- On June 1, 2023, in United States ex rel. Schutte v. SuperValu Inc., the U.S. Supreme Court unanimously held that defendants cannot avoid liability under the False Claims Act (FCA) by demonstrating that their conduct was consistent with an "objectively reasonable" interpretation of an ambiguous legal requirement.
- The Court's decision clarifies that FCA liability turns on the subjective standard of whether a defendant, at the time it submitted a claim, knew or had reason to know that the claim was false.
The SuperValu case arose from separate lawsuits against
two companies that operate retail drug pharmacies across the
country: SuperValu Inc. and Safeway, Inc. In each case, a
whistleblower – on behalf of the federal government –
brought FCA claims against the company for allegedly overcharging
Medicare and Medicaid in seeking reimbursement for prescription
drugs. The companies were obligated, through Medicare contracts or
Medicaid regulations, to disclose their "usual and
customary" prices for drugs.
Each company offered a discount program through which customers could purchase drugs at reduced prices. These programs generated a substantial amount of revenue for the companies. But according to the whistleblowers, the companies did not report those discounted prices as their "usual and customary" prices; instead, they reported – and charged the government – significantly higher, non-discounted prices. The whistleblowers presented evidence that the companies knew their discounted prices were their "usual and customary prices," yet attempted to conceal that fact from regulators and contractors. According to the whistleblowers, the companies knew, when submitting claims based on non-discounted prices, that those claims were false.
The companies won summary judgment in the district court on the basis that they did not act "knowingly." The Seventh Circuit affirmed, concluding – under Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007) (a case interpreting the term "willfully" under the Fair Credit Reporting Act) – that because it was objectively reasonable for the companies to interpret the ambiguous phrase "usual and customary" prices as applying to their non-discounted prices, it was irrelevant that they may have believed that their discounted prices were their "usual and customary" prices (and that their claims were therefore false).
The Supreme Court disagreed unanimously. Looking at the statutory text and common-law roots of the FCA, the Court determined that "[t]he FCA's scienter element refers to respondents' knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed." The Court noted that there are three mental states that satisfy the knowledge requirement under the FCA: (1) actual knowledge that a claim is false, (2) deliberate ignorance of the truth or falsity of a claim, and (3) reckless disregard of the truth or falsity of a claim. The FCA, according to the Court, focuses on "what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it."
This decision comes as no surprise, given the far-reaching implications in FCA matters had the Court imposed an objective, rather than a subjective, standard, especially in the face of allegations that the companies in SuperValu were aware that they were submitting false claims to the federal government for reimbursement. FCA cases will continue to turn on whether a claim was false and whether the company submitting it had knowledge (whether actual or constructive, as broadly interpreted under the FCA) of that falsity. SuperValu makes it clear, however, that there is no safe harbor for conduct that, while subjectively culpable, was objectively reasonable.
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