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On June 1, 2023 in United States et al. ex rel. Schutte v. SuperValu Inc., the Supreme Court rejected an attempt to shift the scienter requirement in federal False Claims Act (FCA) cases. The Court unanimously reaffirmed the current standard, which requires a defendant to act “knowingly,” with actual knowledge, deliberate ignorance, or reckless disregard. The central question addressed by the Court was whether a defendant’s subjective belief was relevant in determining knowledge, or if an objectively reasonable interpretation of the situation could provide cover from liability under the FCA.
Background: The Federal False Claims Act
Sometimes called “Lincoln’s Law,” the federal False Claims Act was originally enacted in 1863 in response to defense contractor fraud during the American Civil War. The FCA provides that anyone who knowingly submits, or causes to submit, false claims to the federal government is liable for three times the government’s damages plus a penalty linked to inflation.
The FCA authorizes private parties (relators) to bring “qui tam action s” in the name of the government. A relator may receive up to 30% of any recovery. The relator must file a complaint under seal and serve a copy and supporting evidence on the government, which has 60 days to decide whether to intervene. As a “real party in interest,” the government can intervene after the seal period ends, if it shows good cause. Many U.S. Department of Justice (DOJ) investigations and lawsuits arise from such qui tam actions.
Fraud cases under the FCA need only be proven by a civil “preponderance of the evidence” standard (as opposed to the higher “beyond a reasonable doubt” criminal burden of proof). Moreover, defendants can be found liable to the government where they acted with deliberate ignorance or reckless disregard (as opposed to actual knowledge).
The FCA is a powerful tool in the federal government’s enforcement arsenal; the DOJ obtained more than $2.2 billion in settlements and judgments from civil cases involving fraud and false claims against the government just in the fiscal year ending in 2022.
SuperValu and Safeway Pharmacies
In United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, which were consolidated, a group of whistleblowers sued SuperValu and Safeway as the operators of hundreds of pharmacies across the country. The plaintiffs alleged that SuperValu and Safeway knowingly overcharged Medicare, Medicaid, and the Federal Employee Health Benefits Program for prescription drug coverage in violation of the FCA. Under those programs, pharmacies cannot bill the government more than the “usual and customary” price for a prescription as charged to customers.
The plaintiffs alleged that to stay competitive in the market, SuperValu and Safeway pharmacies implemented discount and price-matching programs that lowered the price of the prescription for customers but continued to charge the government at the original higher prices.
Subjective vs. Objective Intent and the Safeco Decision
The trial court in SuperValu determined that the discounted prices were the “usual and customary” prices, and that the pharmacy had submitted false claims by failing to report them. However, the court granted summary judgment in favor of SuperValu on the scienter requirement, finding it could not have submitted the alleged false claims knowingly. The Seventh Circuit affirmed and expanded the holding by ruling that the subjective knowledge of the pharmacy was irrelevant given that its actions were consistent with an objectively reasonable interpretation of the “usual and customary” standard.
In a unanimous opinion authored by Justice Thomas, the Supreme Court reversed the Seventh Circuit. The Court rejected this interpretation of the knowledge standard in FCA cases and held that the pharmacies could have made a “forgivable mistake if [they] had honestly read the phrase [usual and customary] as referring to retail prices, not discounted prices,” but found the Seventh Circuit’s determination that the pharmacies’ “subjective beliefs became irrelevant to their scienter” was contrary to the text and meaning of the FCA.
The pharmacies and the Seventh Circuit relied on the Court’s holding in Safeco Insurance Company of America v. Burr that an erroneous interpretation of a legal standard was not reckless, regardless of subjective knowledge, if the interpretation itself was objectively reasonable. The Court declined to extend this line of reasoning to the FCA.
Litigating FCA Cases Going Forward
SuperValu is an important decision in FCA litigation. In emphasizing the history, common law origins, and influences of the FCA, the Court has repositioned it as a fraud-based statute in which subjective intent and knowledge will remain key. As a result, FCA litigation will likely involve more fact-intensive inquiries, and the Court’s decision could hinder defendants’ ability to obtain early dismissal of claims and/or resolve claims at the summary judgment stage.
Putting the defendant’s subjective knowledge at issue in each case could make it much harder for defendants to succeed on motions to dismiss or on summary judgment on the basis of lack of knowledge. SuperValu also is likely to generate years of litigation over the proper application of the FCA’s scienter standard, particularly since the Court left some important questions unanswered (such as the exact contours of the lowest, plaintiff-friendly “reckless disregard” scienter standard).
Authors:
Vince Farhat, Chair, White Collar Defense & Investigations Group
Lena Streisand, Associate, Litigation Group
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