The US Supreme Court held on June 1 that the False Claims Act’s (FCA's) scienter element requires analysis of the defendant’s subjective intent at the time of the alleged false claim, and that a defendant can be liable even if the underlying statute or rule is ambiguous and can be reasonably interpreted to allow the defendant’s conduct.
In United States ex rel. Schutte v. SuperValu, 598 U.S. ____ (2023), and the companion case United States ex rel. Proctor v. Safeway, Justice Clarence Thomas, writing for a unanimous Court, rejected respondents’ argument that a defendant can negate scienter by pointing to an objectively reasonable interpretation of the law.
As discussed in our LawFlash on the oral argument, this decision has important implications for FCA practice and procedure.
The opinion arises from FCA litigation regarding the definition of “usual and customary” pricing in Medicare and Medicaid prescription drug reimbursement programs. Respondents SuperValu and Safeway operate pharmacies that, in certain circumstances, provided cash discounts for prescription drugs. However, when submitting reimbursement claims to Medicare and Medicaid, which required the pharmacies to bill based on their “usual and customary” prices for prescription drugs, relators alleged that the pharmacies failed to take into account the discounts offered to non-Medicare/Medicaid customers.
In each case, the district court held that the pharmacies should have charged the government the discounted prices and that their reimbursement claims to the government were “false” under the FCA. However, applying the scienter test from Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), a Fair Credit Reporting Act (FCRA) case, the district courts held in favor of the pharmacies on the element of scienter.
Specifically, the district courts held that the pharmacies lacked the requisite intent because the phrase “usual and customary” is ambiguous and respondents were not warned away from an objectively reasonable interpretation by authoritative agency guidance.
The district courts concluded that, under these circumstances, the pharmacies’ subjective intent at the time of claim submission—i.e., evidence allegedly showing that the pharmacies believed they were not submitting their usual and customary pricing to the government—was irrelevant for summary judgment purposes. The US Court of Appeals for the Seventh Circuit upheld the lower courts’ application of the Safeco standard.
In its opinion, the Supreme Court rejected Safeco’s application to the FCA, holding that “[f]or scienter, it is enough if [the pharmacies] believed that their claims were not accurate.” The Court described three types of scienter that can give rise to FCA liability:
First, the term ‘actual knowledge’ refers to whether a person is ‘aware of’ information. Second, the term ‘deliberate ignorance’ encompasses defendants who are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement’s truth or falsity. And, third, the term ‘reckless disregard’ similarly captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.
The Court rejected the pharmacies’ contention that ambiguity regarding the meaning of “usual and customary” and the lack of agency guidance precluded a finding that the pharmacies knowingly violated the law: “ambiguity does not preclude respondents from having learned their correct meaning—or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.”
The Court found that, on a summary judgment standard, where the evidence should be construed in the non-moving party’s favor, each non-moving relator had adduced evidence not considered by the district court that the pharmacy was aware that “the phrase ‘usual and customary’ referred to discounted prices.”
The Court distinguished the cases before it from Safeco, holding that the FCRA’s “willful” standard is distinct from the FCA’s “knowing” standard because the FCA more closely tracks common law fraud, which contemplates subjective intent.
Additionally, the Court addressed the pharmacies’ argument that common law fraud draws a distinction between misrepresentations of law and misrepresentations of fact. The Court assumed, without deciding, that “the FCA incorporates some version of this rule”; however, it then ruled that the alleged misrepresentations were not purely legal.
The Court explained that a purely legal representation would be similar to saying, “This is what ‘usual and customary’ means,” whereas the pharmacies allegedly made statements more akin to, “This is what our ‘usual and customary’ prices are.” This distinction means that while there may be a safe harbor for defendants when misrepresentations of law are at issue, the safe harbor was not available given the circumstances behind these cases.
Since the lower courts did not focus on the pharmacies’ subjective intent, the Court vacated and remanded both cases.
The Court seemingly recognized the ruling’s possible impact on policy and procedural consequences—but effectively disregarded the real-world implications: “Nor do we need to address any of the parties’ policy arguments, which ‘cannot supersede the clear statutory text.’”
In practice, the decision hinders FCA defendants’ ability to pursue motions to dismiss based on objective reasonableness arguments. On the other hand, it may become easier for defendants who can demonstrate a record of good-faith subjective belief to prevail at summary judgment. This is particularly important for companies to note because the Court held that the relevant scienter is the defendant’s knowledge or belief at the time of the claim submission.
Given the lengthy FCA limitations period and the fact that many qui tam cases remain sealed for years after filing, the focus on a defendant’s subjective intent at the time of claim submission will present challenges all around (but particularly on defendants) in terms of identifying witnesses and documents pertaining to distant events.
Moving forward, companies should consider putting in place mechanisms to document their decision-making process regarding compliance with ambiguous statutes, regulations, and contract provisions so that the evidence supporting their good-faith subjective intent will be readily accessible in the future.
Ultimately, the government and qui tam relators still bear the burden of proving actionable scienter, which—as the Court reiterated—does not create liability for “honest mistakes.” In emphasizing the fraud-based nature of the FCA and its common law origins, the Court hewed closely to its admonitions in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), that the statute’s elements should be applied rigorously in order to prevent the FCA from devolving into an “all-purpose anti-fraud statute” that would penalize garden-variety breaches of contracts or regulations.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following: