Ruling in case involving national retail pharmacies rejects the “objective reasonableness” standard for the False Claims Act

On June 1, 2023, the U.S. Supreme Court unanimously vacated the 7th Circuit's decision in U.S. ex rel. Schutte v. SuperValu Inc., and in doing so clarified the scienter standard for defendants accused of knowingly submitting false claims to the government. Most significantly, the Court rejected the "objective reasonableness" standard adopted by several circuit courts in recent years. Under the rejected standard, defendants could assert that their actions were consistent with an objectively reasonable interpretation of the law at issue before any consideration of their knowledge or subjective belief in submitting alleged false claims.

Writing for the Court, Justice Clarence Thomas held that the False Claims Act's ("FCA") scienter element concerns a defendant's knowledge and subjective beliefs, not what an objectively reasonable person may have known or believed. To satisfy the scienter element, the Court concluded, "it is enough if [defendants] believed that their claims were not accurate" when submitted. The Court's decision was arguably its most significant concerning the FCA since its ruling in Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), which addressed the implied false certification theory of liability and materiality standard.

Summary of the Case

SuperValu involved two consolidated cases in which national retail pharmacies were accused of violating the FCA by "knowingly" submitting "false" drug reimbursement claims to the Medicare and Medicaid programs. Both programs regularly require pharmacies to submit claims for reimbursement reflecting their "usual and customary" drug prices. The qui tam plaintiffs alleged that by offering discount programs to customers, but then seeking reimbursement from the government at their higher retail prices without discounting (claiming the retail prices were their "usual and customary" drug prices), the pharmacies had been overcharging the Medicare and Medicaid programs for years.

The Supreme Court acknowledged that the phrase "usual and customary" is "on its face, less than perfectly clear" and "appears somewhat open to interpretation." At the same time, plaintiffs argued that the pharmacies were informed that their discounted prices were their "usual and customary" prices (in one pharmacy's case by state Medicaid agencies), believed their discounted prices were their "usual and customary" prices, and "tried to hide their discounted prices from regulators and contractors." The Court's opinion noted plaintiffs' allegation that between 2008 and 2012, 94 percent of one pharmacy's cash sales for a cholesterol drug were priced at $10, yet it reported prices to the government as high as $108 for the drug as its "usual and customary" price during this period. The Court further noted allegations that SuperValu executives regarded their discount program as a "stealthy approach" and that employees were cautioned not to put anything in writing regarding the discount program.

The 7th Circuit affirmed the district court's summary judgment ruling in favor of the pharmacies, joining four other circuits that had adopted the Supreme Court's interpretation of the scienter requirement under the Fair Credit Reporting Act ("FCRA") in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), as the scienter standard for FCA claims. The 7th Circuit held that the pharmacies could not have acted "knowingly" in submitting false claims if their actions were consistent with an objectively reasonable interpretation of the phrase "usual and customary," regardless of whether that interpretation was consistent with their subjective beliefs at the time of submitting claims. So long as the pharmacies' interpretation of "usual and customary" drug prices was "objectively reasonable" and "no authoritative guidance warned the [pharmacies] away from that interpretation," the 7th Circuit held that dismissal was appropriate.

Key Findings from the Supreme Court

The Supreme Court's ruling was dismissive of a potential objective reasonableness safe harbor for defendants alleged to have submitted false claims even in relation to an ambiguous statute. Under the 7th Circuit's standard, the Supreme Court emphasized, "[i]t … did not matter whether respondents thought that their discounted prices were actually their 'usual and customary' prices. What mattered, instead, was that someone else, standing in [the pharmacies'] shoes, may have reasonably thought that the retail prices were what counted."

The Court also emphasized that the FCA does not concern potential "post hoc interpretations" of the law that might have rendered the pharmacies' claims accurate. Rather, the FCA focuses on "what the defendant knew when presenting the claim." If defendants believed that their claims were inaccurate under the governing law and submitted them anyway, they could be liable under the FCA. A defendant's subjective belief in submitting alleged false claims is not irrelevant just because others may have had an incorrect interpretation of the governing law: "[T]he Seventh Circuit did not hold that [the pharmacies] made an honest mistake; it held that, because other people might make an honest mistake, defendants' subjective beliefs became irrelevant to their scienter."

If plaintiffs can show defendants acted in the belief that they were submitting false claims, or in deliberate ignorance or reckless disregard of the truth or falsity of the claims, that is sufficient to satisfy scienter requirements in bringing an FCA claim. "If petitioners can make that showing, then it does not matter whether some other, objectively reasonable interpretation of 'usual and customary' would point to respondents' higher prices. For scienter, it is enough if respondents believed that their claims were not accurate."

The Court held that this standard was consistent with the FCA's text and common law roots. The Court also noted that the FCRA referenced a different mens rea standard ("willfully") than the FCA. And the Court additionally dismissed the pharmacies' argument that their claims could not be considered fraudulent at common law because they involved a misinterpretation of the law, rather than a misrepresentation of fact. The Court maintained that, even assuming the FCA incorporates some version of the common law rule, the claims still implied facts about the pharmacies' prices, making them potentially fraudulent.

The Court remanded to the 7th Circuit for further proceedings consistent with its clarified scienter standard.

Implications of the Decision

The Supreme Court's clarification of the scienter standard halts any perceived erosion of the FCA by the circuit courts, which Senator Charles Grassley (R-Iowa), a longtime champion of the FCA, described in an amicus brief as "the centerpiece of the government's anti-fraud arsenal." The Court's decision may put a hold on further congressional efforts to amend the FCA.

The Court's ruling also seemingly eliminates defendants' ability to obtain dismissal of FCA claims based solely on the ambiguity of the underlying law under which they submitted claims. Instead, courts will be required to consider the subjective belief of defendants in submitting challenged claims. As the Court held, "facial ambiguity alone is not sufficient to preclude a finding that [the pharmacies] knew their claims were false."

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