On June 1, 2023, the U.S. Supreme Court issued its highly anticipated decision in the consolidated cases United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc., Nos. 21-1326 & 22-111, on the scienter element of the False Claims Act (FCA). The Court ruled 9-0 that defendants in FCA cases cannot defeat a finding of scienter simply by arguing that the interpretation of the regulatory requirements they advanced in later litigation was objectively reasonable. The combined case involved allegations that defendant supermarket chains submitted false claims to federal health care programs by failing to disclose the chains’ “usual and customary” prices, as required by applicable regulations. Holding that the FCA’s scienter element refers to a defendant’s knowledge and subjective beliefs, the Court ruled that the defendants could be found to have acted with scienter so long as they correctly understood the applicable regulatory standard and believed that their claims were inaccurate.
Circuit court opinions previously adopted an objective standard in assessing scienter under the FCA. As an element of the FCA, the plaintiff (either the government or a private relator) must prove that the defendant acted with knowledge of the falsity of the claims at issue. That element may be satisfied by proof of actual knowledge, deliberate ignorance or reckless disregard of the truth or falsity of the claim.
Recent decisions of several circuit courts considered how a plaintiff may satisfy this scienter standard when the statutory, regulatory or contractual requirement governing the subject claims is ambiguous. These courts mostly applied the standard the Supreme Court articulated in assessing scienter under the Fair Credit Reporting Act in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), which held that the defendant would prevail if it could offer an objectively reasonable interpretation of the ambiguous provision, unless the plaintiff could prove that the government warned the defendant against adopting that interpretation with “authoritative guidance.”
Schutte and Proctor involved supermarket chains’ reporting of drug pricing. SuperValu and Safeway, the two defendant supermarket chains in the cases consolidated in Schutte, operate pharmacies that serve Medicare and Medicaid beneficiaries. By regulation, Medicare and Medicaid reimbursement for prescription drugs sold at these pharmacies is based on the companies’ disclosures of their “usual and customary” prices for those drugs.
The relators in these cases alleged that the defendant supermarkets, intending to compete with a program at a competitor, began offering a price-match guarantee that offered many prescription drugs for low prices. The relators presented evidence that a majority of the supermarkets’ sales of many drugs — accounting for as much as 88% of cash sales of some drugs in some stores — used the price-matching program to match the competitor’s lower price. However, according to the relators, the defendant supermarkets continued to report their significantly higher, nondiscounted pricing to Medicare and Medicaid programs as their “usual and customary” prices for those drugs. Internal communications within the supermarket companies produced in the case suggested that some executives believed the supermarkets’ reported prices were not accurate.
The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s grant of summary judgment, using an objective test to determine scienter. The District Court granted summary judgment for the supermarkets based on a failure to establish scienter, and the Seventh Circuit affirmed. The Seventh Circuit applied the Safeco framework and held that “[a] defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.” Pursuant to the Safeco standard, the Seventh Circuit held that the supermarkets had offered objectively reasonable interpretations of the “usual and customary” requirement as a matter of law, regardless of other evidence regarding the supermarkets’ subjective beliefs about the accuracy of their pricing disclosures.
The Supreme Court’s Ruling
In a unanimous opinion by Justice Thomas, the Supreme Court held that the FCA’s “scienter element refers to [defendants’] knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.” Looking to the common law elements of fraud for guidance, the Court held that scienter must be determined by “what the defendant knew when presenting the claim” and not by other possible interpretations of the relevant statutory, regulatory or contractual provision offered after the fact. The Court determined that the facial ambiguity of such a provision does not necessarily defeat a finding of scienter under the FCA.
The Court also concluded that its framework for assessing scienter in Safeco does not require courts to determine FCA scienter using a purely objective standard. Rather the Court distinguished Safeco and ruled that evidence of a defendant’s subjective actual knowledge, deliberate ignorance or reckless disregard of the falsity of its claims can satisfy the FCA scienter standard even where the underlying legal requirement governing the claims is ambiguous.
The Supreme Court’s decision provides important clarification on the standard for FCA claims where the underlying legal or regulatory requirements governing defendants’ claims to the government are ambiguous. Future litigation is likely to further develop the scienter standard and provide additional guidance regarding how courts must assess the timing and content of a defendant’s subjective understanding of ambiguous requirements.
The Court’s decision also underscores the importance of evidence regarding defendants’ contemporaneous knowledge and intentions in submitting claims to the federal government amid ambiguous regulatory conditions.
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