dev – Libby ADR

FCA Case Spotlight: FCA Scienter After Schutte — Sheldon v. Allergan & White v. Gainwell

dev — Thu, 06 Aug 2026 18:58:15 +0000

Sheldon: No. ELH-14-2535, 2026 WL 1868781 (D. Md. June 29, 2026) | White: 2026 WL 1864033 (D. Mass. June 29, 2026)

Executive Summary

Decided on the same day, United States ex rel. Sheldon v. Allergan Sales, LLC and United States ex rel. White v. Gainwell Technologies LLC are two district-court opinions applying the Supreme Court’s landmark False Claims Act (FCA) scienter decision, United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023). Schutte held that the FCA’s “knowing” requirement is subjective: it turns on what the defendant actually knew or believed, not on what an objectively reasonable person would have understood. The Sheldon court applied that standard to move a twelve-year-old Medicaid drug-rebate case — that had previously been dismissed on the theory that the manufacturer’s reading of an ambiguous statute was objectively reasonable — to discovery. In contrast, in White, the same subjective standard was not enough to save the relators, whose complaint against a Medicaid fiscal agent failed to plead non-conclusory facts about that defendant’s own knowledge, and the case was dismissed with prejudice. Read together, the two decisions show that Schutte‘s holding denies FCA defendants the “reasonable interpretation” shield, but it does not relieve relators of pleading concrete, plausible facts about the particular defendant’s state of mind.

Why It Matters

For anyone advising healthcare providers, drug manufacturers, pharmacy-benefit managers, and claims processors, these cases are examples of where the FCA scienter battle now takes place. After Schutte, a defendant can no longer win dismissal simply by showing that its reading of an ambiguous legal requirement was objectively reasonable — the question is what the defendant subjectively believed, which is rarely resolvable on the pleadings. That raises the litigation and settlement exposure of any FCA defendant relying on an “everyone read it that way” defense, as Sheldon vividly shows. At the same time, White confirms that the subjective standard is not a free pass for relators: conclusory allegations that a defendant “knew” or “recklessly disregarded” the truth will still be dismissed, especially against downstream intermediaries whose role is processing someone else’s claims. For settlement counsel and neutrals, the practical upshot is that valuing an FCA case now turns less on the reasonableness of the legal position and more on the strength of the evidence of the specific defendant’s knowledge — a fact-intensive inquiry that rewards early, candid evaluation.

Detailed Discussion of the Facts

These cases are good examples of how the district courts are applying Schutte v. SuperValu Inc., where the Supreme Court construed the FCA’s scienter element — “actual knowledge,” “deliberate ignorance,” or “reckless disregard” of the truth or falsity of a claim. The Court held that this standard is subjective, referring to “the defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.” Schutte thereby abrogated the widely used defense — drawn from Safeco Insurance Co. of America v. Burr — that a defendant who adopted an objectively reasonable interpretation of an ambiguous requirement could not have acted “knowingly,” regardless of its actual beliefs.

Sheldon is a qui tam action under the Medicaid Rebate Statute alleging that Allergan misreported its drug “Best Price” — omitting price concessions — to reduce the rebates it owed state Medicaid programs. The case has a long history. The district court originally dismissed it, and the Fourth Circuit affirmed (Sheldon II, 24 F.4th 340 (2022)), holding that Allergan’s interpretation of the ambiguous Best Price requirement was objectively reasonable and therefore defeated scienter. After Schutte, the Supreme Court vacated that judgment and remanded; on remand the Fourth Circuit (Sheldon VII, 170 F.4th 227 (2026)) applied the subjective standard and revived the case, holding that statutory ambiguity does not defeat scienter where a defendant may have subjectively known its reading was wrong. Back in the district court — now in the case’s twelfth year — Allergan asked, under Rule 54(b), for leave to file a third motion to dismiss.

White is a qui tam action against Gainwell Technologies, the private fiscal agent that processes Medicaid claims for Rhode Island. The relators alleged that Gainwell facilitated a years-long scheme by Eleanor Slater Hospital (ESH) — a Rhode Island state hospital — to submit false and inflated Medicaid bills. The United States declined to intervene. The court had dismissed the first amended complaint and allowed a single narrow theory to proceed on amendment; on the second amended complaint it had earlier found the relators plausibly alleged reckless disregard, while noting that “the facts point to the state of Rhode Island, not Gainwell, as the source of ESH’s fraud.” Gainwell again moved to dismiss.

Legal Analysis

Applying Schutte‘s subjective standard, the two courts reached opposite conclusions — a contrast that maps the post-Schutte terrain:

The subjective standard is the common ground. Both courts applied Schutte‘s rule that FCA scienter turns on the defendant’s own knowledge and beliefs. The question is no longer whether a hypothetical reasonable person could have read the requirement the defendant’s way, but whether this defendant actually knew, was deliberately ignorant of, or recklessly disregarded the truth.
Sheldon: ambiguity no longer ends the case at the pleadings. Because Schutte removed the objective-reasonableness shield, whether Allergan subjectively believed its Best Price reporting was correct is a fact question that cannot be resolved on a motion to dismiss. The court denied Allergan’s Rule 54(b) request to file a third motion to dismiss, holding that a twelve-year-old case should proceed to discovery rather than absorb another round of pre-discovery motion practice, and declined to let Allergan re-litigate Rule 9(b) falsity at this late stage.
White: the subjective standard still demands particularized facts. The relators’ complaint “failed to plausibly allege that Gainwell possessed the requisite scienter under the subjective standard established by the Supreme Court in SuperValu.” It pleaded no non-conclusory facts about Gainwell’s subjective knowledge of the adequacy of the hospital’s billing, and no particularized facts showing a scheme to defraud by Gainwell rather than by the hospital or the State.
Causation compounds the problem for intermediaries. As the recipient and processor of the hospital’s claims — with no substantive input into them — Gainwell could not have “knowingly caused” the submission of false claims. The scienter and causation inquiries converged: without facts showing Gainwell’s own culpable state of mind, there was no basis to hold the fiscal agent liable for the hospital’s fraud.
Opposite procedural outcomes. Sheldon proceeds to discovery, its scienter question preserved for a factual record; White was dismissed with prejudice, the relators having neither sought nor warranted further amendment.
The synthesis — Schutte focuses on facts. Post-Schutte, the decisive FCA question has migrated from “was the defendant’s interpretation reasonable?” — a legal issue courts could resolve on the pleadings — to “what did this defendant actually know or believe?”, a fact-specific inquiry. That migration makes ambiguity-based dismissals far harder for defendants, but it puts a premium on the relator’s ability to plead the specific defendant’s knowledge with particularity.

Holding

In Sheldon, the court denied Allergan’s Rule 54(b) motion and refused to permit a third motion to dismiss, holding that under Schutte the subjective-scienter question could not be resolved on the pleadings and the case should proceed to discovery. In White, the court held that the second amended complaint failed to plausibly allege that Gainwell acted with the subjective scienter Schutte requires — or that it knowingly caused the submission of false claims — granted the motion to dismiss, and entered judgment dismissing the case with prejudice.

John Libby is a mediator and arbitrator focused on healthcare and commercial disputes, including False Claims Act, Stark Law, and Anti-Kickback matters. This summary is offered for general informational purposes and does not constitute legal advice.

FCA Case Spotlight: United States ex rel. Kyer v. Thomas Health System, Inc.

dev — Wed, 29 Jul 2026 22:26:20 +0000

No. 25-1507, — F.4th —-, 2026 WL 1595887 (4th Cir. June 4, 2026)

Executive Summary

In United States ex rel. Kyer v. Thomas Health System, Inc., the Fourth Circuit Court of Appeals affirmed the dismissal of a qui tam False Claims Act (FCA) suit brought by a former hospital nurse against a nonprofit health system, its two hospitals, its employed-physician group, and a former executive. The relator alleged that the defendants submitted Medicare claims tainted by violations of the Stark Law and the Anti-Kickback Statute (AKS), so that the system’s certifications of compliance rendered those claims false. Reviewing an 83-page amended complaint supported by roughly 30 pages of billing tables, the court held that the complaint failed to plead fraud with the particularity Rule 9(b) requires. At the heart of the decision is a clean legal line: paying physicians for their own productivity — measured in work relative value units (wRVUs) for services they personally perform — is not the same as paying them for referrals, and does not, by itself, create the prohibited financial relationship the Stark Law requires.

Why It Matters

This decision is a meaningful win for health systems, employed-physician groups, and the compliance teams that advise them. It confirms that widely used wRVU productivity compensation does not, standing alone, create Stark Law exposure, because the statute excludes a physician’s personally performed work from the definition of a “referral.” The ruling also cabins the Fourth Circuit’s landmark Tuomey decision — distinguishing ordinary productivity pay from a “collections” formula that captured the hospital’s facility fees — and it reaffirms rigorous Rule 9(b) gatekeeping: a relator cannot dump thousands of billing codes into an appendix and ask the court to find the fraud, but must connect those codes to Medicare’s “designated health services” and to a concretely pleaded self-referral or kickback scheme. For settlement counsel and neutrals, it is a useful marker of how pleading-stage vulnerabilities drive the realistic value of a healthcare FCA case.

Detailed Discussion of the Facts

Thomas Health System, Inc. is a nonprofit corporation in South Charleston, West Virginia, that owns two hospitals — Thomas Memorial Hospital and St. Francis Hospital — and controls THS Physician Partners, Inc. (THSPP), a multi-specialty group employing physicians and nonphysician providers such as physician assistants and nurse practitioners (who, under West Virginia law, generally must practice under physician supervision). The hospitals participate in Medicare and, on enrollment and in annual cost reports, must certify compliance with the Stark Law and the Anti-Kickback Statute. The relator, Liesa Kyer, was a former nurse at Thomas Memorial.

THSPP paid its physicians based on their wRVU totals — a work-based measure of the time, skill, and effort a procedure requires — with a minimum target to earn a base salary and a bonus that scaled with wRVUs above the target; some physicians also received credit for a share of the wRVUs generated by nonphysicians they supervised, and a handful were paid at or above the 90th percentile of national benchmarks. In early 2015, the system adopted a “provider-based billing” structure, converting certain physician offices into hospital departments. That change “unbundled” billing so that THSPP billed the professional-services component while the hospital separately billed a higher facility fee, leaving THSPP to run operating losses that the parent backfilled through transfers — while the integrated system captured more Medicare revenue overall.

Kyer filed her qui tam complaint under seal in November 2020; the government obtained five seal extensions over nearly three years before declining to intervene. Her March 2024 amended complaint asserted four counts — presenting false claims, false statements material to false claims, conspiracy, and a reverse false claim. Rather than sue to recover any overcharges itself, she pursued the claims on the government’s behalf. The district court (S.D. W. Va., Judge Goodwin) dismissed the complaint under Rule 9(b) and denied post-judgment vacatur and leave to amend; Kyer appealed both rulings, which the Fourth Circuit reviewed together as a single judgment.

Legal Analysis

The district court dismissed the complaint for failing to plead fraud with the particularity Rule 9(b) requires — a standard that, where FCA liability hinges on an underlying Stark or Anti-Kickback violation, demands that the underlying scheme itself be pleaded with particularity. The relator’s billing tables established the who, what, where, and when, but not the “how,” or indeed “whether,” any claim was actually false. Affirming, the Fourth Circuit detailed several key points:

wRVU productivity is not referral-based compensation. The dispositive Stark element was the “financial relationship.” An indirect compensation arrangement requires physician pay that “varies with, or takes into account, the volume or value of referrals,” and wRVU compensation rewards the physician’s own personally performed work — which the statute expressly excludes from the definition of a “referral.” A formula “takes into account” referrals only if it includes referrals as a variable; a wRVU formula contains no such input.
Distinguishing Tuomey. In Tuomey II, the unlawful formula was based on “collections” that included the hospital’s facility fees, tying physician pay directly to referral revenue. wRVUs, by contrast, track only the physician’s labor — so Tuomey does not sweep in ordinary productivity pay.
Supervision credit and high pay did not bridge the gap. Crediting a physician for supervising nonphysicians rewards the physician’s own (legally required) work, not referrals. Pay above the 90th percentile, standing alone, does not show variation with referrals — by definition, ten percent of physicians exceed it — distinguishing Bookwalter, where compensation ran two-to-three times that benchmark with other red flags.
The Anti-Kickback theories failed. The hospitals’ transfers covering THSPP’s operating deficit were at least as consistent with lawful explanations — maintaining unprofitable service lines or the accounting consequence of provider-based billing — as with a kickback, and facts equally consistent with lawful and unlawful conduct do not survive Rule 9(b). A $5,000 marketing stipend cut the other way entirely: it induced THSPP physicians to attract patients to their own practices, making them the inducers of outside referrals rather than parties induced to refer to the hospitals.
The derivative counts collapsed. Because no claim was rendered false, there was no unlawful agreement to support the conspiracy count, and the reverse-false-claim count necessarily failed as well.
Denial of leave to amend was no abuse of discretion. Having filed in 2020, amended in 2024 with the benefit of more than 500,000 pages of pre-amendment discovery and the roadmap of a motion to dismiss, and still offered no proposed cured complaint, the relator gave the district court ample basis to deny another round for undue delay and repeated failure to cure.

Holding

The Fourth Circuit affirmed, holding that the complaint failed to plead FCA fraud with Rule 9(b) particularity: it alleged neither a Stark Law violation — because wRVU-based productivity compensation is not compensation tied to the volume or value of referrals — nor a plausible Anti-Kickback Statute violation. The derivative conspiracy and reverse-false-claims counts failed with the substantive claims, and the district court did not abuse its discretion in denying post-judgment vacatur and leave to amend. The judgment was affirmed.