SCOTUS Rejects Defense-Friendly Scienter Standard In Schutte Opinion

• Published date: 23 June 2023
• Subject Matter: Litigation, Mediation & Arbitration, Food, Drugs, Healthcare, Life Sciences, Trials & Appeals & Compensation
• Law Firm: Polsinelli LLP
• Author: Mr Gregory R. Jones and Jessica M. Andrade

On June 1, 2023, the Supreme Court of the United States (SCOTUS) issued its much-anticipated opinion in United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc. (Schutte), holding that a defendant's subjective understanding of an ambiguous law, even if objectively reasonable, is relevant in proving scienter under the False Claims Act (FCA). The opinion, which was unanimous and authored by Justice Thomas, is not surprising given the questions and comments from the justices during the oral argument. Although SCOTUS framed the issue under review in Schutte in narrow terms, the opinion is likely to have broad implications for future cases brought under the FCA, especially those based on alleged violations of ambiguous laws.

In Schutte, SCOTUS granted certiorari to review two rulings from the Seventh Circuit Court of Appeals affirming summary judgment for the defendants in two non-intervened cases brought under the FCA based on the theory that the defendant-pharmacies defrauded the federal government by underreporting their "usual and customary" (U&C) drug prices because they excluded lower pricing offered to customers through discount programs. See United States ex rel. Schutte v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021); United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022). The fraud theory in Schutte and Proctor hinges on the interpretation of the regulatory definition of U&C pricing. The defendants won summary judgment in both cases by invoking the scienter standard articulated in Safeco. Counsel argued that the relators could not establish a triable issue of fact on the question of scienter because the defendants had an objectively reasonable interpretation of the U&C price definition that was not contradicted by authoritative guidance, and any evidence of a contrary subjective understanding of the definition was irrelevant. In split panel decisions, the Seventh Circuit affirmed the dismissal of both cases.

In reversing the Seventh Circuit's rulings, SCOTUS rejected the application of the scienter standard reflected in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), which was decided under the Fair Credit Reporting Act and applies a different mens rea standard than the FCA, and resolved a circuit split regarding whether a defendant can be liable under the FCA when it has an objectively reasonable interpretation of an ambiguous law, regardless of subjective intent. Without...