is construed broadly—supporting a non-cramped reading of FCA reach.

B. Scienter—shift from objective to subjective

• United States ex rel. Schutte v. SuperValu Inc. (2023): The controlling precedent. The majority treats Schutte as rejecting the “objectively reasonable interpretation” safe harbor and requiring an inquiry into the defendant’s “knowledge and subjective beliefs.” The opinion also uses Schutte to explain that legal ambiguity does not negate scienter if the defendant learned (or strongly suspected) the government’s contrary meaning.
• United States ex rel. Proctor v. Safeway, Inc. (7th Cir. 2022): Mentioned to illustrate the now-rejected objective scienter approach that had been used by multiple circuits pre-Schutte.

C. Pleading standards at Rule 12(b)(6) and Rule 9(b)

• Ashcroft v. Iqbal (2009): Standard for plausibility—facts must allow a reasonable inference of liability.
• United States ex rel. Taylor v. Boyko (4th Cir. 2022): “Who, what, when, where, and how” of fraud for Rule 9(b).
• Shook v. NCG Acquisition, LLC (4th Cir. 2024): On a motion to dismiss, allegations accepted as true; reasonable inferences for plaintiff.
• United States v. Walgreen Co. (4th Cir. 2023): De novo review of dismissal; reinforces standard-of-review posture.

D. Post-Schutte pleading landscape (persuasive authorities)

• United States ex rel. Jacobs v. Pac. Dermatology Inst., Inc. (C.D. Cal. 2024): Cited to show scienter can be pleaded via “red flags” tipping off defendants.
• United States ex rel. Nunnelly v. Regeneron Pharms., Inc. (D. Mass. 2025): Used to emphasize irrelevance of statutory ambiguity and “reasonableness” of interpretation to scienter post-Schutte.
• United States ex rel. McCullough v. Anthem Ins. Cos., Inc. (S.D. Ind. 2025): Supports the proposition that requiring direct proof of scienter at the pleading stage would improperly stifle FCA claims; circumstantial allegations suffice.
• United States ex rel. Ocean State Transit, LLC v. Infante-Green (D.R.I. 2023): Example of cases reopened after Schutte because “lack of clarity” is not itself a basis for dismissal at pleadings.

E. Government-funds doctrine and “know the law” principle

• Heckler v. Cmty. Health Servs. of Crawford County, Inc. (1984): The majority uses this to support the expectation that recipients/seeker of public funds act with “scrupulous regard” and are expected to “know the law.” This undergirds the inference that awareness of the government’s view matters to scienter.

F. Considering materials outside the complaint

• Bosiger v. U.S. Airways (4th Cir. 2007) and E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc. (4th Cir. 2011): Cited to caution that reliance on materials outside the pleadings can require conversion to summary judgment under Rule 12(d). The majority flags the district court’s broad judicial-notice approach as problematic in a 12(b)(6) posture.

G. Falsity as an objective inquiry; ambiguity not a falsity defense

• United States ex rel. Drakeford v. Tuomey (4th Cir. 2015): Central to the majority’s separation of scienter from falsity; falsity is objective and may exist even amid reasonable disagreement.
• United States v. Elfenbein (4th Cir. 2025): Quoted for the proposition that the “possibility of reasonable disagreement doesn’t rule out falsity.”
• United States ex rel. Streck v. Eli Lilly & Co. (7th Cir. 2025): Cited for the idea that even “reasonable interpretations” can be false as a matter of law.
• Wilson v. Kellog Brown & Root, Inc. (4th Cir. 2008): Distinguished; contract-performance disputes may not fit the “either/or” statutory falsity inquiry in the way statutory-meaning disputes do.

H. Medicaid background authorities

• Children's Hosp. of the King's Daughters, Inc. v. Azar (4th Cir. 2018) and Pharms. Rsch. & Mfrs. of Am. v. Walsh (2003): Provide Medicaid program and rebate-statute context (cost containment; tying Medicaid costs to private-market low prices).

I. Dissent’s statutory-interpretation authorities

• Copley v. United States (4th Cir. 2020) and Desert Palace, Inc. v. Costa (2003): Text-first interpretive framing.
• Lamie v. U.S. Tr. (2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. (2000)): “Enforce according to its terms” when clear.
• Gundy v. United States (2019) (quoting Nat'l Ass'n of Home Builders v. Defs. of Wildlife (2007)): Read statutory words in context and within the scheme.
• Loper Bright Enters. v. Raimondo (2024): Invoked to emphasize that courts, not agencies, determine statutory meaning—used by the dissent to downplay regulatory “interpretations” when the statute is (in its view) unambiguous.
• Astra USA Inc. v. Santa Clara Cnty. (2011): Cited for the proposition that rebate agreements operationalize statutory obligations and cannot expand them.

3.2 Legal Reasoning

A. The operative doctrinal move: separating scienter from ambiguity

The majority’s key doctrinal contribution is operational: it applies Schutte to a common defense posture in complex regulatory FCA cases—“the law was unclear, so we couldn’t have known.” The panel makes three linked points:

• Scienter is subjective: What matters is what Forest thought—whether it believed its Best Price reporting was wrong or consciously disregarded a substantial risk it was wrong.
• Ambiguity is not dispositive: Even if “Best Price” is “less than perfectly clear,” ambiguity does not preclude Forest from learning CMS’s meaning (or at least recognizing a substantial likelihood of that meaning).
• Pleading burden is modest for scienter: Rule 9(b) allows scienter to be alleged generally, and plaintiffs seldom can plead “direct proof” of mental state pre-discovery.

B. Why the complaint plausibly alleged reckless disregard

The panel emphasizes two clusters of allegations as “enough” at the pleading stage:

• Rulemaking record and the McKenna letter: Forest’s comment letter objected that CMS appeared to treat Best Price as the “net amount realized” and urged CMS to clarify that “prices to unrelated entities” should not be aggregated. CMS did not adopt Forest’s limiting language in the 2007 Final Rule. From this, the majority infers Forest was at least subjectively aware CMS read the regime to require aggregation.
• Post-rule internal audit and selective behavior change: Sheldon alleged Forest implemented an audit to detect “double rebates” and changed practices for many customers—suggesting it perceived “potential Best Price violation”—but excluded Pharmacy Providers and GPOs to preserve business relationships while continuing to report non-aggregated Best Price. The panel treats the timing and selectivity as circumstantial evidence of subjective awareness and risk-taking.

Under the majority’s lens, these allegations plausibly fit Schutte’s definition of reckless disregard: being “conscious of a substantial and unjustifiable risk” that claims are false, but submitting them anyway.

C. Procedural rigor: keeping 12(b)(6) confined to the complaint

The opinion also contains an important procedural warning: the district court, in dismissing, considered numerous documents beyond the complaint (including agency releases, letters, proposed rules, government briefs, and press materials). The majority notes that the ability to consider extra-pleading materials on a motion to dismiss is limited (Bosiger v. U.S. Airways), and that a court generally must convert to summary judgment if it considers outside materials not integral to the complaint (E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc.; Rule 12(d)). While the panel does not fully resolve the evidentiary boundary, it signals that overreliance on extrinsic sources can distort the pleading-stage inference-drawing required under Iqbal.

D. The opinion’s second separation: scienter vs. falsity

The panel is explicit that:

• Scienter: Ambiguity may bear on what the defendant believed, but it does not immunize a defendant who subjectively suspected its conduct was wrong.
• Falsity: Ambiguity is not a defense to falsity; falsity is objective (United States ex rel. Drakeford v. Tuomey), and “reasonable disagreement” does not foreclose falsity (United States v. Elfenbein).

Crucially, the panel declines to decide whether the Medicaid Rebate Statute requires discount stacking across entities. That interpretive question is left for remand.

3.3 Impact

A. Practical litigation impact in the Fourth Circuit

• Easier path past dismissal on scienter: Relators can survive Rule 12(b)(6) by pleading circumstantial facts showing that the defendant was alerted to (or internally recognized) the government’s interpretation and continued anyway.
• Rulemaking comments become scienter evidence: Corporate submissions in agency rulemaking—especially objections revealing awareness of an agency’s intended meaning—may be used to plead subjective awareness of risk.
• Compliance actions can cut both ways: Audits, policy changes, or selective “fixes” may support an inference of knowledge/risk recognition if paired with continued disputed reporting in carve-outs.
• Reduced force of “legal uncertainty” defenses at pleadings: Defendants in complex regulatory FCA cases will have a harder time defeating scienter on “ambiguity” alone post-Schutte.

B. Substantive law impact: clarifying the role of ambiguity

Although the panel does not decide “Best Price,” it clarifies a broader FCA principle: statutory/regulatory ambiguity does not categorically defeat scienter and does not categorically defeat falsity. That framing is likely to influence future FCA cases involving pricing, reimbursement, and reporting under complex federal programs.

C. What remains open (and why it matters)

• The “Best Price” stacking question: The dissent would decide now that “best price” is the lowest price to a single purchaser and reject stacking as a matter of plain meaning. The majority’s remand ensures this interpretive issue will be litigated further and will likely determine whether any “false” claim existed.
• Post-Loper Bright interpretive method: The dissent’s reliance on Loper Bright Enters. v. Raimondo foreshadows that remand will focus heavily on statutory text and structure rather than deference to CMS interpretations.

4. Complex Concepts Simplified

• Qui tam / relator: A private whistleblower sues on behalf of the United States under the FCA and may share in any recovery.
• Scienter (FCA): The defendant must have acted “knowingly,” which includes (i) actual knowledge, (ii) deliberate ignorance, or (iii) reckless disregard. After Schutte, this turns on the defendant’s subjective belief/awareness, not what a reasonable person might have believed.
• Reckless disregard: Not mere carelessness—think “I see a substantial risk this is wrong, but I’ll do it anyway.”
• Best Price (Medicaid rebates): A statutory benchmark intended to ensure Medicaid gets the benefit of low private-market pricing; manufacturers report Best Price and Average Manufacturer Price, and rebates are calculated from those numbers.
• “Stacking” discounts: Combining multiple rebates/discounts given to different entities in a distribution chain (e.g., insurer + facility + intermediary) to reflect a lower net “price actually realized.”
• Falsity vs. scienter: A claim can be objectively false (wrong under the law) even if the defendant lacked the required mental state; and a defendant can have culpable scienter even when the legal text is debatable—if the defendant suspected the government’s contrary meaning.
• Rule 9(b): Fraud claims must plead the “who, what, when, where, how.” But mental state (intent/knowledge) can be pleaded more generally, because direct evidence is usually unavailable pre-discovery.

5. Conclusion

The Fourth Circuit’s decision marks a clear post-Schutte application: an FCA defendant cannot defeat scienter at the pleading stage simply by pointing to ambiguity in complex program requirements where the complaint plausibly alleges the defendant was aware of a substantial risk that the government’s interpretation differed from its own. By crediting allegations drawn from the defendant’s rulemaking comments and subsequent internal audit behavior, the court reinforces that subjective awareness can be pleaded circumstantially and that motions to dismiss should not become mini-trials on intent.

At the same time, the dissent underscores that the case’s ultimate viability will likely hinge on a hard interpretive question the majority leaves open—whether “best price” requires cross-entity stacking. On remand, the district court’s objective falsity analysis (now unmoored from Chevron-era instincts and attentive to text-first interpretation) will likely determine whether this case becomes merely a scienter pleading milestone or also a substantive Medicaid “Best Price” precedent.