Summary

On June 1, 2023, the Supreme Court issued a landmark decision in False Claims Act cases. In United States ex rel. Schutte v. SuperValu Inc., it unanimously held that liability under the False Claims Act depends on a defendant’s subjective belief as to whether a claim was false, and not what an objectively reasonable person may have known or believed.

The Upshot

• Prior to the Court’s ruling in SuperValu, it was unclear whether the standard for determining knowledge in the False Claims Act context was an objective or subjective one.
• In its decision, the Court held that to impose liability on a defendant for “knowingly” submitting a false claim to the government for payment, it is sufficient for a plaintiff to prove that a defendant knew or suspected the submission was false, even if an objectively reasonable person may not have known or believed otherwise.
• The decision removes a powerful False Claims Act defense that defendants could use to move for dismissal of the action or for summary judgment if they could show that an objectively reasonable person would not have known the claim was false, regardless of the defendant’s intent.

The Bottom Line

This is a pivotal decision in False Claims Act jurisprudence; by putting the defendant’s subjective knowledge at issue in each case, it will be very difficult for defendants to succeed on a motion to dismiss or on summary judgment on the basis of lack of knowledge. The issue of the defendant’s state of mind will necessarily require discovery of internal communications regarding the defendant’s interpretation of regulatory requirements — a material issue of fact that will undoubtedly be in dispute.

On June 1, 2023, the Supreme Court unanimously held that defendants can be liable under the False Claims Act (FCA) if they knowingly submit a false claim regardless of whether an objectively reasonable person may have believed the claim to be proper. This decision vacated the Seventh Circuit’s ruling in United States ex rel. Schutte v. SuperValu.

Specifically, the Supreme Court rejected the Seventh Circuit’s two-step inquiry approach for ascertaining whether a defendant is liable for violating the FCA. That approach first required a threshold determination of whether a defendant’s acts were consistent with any objectively reasonable interpretation of the relevant law. Only if the acts were inconsistent with such an interpretation would the court proceed to consider the second step — a defendant’s actual subjective thoughts. The Supreme Court concluded that the FCA’s knowledge element refers to a party’s knowledge and subjective beliefs, and there is no need for a court to determine what an objectively reasonable person may have known or believed.

Background

Two whistleblowers alleged that the supermarket chains SuperValu, Inc. and Safeway, Inc. (the Companies) defrauded the Medicare and Medicaid federal benefits programs when the Companies submitted claims to the government program that they knew were false. In certain circumstances, pharmacies must bill Medicare and Medicaid for their “usual and customary” drug prices. The Companies sold the majority of their generic drugs at a discounted price to match a competitor’s discount program. However, the Companies charged Medicare and Medicaid the higher, non-discounted retail prices (knowing, and thus subjectively believing, that those higher prices were not their “usual and customary” prices).

The FCA imposes liability on anyone who knowingly submits a false claim for payment or approval. 31 U. S. C. §3729(a). The Seventh Circuit applied the knowledge standard set forth in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), which stands for the proposition that a defendant cannot knowingly violate a regulation when the regulation has more than one reasonable interpretation, the defendant’s interpretation of the regulation is objectively reasonable, and the defendant has not been warned away from that interpretation.

The question presented before the Court in SuperValu was whether the Companies could be held liable under the FCA if they believed the discounted prices were their “usual and customary” prices, and then knowingly submitted false claims by charging Medicare and Medicaid the higher retail prices even where some other, objectively reasonable interpretation of “usual and customary” would point to the higher prices.

Holdings

The District Court found that SuperValu’s discounted prices were its “usual and customary” prices, and that it submitted false claims by submitting the higher, non-discounted prices. But, the District Court granted SuperValu summary judgment finding that SuperValu could not have acted knowingly, because its actions were consistent with an objectively reasonable interpretation of the ambiguous term “usual and customary.”

The Seventh Circuit affirmed the District Court’s ruling, relying heavily on the standard set forth in Safeco. Under the pre-existing Safeco doctrine, a defendant’s subjective thoughts are considered when determining “knowledge” only if the defendant’s acts were inconsistent with an objectively reasonable interpretation of the relevant law. Therefore, the Seventh Circuit found that the Companies were entitled to summary judgment even if they thought their discounted prices — as opposed to their higher, retail prices — were the “usual and customary” prices; “usual and customary” could have been understood as referring to the Companies’ higher, retail prices. Thus, it was objectively reasonable.

The Supreme Court reversed the Seventh Circuit’s ruling. It held that what matters for an FCA claim is whether the defendant knew and believed the claims it was submitting were false. The Supreme Court noted that Safeco’s interpretation of “knowing” and “reckless” was specific to the Federal Credit Reporting Act’s text and had a different mens rea standard — “willfully.” Thus, one implication of the Supreme Court’s holding is that the Safeco knowledge standard is no longer applicable in FCA cases.

The Supreme Court stated that the FCA is largely a fraud statute, and its statutory text tracks the common law. Common law fraud generally depends on a defendant’s subjective beliefs and culpable state of mind. The two essential elements of an FCA violation are (i) the claim’s falsity and (ii) the defendant’s knowledge of the claim’s falsity. The FCA defines “knowingly” as encompassing three mental states: (i) the person had actual knowledge of the information, (ii) the person acted in deliberate ignorance of the information’s truth or falsity, or (iii) the person acted in reckless disregard of the information’s truth or falsity. Under the FCA, a person has “actual knowledge” if they are aware of the information. “Deliberate ignorance” is when a defendant is aware of a substantial risk their statements are false but intentionally avoids taking steps to confirm the statement’s truth or falsity. Similarly, “reckless disregard” encompasses when a defendant is conscious of a substantial and unjustifiable risk that their claim is false but submits the claim regardless. Therefore, SuperValu had the required scienter under the FCA if it (i) actually knew its reported prices were not its “usual and customary” prices when it submitted its claims, (ii) was aware of a substantial risk that its higher, retail prices were not its “usual and customary” prices and intentionally avoided determining whether its claims were accurate, or (iii) was aware of a substantial and unjustifiable risk that its claims were false but submitted them regardless.

Justice Clarence Thomas, who wrote the Supreme Court’s decision, noted that the whistleblowers presented evidence showing (i) several parties, including state Medicaid agencies, informed SuperValu that its lower, discounted prices were its “usual and customary” prices and not its higher, retail prices, (ii) SuperValu believed its discounted prices were its “usual and customary” prices, and (iii) SuperValu affirmatively attempted to hide its discounted prices from regulators and contractors. The Court pointed to SuperValu’s internal emails and other documentation evidencing that it was aware that the higher, retail prices were not its “usual and customary” prices and that it was aware it was submitting false claims.

Analysis

The Supreme Court’s SuperValu decision means that parties defending FCA actions cannot rely on a defense based on Safeco’s knowledge standard in their motions to dismiss. Indeed, courts in such cases will now likely grant discovery of companies’ internal communications to evaluate the companies’ subjective beliefs. Moreover, it will be very difficult for parties defending FCA actions to win summary judgment based on the FCA knowledge element, as many courts will be confronted with records that make it hard to determine, as a matter of law, whether a company’s subjective interpretation of a regulation is reasonable.

As the vast majority of FCA recoveries are in the health care industry, health care companies interfacing with the government that operate in a sprawling and often ambiguous regulatory environment now stand to lose a powerful FCA defense. Companies and individuals defending FCA actions have always been under tremendous pressure to settle, due to the potential for extraordinarily high damages upon a finding of liability. As a result of this ruling, that pressure will be further increased.

Companies that regularly submit claims to the government should consider how to best document the factual and legal basis for submitting such claims, which will be put at issue in any FCA defense based on knowledge. Those already concerned about FCA enforcement issues should consult with counsel who can help them evaluate the best strategy to engage with the government. Some may choose overt litigation. For many others, a cooperative approach may achieve the best outcome by offering a chance to receive cooperation credit and reduce FCA damages multipliers.

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