In a unanimous decision Thursday, the U.S. Supreme Court, in an opinion written by Justice Thomas, ruled that the False Claims Act’s (“FCA”) scienter element refers to a defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.

The case, U.S. ex rel. Schutte v. SuperValu Inc., involved qui tam whistleblowers (“petitioners”) asserting that retail pharmacies Safeway and SuperValu (“respondents”) violated the FCA by knowingly submitting claims to Medicare and Medicaid for reimbursement based on what they reported as their “usual and customary” charges (under those programs reimbursement is limited to the lower of different amounts, one of which is a pharmacy’s “usual and customary” charges) when in fact they knew that those charges were not their “usual and customary” charges given the lower amounts they were charging retail customers under various discount programs.

The FCA imposes liability on those who “knowingly” present a false or fraudulent claim for reimbursement. Accordingly, two essential elements of an FCA violation are (1) the falsity of the claim and (2) the billing party’s knowledge of the claim’s falsity (i.e., scienter).

The Schutte case came to the Supreme Court on appeal from the Seventh Circuit Court of Appeals holding that SuperValu’s and Safeways’ claims were false, but that they had not acted with the requisite scienter.

In reaching this conclusion, the Seventh Circuit relied heavily on the Supreme Court’s prior decision in Safeco Ins. Co. of America v. Burr, 551 U. S. 47 (2007), a case that interpreted the term “willfully” in the Fair Credit Reporting Act (“FCRA”). The Seventh Circuit read Safeco to dictate a two-step inquiry for ascertaining whether a defendant acted recklessly or knowingly. At step one, the court asks whether a defendant’s acts were consistent with any objectively reasonable interpretation of the relevant law that had not been ruled out by definitive legal authority or guidance. This step, the Seventh Circuit held, applied regardless of whether the defendant actually believed such an interpretation at the time of its claims. Only if the defendant’s acts were not consistent with any objectively reasonable interpretation would the court proceed to step two, which would involve considering the defendant’s actual subjective thoughts.

As explained by Justice Thomas, under the Seventh Circuit’s approach, a claim would have to be objectively unreasonable, as a legal matter, before a defendant could be held liable for “knowingly” submitting a false claim, no matter what the defendant actually thought.

Turning to the facts in the case, Justice Thomas went on to explain that the Seventh Circuit held that the respondents were entitled to summary judgment because their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary.” Specifically, the Seventh Circuit reasoned that the phrase could have been understood as referring to the respondents’ retail prices, not their discounted prices — even if the phrase, correctly understood, referred to their discounted prices. It thus did not matter whether the respondents thought their discounted prices were actually their “usual and customary” prices. What mattered, instead, was that someone else, standing in the respondents’ shoes, may have reasonably thought that the retail prices were what counted.

In reversing the Seventh Circuit, Justice Thomas opined that, based on the FCA’s statutory text and its common-law roots, the FCA’s scienter element clearly referred to the respondents’ “knowledge and subjective beliefs not to what an objectively reasonable person may have known or believed.” Even though the phrase “usual and customary” may be ambiguous on its face, he wrote, “such facial ambiguity alone is not sufficient to preclude a finding that respondents knew their claims were false.”

According to Justice Thomas, under the FCA, the petitioners could establish scienter by showing that respondents (1) actually knew that their reported prices were not their “usual and customary” prices when they reported those prices, (2) were aware of a substantial risk that their higher, retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway.

In his opinion, he states: “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.”

With respect to the respondents’ argument that Safeco already interpreted the common-law definitions of “knowing” and “reckless” and that it did so by looking first at whether the defendants’ reading of the statute was objectively unreasonable, Justice Thomas stated that the argument fails “twice over.” First, Safeco interpreted a different statute, the FCRA, which has a different mens rea standard, and the Court’s decision in Safeco was ultimately tied to the FCRA’s particular text. Second, Safeco did not purport to set forth the purely objective safe harbor that respondents invoke. To the contrary, Safeco stated that a person is reckless if he acts “knowing or having reason to know of facts which would lead a reasonable man to realize” that his actions were substantially risky.

In issuing the opinion, Justice Thomas carefully noted that the Court was neither reviewing the meaning of the phrase “usual and customary” nor whether any of the respondents’ claims were in fact inaccurate or otherwise false. Justice Thomas went on to state: “Nor are we reviewing whether respondents actually thought that the phrase ‘usual and customary’ referred to their discounted prices. Nor, for that matter, are we reviewing any factual disputes about what respondents did or did not believe or do.”

Significantly, these questions are now left to another day, as is the meaning of the phrase “substantially and unjustifiably risky,” which Justice Thomas uses when defining what level of knowledge or awareness an FCA defendant must have in order to satisfy the “knowingly” requirement for liability in connection with the submission of a false claim when actual knowledge is not present.