On June 1, 2023, in a case closely followed by government contractors, health care providers, and other businesses that receive payments from the federal government, the U.S. Supreme Court issued a unanimous decision rejecting a defense often invoked by defendants in False Claims Act (FCA) litigation.
The FCA imposes significant penalties on anyone who "knowingly" submits a "false" claim to the federal government. 31 U.S.C. § 3729(a). The issue in U.S. ex rel. Schutte v. SuperValu Inc. involved what it means to "knowingly" submit a false claim when interpreting an ambiguous regulation – here, the meaning of "usual and customary" in the context of drug prices pharmacies are permitted to bill Medicare and Medicaid. Respondents in the case argued that an "objectively reasonably" interpretation of the phrase "usual and customary" shielded it from FCA liability. The Supreme Court rejected that argument – holding that the test was subjective rather than objective. In other words, what matters is whether a defendant knew a claim was false, i.e., if a defendant correctly interprets an ambiguous regulation and believes its claim is false, then they could have known the claim was false. In so holding, the Supreme Court vacated the lower courts' judgments and remanded the case for further proceedings.
In SuperValu, two pharmacies instituted discount drug pricing programs. As a result, consumers regularly paid discounted drug prices rather than the retail rate. Despite what consumers were actually paying, the pharmacies billed Medicare and Medicaid for the retail prices even though both Medicare and Medicaid require billing to be for the "usual and customary" prices. Accordingly, the U.S. Government argued that the bills were false claims and that the pharmacies were liable under the FCA for the difference between the discount prices the pharmacies charged and what the pharmacies actually billed to Medicare and Medicaid.
The pharmacies argued, and the Seventh Circuit held, that they were not liable under the FCA because their actions were consistent with an objectively reasonable interpretation of the phrase "usual and customary." Rejecting the lower court's reliance on Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007) (a case interpreting a different statute, the Fair Credit Reporting Act), the Supreme Court held that the FCA's state of mind element (scienter) refers to respondents' knowledge and subjective beliefs – not what an objectively reasonable person may have known or believed.
The U.S. Government argued that "knowingly" focuses primarily on what the person who submitted the claim thought and believed when submitting the claim. In other words, a person who submits a claim that they know to be false cannot conjure a post hoc explanation that might render the claim accurate under an objectively reasonable test in order to evade FCA liability.
The Court agreed, holding that a person "knowingly" submits a false claim if that person:
- actually knew that the claim was false; or
- was aware of a substantial risk that the claim was false and intentionally avoided learning whether it was false; or
- was aware of such a substantial and unjustifiable risk that the claim was false but submitted it anyway.
In summary, entities receiving payment from the federal government within the context of an ambiguous regulatory framework must proceed cautiously following the Court's decision in SuperValu. To be clear, while the lower court's decision arguably created a shield and/or mechanism for post hoc arguments that a claim was not false in the eyes of an objective interpreter, that defense will not work following the Court's decision. In the past, organizations that do business with the government might point to nonbinding interpretive regulatory guidance after the fact when arguing that an objective interpretation of that guidance justified a claim the government is now alleging was false. The Court's decision in SuperValu makes clear that that defense will not fly if the organization subjectively knew the claim was false.
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