On June 1, 2023, the Supreme Court decided a pair of closely watched False Claims Act (FCA) cases, U.S. ex rel. Schutte v. SuperValu Inc., No. 21-1326, and U.S. ex rel. Proctor v. Safeway, Inc., No. 22-111. The decision resolves a narrow but important question: Is subjective intent relevant to FCA claims involving so-called “legal falsity” in which the defendant is alleged to have knowingly misrepresented its compliance with a legal requirement in connection with a claim for payment from the government? The Court answered yes, holding that in such cases FCA liability turns on what the defendant actually believed about the truth or falsity of its representations, not on what an objectively reasonable person may have believed.
The plaintiffs here sued two retail pharmacies, SuperValu and Safeway, alleging that they misreported their “usual and customary” price in submitting claims for reimbursement from Medicare and Medicaid. In the decisions below, split panels of the Seventh Circuit affirmed summary judgment for each defendant based on the ambiguity of the phrase “usual and customary” and the objective reasonableness of the defendant’s interpretation during the litigation, rejecting the need for a separate inquiry into the defendant’s beliefs at the time the claims were submitted.
In reaching the opposite conclusion—that a defendant’s contemporaneous belief is what matters under the FCA—the Supreme Court framed its decision narrowly, addressing only that “one discrete legal issue.” Slip op. 8. The Court grounded the need for a subjective inquiry in the FCA’s text and “common-law roots.” Id. Both the statutory definition of “knowingly” and common-law fraud, it explained, focus on a defendant’s subjective belief, by requiring “actual knowledge of the information” or at least “deliberate indifference to” or “reckless disregard of” the truth or falsity of the information. 32 U.S.C. § 3729(b)(1). In contrast, the Seventh Circuit based its focus on ambiguity and objective reasonableness—and its rejection of subjective intent—on the Supreme Court’s own reasoning in Safeco Insurance Co. of America v. Burr , 551 U.S. 47 (2007). But the Court distinguished Safeco, saying that it interpreted a different term (“willfully”) under a different statute (the Fair Credit Reporting Act) and in any event did not rule out subjective intent in the way that the Seventh Circuit concluded it did.
Just as the Supreme Court’s decision in Universal Health Services v. U.S. ex rel. Escobar, 579 U.S. 176 (2016), generated years of litigation over the proper application of the FCA’s materiality and scienter standards, the Court’s decision in SuperValu is likely to generate its own cycle of litigation over the many questions it left unanswered. And we may see that SuperValu ultimately turns out to be better for FCA defendants than initial reporting would suggest.
In particular, the Court stated that the term “reckless disregard”—the lowest of the FCA’s three scienter standards and thus the friendliest to FCA plaintiffs—“captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit them anyway.” Slip op. 10 (emphasis added). We expect that language to play an important role in FCA litigation over the next several years.
At the pleading stage, requiring FCA plaintiffs to plead conscious disregard of a risk that is both substantial and unjustified could prove to be an insurmountable barrier to those who lack inside knowledge of a corporate defendant’s internal risk assessment and decision-making. While relators may argue that such consciousness can be inferred at the pleading stage from objectively reckless conduct, the Court made clear it was leaving the viability of such arguments for another day. Id. at 10 & n.5 (“We need not decide how (or whether) that objective form of ‘recklessness’ relates to the FCA today[.]”).
For cases that do proceed beyond the pleadings, the three-part question of whether a defendant was “[1] conscious of a [2] substantial and [3] unjustifiable risk” is likely to be a critical focus of discovery, summary judgment, and trial. Relators may have a difficult time proceeding against sophisticated corporate defendants who would be unwilling to consciously take on any degree of substantial compliance risk, or at least do so only in circumstances that are justifiable. And, as the case law in this area develops, we would expect sophisticated entities in heavily regulated industries to hone their risk-management protocols to minimize the risk of FCA liability under this standard.
Our team of FCA litigators and counselors will monitor legal developments in relation to SuperValu for their impact on litigation and compliance practices.
