Supreme Court Issues Decision Regarding False Claims Act's Scienter Element

• Jurisdiction: United States,Federal
• Law Firm: K&L Gates
• Subject Matter: Food, Drugs, Healthcare, Life Sciences, Coronavirus (COVID-19), Insurance Claims
• Author: Mr Norman G. Acker III, Robert J. Higdon Jr., John H. Lawrence, Natalia A. Nino and Michael H. Phillips
• Published date: 13 June 2023

The United States Supreme Court recently held that a defendant's subjective belief is always relevant to the False Claims Act's scienter element, regardless of what an objectively reasonable person may have believed. This means that an objectively reasonable interpretation of a requirement can still result in False Claims Act liability if accompanied by evidence that a defendant thought the claim was inaccurate at the time of submission. In practice, the holding means that it will be increasingly difficult for defendants to prevail in False Claims Act litigation as to scienter at the motion to dismiss stage. Instead, any fight regarding scienter will need to be made with discovery, in motions for summary judgment, and at trial. For health care providers and government contractors, the holding also confirms entities should carefully consider (1) carefully and contemporaneously documenting their interpretations of ambiguous provisions and should consider (2) whether adopting a more conservative interpretation of an ambiguous provision and/or inquiring with the relevant agency as to the "correct" interpretation is the safest course of action given potential reduction in enforcement risk.

INTRODUCTION

On 1 June 2023, the United States Supreme Court in the case of United States ex rel. Schutte v. SuperValu issued one of the most anticipated decisions in federal False Claims Act (FCA) jurisprudence in years. In a unanimous opinion drafted by Justice Clarence Thomas, the Supreme Court addressed what constitutes a "knowing" violation of the FCA. Focusing on the "usual and customary" price requirement for reimbursement under Medicare and Medicaid, the court held that the FCA's scienter element "refers to the respondents' knowledge and subjective beliefs'not to what an objectively reasonable person may have known or believed."¹

BACKGROUND & PROCEDURAL HISTORY

The narrow question before the court was "whether respondents could have the requisite scienter under the FCA if they correctly understood that standard and thought their claims were inaccurate."² In other words, did the FCA's scienter element ignore the respondents' subjective belief where their actions fell within an objectively reasonable interpretation?

Before the court were two consolidated FCA cases from the Seventh Circuit, United States ex rel. Schutte v. SuperValu³ and United States ex rel. Proctor v. Safeway.⁴ SuperValu concerned a large retail pharmacy, which billed Medicare Part D (the prescription drug arm of Medicare) and Medicaid from 2006 to 2016.⁵ Under the relevant Medicare and Medicaid programs, the reimbursement for certain drugs is often capped at the providers' "usual and customary" charge for the drug.⁶ Relators alleged that during that decade, SuperValu created a price-match program whereby, upon a customer's request, it would match a competitor's lower prescription drug price.⁷ Once the customer asked for the price match, SuperValu would then automatically apply the price-matched value to all of the customer's refills.⁸ SuperValu, however, would then bill Medicare and Medicaid its standard higher retail price, rather than the discounted, price-matched amount it accepted from customers.⁹ Based on those allegations, in 2011, relators filed an FCA complaint alleging that SuperValu "price-matched to avoid losing customers to competitors with lower drug prices . . . and made up the difference by charging the government healthcare programs its higher retail price."¹⁰

The district court granted partial summary judgment against SuperValu on the falsity prong of the FCA.¹¹ The district court found that the discounted prices were the "usual and customary" prices and that in not reporting the discounted prices'but rather billing Medicare and Medicaid for the higher retail price'SuperValu submitted false claims. In applying the holding in Safeco Insurance Co. of America v. Burr¹² 'a Supreme Court case regarding the Fair Credit Reporting Act (FCRA)'however, the district court ultimately entered summary judgment in favor of SuperValu on the scienter prong of the FCA,¹³ which requires that the defendant act "knowingly" in order for FCA liability to attach.¹⁴ The district court...