United States: What Did You Think And When Did You Think It? Supreme Court Clarifies Mental State Needed For False Claims Act Violation

In United States ex rel. Schutte v. SuperValu and United States ex rel. Proctor v. Safeway, Justice Thomas, writing for a unanimous Supreme Court, held that a defendant's subjective belief about a claim being submitted to the government is what determines scienter under the False Claims Act (FCA). "What matters for an FCA case is whether the defendant knew the claim was false. Thus, if [the defendants] correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false." The decision, published on June 1,2023 has important implications for determining the scope of future FCA liability.

The FCA is a Powerful Tool Used by the Department of Justice

The FCA was passed on March 2, 1863, in response to widespread fraud during the Civil War. It imposes liability on anyone who "knowingly" submits a "false" claim to the government.¹ Private citizens, known as whistleblowers or relators, are permitted to bring qui tam lawsuits on behalf of the government when false or fraudulent claims are made for payment, and then share a percentage of the monies that are recovered.

Since 2011, more than 600 qui tam cases have been filed annually.² In the fiscal year ending September 30, 2022, the Department of Justice (DOJ) reported that settlements and judgments under the FCA exceeded $2.2 billion. The vast majority of monies recovered are tied to the health care industry, including drug and medical device manufacturers, durable medical equipment, home health providers, physicians and pharmacies. The DOJ reports that over $72 billion has been recovered via FCA litigation since 1986.

SuperValu and Safeway Raised Question About Whether an Objective or Subjective Standard is Used to Determine Scienter

SuperValu and Safeway operate hundreds of retail drug pharmacies across the nation. Both companies were sued via qui tam lawsuits that alleged the companies overcharged the Medicare and Medicaid programs when seeking reimbursement for prescription drugs. The Centers for Medicare and Medicaid Services (CMS) publish regulations limiting the amount these programs may reimburse for certain drugs.³ In particular, the regulations limit reimbursement to the lower of two amounts, one of which is the "usual and customary charges [for the drug] to the general public." SuperValu and Safeway were required to charge and disclose their "usual and customary" price for prescription drugs when seeking reimbursement, and the qui tam lawsuits alleged the companies overstated that amount and thus defrauded the government.

In SuperValu, the District Court concluded that SuperValu's discounted prices were its "usual and customary" prices and, by not reporting their discounted prices, SuperValu submitted claims that were false. The District Court nonetheless granted summary judgment based on the scienter element, holding that SuperValu could not have acted "knowingly" in making these submissions. Soon thereafter, in Safeway, the District Court granted summary judgment on the same legal basis.

The Seventh Circuit affirmed the District Court's decisions, holding that SuperValu and Safeway were entitled to summary judgment because their actions were consistent with an objectively reasonable interpretation of the phrase "usual and customary." The Seventh Circuit relied on Supreme Court precedent interpreting the term "willfully" from a different statute,and concluded a two-step inquiry was necessary to decide whether a defendant acted knowingly or recklessly under the FCA. In the first step, the inquiry focused on whether the defendant's acts were consistent with any objectively reasonable interpretation of the law or regulation. In the second step, the inquiry focused on the defendant's subjective thinking. Based on the Seventh Circuit's approach, the second step was unnecessary if the defendant presented an objectively reasonable interpretation of the law or regulation. This meant the defendant could avoid FCA liability by presenting an objectively reasonable explanation after-the-fact, even if the defendant did not subjectively believe that interpretation when they submitted their claim for payment.

The Supreme Court Rejects the Seventh Circuit's Approach

The Supreme Court granted certiorari on both SuperValu and Safeway to resolve this question: "[i]f [SuperValu's and Safeway's] claims were false and they actually thought that their claims were false—because they believed that their reported prices were not actually their 'usual and customary' prices—then would they have 'knowingly' submitted a false claim within the FCA's meaning?"

Justice Thomas' opinion answered that question with an emphatic "yes." He wrote "[t]he FCA's scienter element refers to [the defendants'] knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed." In vacating the circuit court judgments, the Supreme Court provided that the relators may establish the scienter required by the FCA by showing that SuperValu and Safeway "(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."

Impact on Future FCA Litigation

The Supreme Court's decision in SuperValu and Safeway presents a number of takeaways. Qui tam lawsuits are sealed, often for years, before the government intervenes and the matter becomes public. Evidence about the subjective thinking of a person submitting a claim for payment to the government is easily lost with the passage of time. Companies and professionals would be well-served to preserve documents and correspondence that reflect: (a) why they billed the government a specific amount; and (b) why they believed that amount was justified. Further, correspondence with outside government agencies or outside legal counsel seeking clarification on the meaning of a particular term (like "usual and customary") in a law or regulation would be vital evidence in rebutting a claim the defendant acted with willful blindness or a reckless disregard for the law. Finally, in civil suits charging FCA violations, the fact a defendant can point to an objectively reasonable interpretation of the law means little in obtaining summary judgment if the defendant did not subjectively believe that approach was correct. Ultimately, what a defendant subjectively thought when they submitted a claim for payment from the government will determine scienter under the FCA.

Footnotes

1. 31 U.S.C. § 3729(a)

2. U.S. Department of Justice, Press Release, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the Federal Bar Association Qui Tam Conference (Feb. 28, 2018), https://tinyurl.com/daag-fca-remarks.

3. See 42 CFR §447.512(b)(2) (2021)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.