The plaintiff raises the concern that an interpretation leaving out subjective intent will incentivize defense attorneys to mine the U.S. code to potentially exploit ambiguities.
On April 18, 2023, the Supreme Court of the United States heard arguments as to whether subjective intent is relevant in assessing scienter in a False Claims Act (FCA) case. The Supreme Court will assess the FCA’s standard for scienter, or knowledge of wrongdoing, which is an important factor that determines countless cases. “Knowingly” is defined as "actual knowledge," "deliberate ignorance" or "reckless disregard” in the context of FCA cases. The Court will determine in this case whether the billing of medication that reasonably interpreted ambiguous policies can be considered fraudulent if the billers never believed their interpretations were correct.
This FCA case, brought by a whistleblower against retailers SuperValu and Safeway for allegedly overcharging taxpayers for generic drugs, was rejected in the Seventh Circuit as well as the lower trial court. The whistleblower, Thomas Proctor, a pharmacist at Safeway, alleged that Safeway was aware of its overbilling in prescription drug programs. Proctor alleged that Safeway would discount generic drugs for cash customers to price match other competitors. Then, it would bill the government for a higher, nondiscounted rate, thereby obtaining reimbursement in excess of the amount actually charged to the customer. Safeway would cite the higher rate as the “usual and customary” price.
The lower court specifically found that Safeway could not have violated the FCA because the billing terms were not clearly defined for pharmacies when the programs were created. Thus, Safeway could not have knowingly submitted false claims to the government. The Seventh Circuit agreed, affirming the lower court’s ruling that Safeway pricing practices were "objectively reasonable" and that it didn't have any reliable guidance on how to otherwise interpret Medicare and Medicaid billing regulations.
The plaintiff is now asking the Supreme Court to overturn the Seventh Circuit’s opinion, which held that "nothing in the language of the FCA suggests that a defendant's subjective intent is relevant[.]" A number of whistleblower advocates have filed amicus briefs supporting the plaintiff, including more than 30 state attorneys general and the FCA's modern architect, Republican Senator Chuck Grassley of Iowa.
The plaintiff raises the concern that an interpretation leaving out subjective intent will incentivize defense attorneys to mine the U.S. code to potentially exploit ambiguities. U.S. Circuit Judge David Hamilton of the Central District of Illinois dissented from the majority and called its interpretation of the law "a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test." United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 473 (7th Cir. 2021) (Hamilton, J., dissenting).
The defense has garnered amici support from a number of large corporations and a number of healthcare groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, the American Medical Association and Pharmaceutical Research and Manufacturers of America. The amici briefs call for the Supreme Court to back the "objectively reasonable" standard for determining when a defendant has acted "knowingly" under the FCA. These organizations warn that companies shouldn't risk punishment for trying to interpret unclear policies.
If the holding in this case aligns with the 2016 case United Health Services v. Escobar, then it is likely the Supreme Court will deliver a nuanced opinion, allowing both sides to claim a partial victory. The Supreme Court in Escobar delineated a test for whether compliance lapses are "material" to government reimbursement, both recognizing a controversial form of liability and creating a high bar to meet materiality under the FCA.
The current cases are U.S. ex rel. Proctor v. Safeway Inc., case number 22-111, and U.S. ex rel. Schutte et al. v. SuperValu Inc. et al., case number 21-1326, each before the Supreme Court of the United States.
Duane Morris attorneys will continue to monitor developments in this area and other related issues and report on the key details for the industry in subsequent Alerts.
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