The United States Supreme Court recently heard oral arguments in a pair of consolidated cases concerning the proper interpretation of the federal False Claims Act. The outcome could have a profound effect on one of the government’s most powerful tools in fraud prosecution.

The False Claims Act (FCA) is one of the most powerful tools for federal regulators and prosecutors to pursue claims of fraud perpetrated against the government. Originally passed during the Civil War to target government contractors who overbilled or under-delivered, the FCA has a wide purview, touching on any services provided through federal programs or any parties receiving government reimbursement.

The FCA is especially prevalent in healthcare fraud investigations. The FCA allows prosecution for any false claims made affecting the federal treasury, including by way of government programs such as Medicare and Medicaid. The law has been interpreted to allow prosecution for a wide swath of unlawful acts in the healthcare industry, from billing fraud to anti-kickback violations.

The logic goes like this: When you make a claim for payment to the government, you are implicitly certifying that you’ve complied with all relevant contractual provisions, laws, and regulations. If it turns out that you failed to comply with any relevant provision, law, or regulation, then you are lying to the government, and you’re doing it to get money from the government you might not otherwise get. Thus, you’ve submitted a “false claim.”

The FCA also authorizes so-called “whistleblower” or “qui tam” actions, by which a private individual files a lawsuit against the company on behalf of the government. Whistleblowers, often patients or employees of the defendant, can take home a share of the government’s proceeds for their trouble.

Penalties for FCA violations can be severe. Healthcare entities can be subjected to major fines, including up to triple the damages their alleged schemes caused. Individuals can even face criminal prosecution. The severity of the penalty often turns on the state of mind of the defendants: Did they know they were breaking the law, or did they make innocent, even if negligent, billing mistakes?

The cases now before the Supreme Court concern how the statute’s scienter, or state of mind, language should be interpreted. A defendant who “knowingly” defrauded the government can be hit with massive penalties, including up to three times the amount allegedly defrauded. For wide-ranging alleged fraud schemes, such penalties could bankrupt a healthcare practice.

The cases at bar concern whether pharmacy chains, including defendants Safeway and SuperValu, knowingly defrauded the government by offering discount drugs to cash customers but not to Medicaid and Medicare. Pharmacies are supposed to bill federal payers at the “usual and customary price” given to other customers. The prices quoted to Medicare and Medicaid were the pre-discount prices. The defendants claim that they acted within a reasonable interpretation of the relevant regulations and were not given clear governmental guidance to the contrary.

At issue is whether a defendant’s subjective belief about the lawfulness of its conduct is relevant to whether it violated the FCA, when the actual conduct is consistent with an objectively reasonable interpretation of the relevant laws, and the government has issued no authoritative guidance on the issue. That is, if what the pharmacies did might have been legal under the relevant regulations, based on a reasonable reading of the law, does it matter whether the defendants actually thought it was legal? Is it a “knowing” violation of the law if they subjectively thought they might be acting illegally, but one possible reading of the relevant law would allow their conduct?

It’s a difficult question. The Seventh Circuit Court of Appeals held that there is no reason to inquire about the subjective intent of the defendant if their conduct could have been lawful under an objectively reasonable reading of the law.

At oral argument, the majority of Supreme Court justices seemed skeptical that no subjective intent was relevant in such a case. On the other hand, the justices seemed very taken aback by the government’s argument that a defendant given several perfectly reasonable options for interpreting a law should be found liable just because a court later decides they chose wrong. The Court may land somewhere in the middle, finding that an interpretation of the law can be incorrect without being knowingly false.