On June 1, 2023, the United States Supreme Court issued a unanimous opinion (authored by Justice Clarence Thomas), providing a long-awaited answer to the question of whether, under the Federal Claims Act (“FCA”), a defendant “knowingly” submits a false claim by reporting its retail cash price as its “usual and customary price” rather than the lower and more-common price offered through discount programs. The Seventh Circuit twice held that such reporting is not a “knowingly” false claim under the FCA because “a reasonable person” could reach a similar interpretation of “usual and customary price.” United States 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 Supreme Court vacated the Seventh Circuit’s judgments and ruled that the FCA scienter requirement refers to a defendant’s knowledge and subjective beliefs – not to what an objectively reasonable person may have known or believed. United States ex rel. Shutte v. SuperValu Inc., 598 U.S. (2023) The Court also determined that facially ambiguous language is not a sufficient reason to prohibit a finding that a defendant knew its claims were false.
This grant of certiorari arises out of two Seventh Circuit cases in which the whistleblowers alleged that two companies who operate national pharmacies, Safeway and SuperValu, had defrauded the Federal Government for years by submitting false claims for reimbursement under Medicare and Medicaid. Proctor v. Safeway, 30 F.4th 455 (7th Cir. 2022); Schutte v. SuperValu, 9 F.4th 455 (7th Cir. 2021). The petitioners in both cases alleged that the two companies offered a significant discount in pricing to out-of-pocket Medicare and Medicaid patients at around $4.00 and then billed Medicare and Medicaid under a “usual and customary” price of around $108.00. Additionally, petitioners maintain that both companies knew about and supported efforts to conceal this practice. Albeit, recognizing the companies did overcharge Medicare and Medicaid, the Seventh Circuit used an “objective reasonable” standard articulated in Safeco Insurance Co. of America v. Burr, which states that an individual who acts under an incorrect legislative interpretation could not possibly have acted with knowledge or reckless disregard if their interpretation was “objectively reasonable” and there was no “authoritative guidance” explicitly cautioning against their interpretation. 551 U.S. 47 (2007).
Medicare and Medicaid provide federal and state-funded health insurance to patients over 65 and low-income patients. Nonetheless, the Centers for Medicare and Medicaid have promulgated regulations that limit reimbursement to the lower of two amounts; one of which, is the provider’s “usual and customary” charge to the general public. According to petitioners, the “usual and customary” lower charge offered to the general public was never the amount reported to the programs by the defendant pharmacies, who instead reported their much higher retail cash prices. Petitioners further alleged and presented evidence that both companies knew their lower discounted prices should qualify as the “usual and customary” price but tried to conceal this price.
The Supreme Court states that the FCA defines the term “knowingly” as three states of mind: 1) “has actual knowledge of the information”, 2) “acts in deliberate ignorance of the truth or falsity of the information”, and 3) “acts in reckless disregard of the truth or falsity of the information”. Any of these three mental states suffice to constitute scienter under the FCA. Justice Thomas further quoted Halo Electronics, Inc v. Pulse Electronics, Inc., stating, “[C]ulpability is generally measured against the knowledge of the actor at the time of the challenged conduct.” 579 U.S. 93, 105 (2016). The Court quotes Halo to highlight that the “knowing” standard should be evaluated in the present tense of the action. The Court concludes that the respondent’s assertion that they could not have acted “knowingly” because they could not have “known” what the phrase “usual and customary” actually meant, is not plausible. The Court states that in and of itself, the term may be ambiguous; however, the ambiguity doesn’t preclude the respondent from having knowledge of what it means or, at a minimum, being aware they risk misinterpreting the term. Applying this to the facts, respondents were provided notice and tried to hide their discounted prices. This shows they comprehended the notice or were at least aware of the high risk of their misinterpretation. Thus, the Court held that facial ambiguity does not preclude a finding of scienter.
The respondents relied on the holding in Safeco, which defines the common law definitions of “knowing” and “reckless” by contemplating whether the reading of the statute was “objectively unreasonable”. Respondents further asserted that because the FCA has the same common law terms, it should be read with the same objective common law focus. Justice Thomas writes that this assertion fails because Safeco interprets the Fair Credit Reporting Act differently than the FCA, which applies a different mens rea (state of mind) standard of willfully rather than knowingly. Further, Safeco stated that a person is reckless “if he acts knowing or having reason to know of facts which could lead a reasonable man to realize” that his actions were substantially risky. This interpretation does not support the respondents’ argument. The Court concluded that it would not look to a legal interpretation that nullifies the respondent’s belief at the time they submitted their claims.
Justice Thomas described the final argument as an approach from a different angle in which respondents allege that under common law, misrepresentations of law are not actionable, and because the FCA incorporates the common law of fraud, the same limitation should be upheld. Respondents claim that because they correctly understood what “usual and customary” meant, their reports, in turn, were not false because of a misrepresentation of fact but rather one of law. The Court was unconvinced by this argument, stating that the respondent’s disclosure does not say “this is what our ‘usual and customary’ prices mean” but rather “this is what our ‘usual and customary’ prices are,” essentially misrepresenting fact under the guise of interpreting a legal meaning.
The Court vacated and remanded the Seventh Circuit’s rulings for new judgments in both cases. So, what does this mean for the future of FCA claims? It means a lower bar for proving scienter in FCA cases. The Court unanimously confirmed that a lower threshold of scienter is required under the FCA. They confirmed that this new lower threshold should be one that is based on a subjective standard. Had they decided otherwise, a respondent could only be liable if there was no showing of an “objectively reasonable” explanation. This would have provided respondents in future cases the opportunity to justify their conduct after the fact, all the while discouraging otherwise valid relator claims of fraud. Now that the actions involving FCA scienter are evaluated in the present tense, more bad actors will experience the consequences of their fraudulent acts.
Kandis L. Kovalsky, a member at the firm, focuses her practice on representing both corporate and individual clients in a broad range of complex commercial litigation matters in Pennsylvania and New Jersey state, federal and bankruptcy courts. Her whistleblower practice focuses on healthcare fraud. Kandis represents relators in high stakes qui tam actions filed under the federal and state False Claims Acts relating to fraud on government healthcare payors such as Medicare, Medicaid, Department of Defense TRICARE, State Children’s Health Insurance Program, Veterans Health Administration, and the Indian Health Service program. Contact her at firstname.lastname@example.org.
Looking to read more? Kang Haggerty members Edward T. Kang and Kandis L. Kovalsky recently analyzed this case in The Legal Intelligencer, When Is Knowing ‘Knowing’ in FCA Cases? High Court Examines Two Cases, published on May 19, 2023.