The Supreme Court continues to define the False Claims Act
The Supreme Court continues to define the False Claims Act (“FCA”). In September 2022, Ward & Berry explained the possibility of the Supreme Court taking on a second FCA case¹ this term, and why we should care about it. Short answer: The “knowledge” aspect of the FCA is under heavy debate and any resolution will (hopefully) leave us with a better understanding of how and why someone can be found liable for an FCA violation.
The Supreme Court has officially granted certiorari on not one, but two, more FCA cases, both from the 7 th Circuit. These cases will be heard on April 18, 2023.
1. U.S. ex rel. Tracy Schutte v. SuperValu, Inc.
In this case, petitioners allege that SuperValu intentionally misreported the “usual and customary prices” it charged its customers for prescription drugs which caused government healthcare programs such as Medicare Part D and Medicaid to pay more for the drugs than they should have. Essentially, SuperValu utilized its price matching program so often that the discounted prices became the “usual and customary” pricing of their prescription drugs. Under Medicaid regulations, SuperValu is not allowed to charge the government more than the “usual and customary” price. Not only did SuperValu not report its discounted prices as the “usual and customary” pricing, it also charged the government for an amount higher than it was actually charging its customers.
This case originated as a qui tam² suit in district court. Individuals (“Relators”) sued SuperValu on behalf of the federal government, alleging that SuperValu “knowingly caused false payment claims to be submitted to government healthcare programs between 2006 and 2016 by incorrectly reporting their [usual and customary] drug prices.”³ Relators argued that SuperValu’s price matching “caused the government to subsidize its market competitiveness” when SuperValu continued to charge the government its higher retail price.⁴ SuperValu argued that, with respect to the scienter requirement of the FCA, “bad faith is irrelevant when there is no showing of objective recklessness.”⁵
Relying on 7th Circuit precedent in United States ex rel. Garbe v. Kmart Corp,⁶ the district court granted summary judgment for Relators with respect to the “falsity” requirement because “SuperValu made its price-match policy available to the general public throughout a benefit year.”⁷ With respect to the “scienter” requirement of the FCA,
the district court agreed with SuperValu, stating that under a Safeco⁸ standard, there is no FCA liability without establishing “objective scienter.”⁹ Specifically, the district court held that, “SuperValu’s understanding of [usual and customary] price, while incorrect, was objectively reasonable at the time.”¹⁰ The district court granted summary judgment for SuperValu on all FCA claims (except the “falsity” determination), which the Relators appealed to the 7th Circuit. The 7th Circuit affirmed the district court’s opinion and found that, under the Safeco standard, Relators could not prove that SuperValu acted “knowingly” since “SuperValu had an objectively reasonable understanding of the regulatory definition of [usual and customary] pric[ing] and no authoritative guidance placed it on notice of its error.”
2.U.S. ex rel. Thomas Proctor v. Safeway, Inc.
In this case, Safeway acted much like SuperValu. Wanting to compete with Walmart, Safeway implemented discount programs to its customers by offering “price matching” and “discount clubs.” However, Safeway did not report these discounted rates as its “usual and customary” pricing even though 88% of cash sales for top 20 generic drugs were sold at discounted rates. Safeway was aware that it was required to disclose its discounted pricing as the “usual and customary” rate because of known federal regulations and issued bulletins by companies that negotiate drug pricing on behalf of the government.
This case also originated as a qui tam suit in district court. The main issue in this case centered around the definition of “general public.”¹¹ Safeway argued that it “correctly reported its [usual and customary] prices when seeking reimbursement under Medicare Part D and Medicaid.” ¹² The government argued that it did not. The district court, applying the Safeco standard, granted summary judgment in Safeway’s favor. The two main questions on appeal were (1) was Safeco the proper standard to apply; and (2) “whether a footnote in a Centers for Medicare and Medicaid (“CMS”) manual constitutes ‘authoritative guidance’ under Safeco.”¹³
When this case was pending on appeal, the decision in SuperValu, Inc. was announced, formally applying the Safeco standard to FCA cases in the 7th Circuit. Accordingly, the 7th Circuit then applied the Safeco standard in this case, affirming the district court’s holding. The 7th Circuit found that the CMS footnote in question was not authoritative guidance because it was taken in and out of the manual during the relevant period. As such, it was not clear whether the footnote was intended to be authoritative or “merely illustrative.”¹⁴ Without a definitive answer, the Court could not find that Safeway acted “knowingly.”
What is the FCA?
For context, the FCA imposes liability if a defendant “knowingly” presents false claims or makes false statements to the government.¹⁵ Under 31 U.S.C. § 3729(b)(1)(A), “knowingly” means to act with: (1) actual knowledge; (2) deliberate ignorance; or (3) reckless disregard of the falsity of information. A FCA violation takes place when a company “knowingly” bills the government for goods or services it did not provide, or “knowingly” omits its non compliance with a material legal requirement.¹⁶
The question is – what is “knowingly”? In SuperValu and Safeway, the Court will determine whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it “knowingly” violated the FCA.
What the Interpretation of the FCA’s Scienter Requirement Means for You
The 7th Circuit’s interpretation is that if a company “had an objectively reasonable understanding of the regulatory definition of [usual and customary] price and no authoritative guidance placed it on notice of its error” there is no FCA violation.¹⁷ This proposes a very good question: if the contractor’s actions were objectively reasonable, does it matter what they were thinking at the time of the violation? As, we head into oral arguments, we anticipate the Court will address the following questions:
– Is the FCA’s knowledge requirement ambiguous?
– Will a contractor’s subjective intent or thoughts at the time of the violation matter?
– Will a contractor’s knowledge be considered a question of fact for the jury to decide? – How should a contractor determine what their “usual and customary” pricing is? The price most often used? The price used 50% of the time? Or the standard rate against which discounts might be made?
– How should the Court treat a contractor who makes a reasonable interpretation of an ambiguous regulation to either continue performing a contract or submit a claim for payment. Under a subjective inquiry, contractors who had an objectively reasonable basis for its interpretation may be dragged through expensive litigation for a decision it had to make.
Yet, on an objective standard, a contractor who may have acted fraudulently (knowingly) could very well avoid liability by articulating an after-the-fact justification that sounds reasonable. Given the time it takes agencies to publish new regulations, consider comments from the public, or even issue non-binding guidance and interpretation of its own rules, a Supreme Court’s decision can have far reaching implications for contractors.
Ward & Berry will continue to monitor developments in the FCA. If you have any questions about potential FCA related issues, please contact Ward & Berry.