The Federal False Claims Act (“FCA”) allows private parties to bring lawsuits in the name of the federal government against defendants who allegedly “knowingly” present a false claim to the government for payment.  The question for courts has been what standard should be applied to evaluate a defendant’s “knowledge.”  The US Supreme Court recently clarified that courts must examine a defendant’s subjective belief as of the time a claim is submitted.

Medicare and Medicaid offer prescription drug coverage to beneficiaries with payments that are typically capped at a pharmacy’s “usual and customary” rates. In a unanimous June decision, the Supreme Court reversed the Seventh Circuit and found the defendant pharmacies could have violated the FCA by submitting claims for reimbursement from Medicare and Medicaid for purportedly “usual and customary” retail pharmacy prices, which were higher than discounted prices actually charged to customers.[1]

There is a two-prong test to establish a violation of the FCA. The claims must be false, and the defendants must know the claims are false. “Knowledge” is defined as a defendant’s:

• Actual knowledge, or whether a defendant is aware of information;
• Deliberate indifference, or awareness of a substantial risk that statements are false and intentionally avoiding steps to confirm truth or falsity; or
• Recklessness that a claim is falsely submitted for reimbursement, or consciousness of a substantial and unjustifiable risk that claims are false and submitting them regardless.

These consolidated cases involved pharmacies that offered prescription discounts to their customers through price matching or membership arrangements and submitted claims for reimbursement by Medicare and Medicaid at the pharmacies’ higher, non-discounted rates. Defendants argued that their non-discounted prices were, in fact, their “usual and customary” rates and, therefore, not fraudulently submitted.

The petitioners presented evidence that the pharmacies tried to prevent regulators and contractors from finding out about the discounts and that the pharmacies internally considered the discounted rates to be the “usual and customary” rates. Further, both pharmacies earned over 80% of their cash sales at discounted rates rather than the higher rate sought for reimbursement. As a result, petitioners argued that the defendants “knew” that the claims were fraudulently submitted.

The Seventh Circuit agreed in both cases that the discounted prices did not constitute usual and customary rates. Therefore, the question on appeal for the Court was whether the defendants acted knowingly and how that was determined.

The Seventh Circuit applied an objective standard to evaluate the defendants’ purported knowledge of their fraud. The Appellate Court determined the defendants could not have committed an FCA violation if their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary.”

However, the Supreme Court disagreed and held that the FCA’s knowledge – or scienter – element referred to a defendant’s knowledge and subjective beliefs, not what an objectively reasonable person may have known or believed. The Court reasoned that the focus should be on what a defendant thought when submitting a claim, not what a defendant may have thought after submitting it as a potentially retroactive justification.

The Court considered and rejected the defendants’ argument that the term “usual and customary” was ambiguous, finding that even if that term was ambiguous, defendants had notice of the intended meaning, understood the meaning, and then tried to hide their discounted prices (as evidenced by internal communications). Further, the Court declined to accept the defendants’ interpretation of “knowing” based on a different statute with a separate mens rea or criminal intent of willfulness rather than mere knowledge. Finally, the Court disagreed with the defendants’ argument that their claims were a misrepresentation of law rather than an affirmative factual misstatement regarding their rates.

Ultimately, the Court did not rule on the meaning of “usual and customary,” nor did the Court rule on whether the defendants’ claims were, in fact, false. The cases were remanded to the Seventh Circuit for further proceedings.

This case clarifies the “knowledge” standard for FCA cases. Courts are instructed to evaluate evidence of a defendant’s subjective beliefs when a claim is submitted. Moreover, a court will not base its decision on what another party might reasonably or objectively believe regarding the truth or falsity of a claim. Instead, a court will look to the defendants’ actions or conduct to analyze what that party “knew,” any steps taken to confirm or deny that party’s knowledge, or whether the party submitted claims without reasonable consideration of possible falsity.

[1] US ex rel Schutte v Supervalu, Inc. et al, Case no. 21-1326 consolidated with US ex rel Proctor v. Safeway, Inc., Case no. 22-111, June 1, 2023 (slip op.), 598 U.S. ___.

[View source.]