On June 1, 2023, the U.S. Supreme Court ruled in the consolidated False Claims Act ("FCA") cases, U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway, Inc., that “[w]hat matters for an FCA case is whether the defendant knew the claim was false.” Justice Clarence Thomas wrote the unanimous decision.
The FCA imposes liability for civil penalties, treble damages, and litigation costs for “knowingly” submitting a false claim to the U.S. government. Knowingly means actual knowledge, deliberate ignorance, or reckless disregard.
The relators in SuperValu and Safeway alleged that defendants knowingly defrauded the U.S. government by overcharging Medicare and Medicaid for drug reimbursements. Specifically, they alleged that defendants submitted false claims by not passing through all discounts in their “usual and customary” drug pricing. The relators pointed to company emails and internal documents reflecting concerns over discounted prices and “U&C” price claims.
The district courts granted summary judgment for defendants because defendants could not have “knowingly” submitted false claims. The U.S. Court of Appeals for the Seventh Circuit affirmed. Relying on Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), a Fair Credit Reporting Act ("FCRA") case interpreting the term “willfully,” the Seventh Circuit held that defendants’ reporting of higher prices was “consistent with an objectively reasonable interpretation of the phrase ‘usual and customary.’” As such, defendants’ subjective beliefs about pricing were irrelevant.
On appeal, the narrow issue before the U.S. Supreme Court was whether the definition of “knowingly” concerns only whether the person submitting a claim knew or believed the claim to be false—i.e., a subjective test. Or, whether this definition requires, as the Seventh Circuit held, an initial inquiry into whether anyone could have reasonably known or believed the claim to be true—i.e., an objective test.
The Court sided with the subjective test: “The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”
Both the text of the FCA and its common-law fraud roots (going back to the Civil War to stop contractor fraud) lead to this conclusion. Actual knowledge, deliberate ignorance, and reckless disregard refer to a person’s awareness of falsity or consciousness and then disregard of “substantial” risks of falsity. The Court observed that although Safeco had referenced an objective element to recklessness under the common law, that ruling was in the context of a different statute, the FCRA, and “was not meant to establish the general rule for the terms ‘knowing’ or ‘reckless’ in all contexts.”
Thus, defendants may have knowingly submitted false claims if they (1) actually knew their reported prices were not “usual and customary,” (2) were aware of a “substantial” risk of same and “intentionally avoided learning” the truth, or (3) were aware of a “substantial and unjustifiable risk” but proceeded to submit claims anyway. Consequently, the Court vacated the summary judgments for respondents and remanded the cases to the Seventh Circuit for further proceedings.
SuperValu and Safeway all but eliminate the ability to present objective, even after-the-fact, scienter evidence of lawful conduct.
Going forward, the cases present other challenges for the defense side such as:
- Obtaining early dismissal of FCA claims on the basis of lack of scienter,
- Limiting discovery into the knowledge of those involved in submitting claims, including circumstantial evidence of state of mind,
- Presenting expert evidence on industry knowledge, practices, and procedures, and
- Clarifying falsity in the context of ambiguous legal and policy matters.