Two landmark cases fraught with False Claim Act (“FCA”) allegations of fraudulent billing for prescription drugs against food and pharmacy chains are making their way from the Seventh Circuit to the Supreme Court. The decision in each case will have an impact on what it means for a provider to “know” that it is violating the False Claims Act—a critical element in proving liability under the law.”
Former pharmacists for SuperValu Inc. and Safeway Inc. blew the whistle on the retailers for allegedly failing to include all available discounts they offered to retail customers in the “usual and customary” pricing they offered to the government. Yet the circuit court viewed the conduct differently, ultimately concluding that the retailers had made “objectively reasonable” determinations of the pricing under an ambiguous regulation. And because the alleged misconduct reflected reasonable (albeit erroneous) interpretations of compliance obligations, it declined the opportunity to inquire whether the “reasonable” views were held in good faith. Needless to say, both the government and the whistleblowers weren’t happy.
In examining the central issue of “scienter,” the court adopted the standard elucidated in the Supreme Court’s 2007 Safeco Insurance Co. of America v. Burr decision which discussed the notion of scienter under the Fair Credit Reporting Act. As applied there, the justices concluded that acting under an incorrect interpretation of a statute or regulation where such interpretation of an unclear rule was objectively reasonable (and in the absence of “authoritative guidance” mandating against such an interpretation), does not amount to the “knowledge” or “reckless disregard” prerequisite to liability. Whether the Safeco standard should be applied in FCA cases is an issue that remains wide open.
So now, the Supreme Court has granted certiorari to explore and decide whether Safeco applies to the FCA and whether a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct is relevant to whether it “knowingly” violated the FCA. This determination highlights the critical finding necessary for the imposition of liability under the FCA which requires that the fraud occur knowingly or with “reckless disregard” or “deliberate ignorance” of the truth. The decision will have a profound effect on federal and state courts who are increasingly confronted with billing disputes and fraud claims against providers.
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