Proving an FCA violation requires establishing that defendants acted with the required scienter based on the defendant’s subjective beliefs.
Writing for a unanimous Supreme Court of the United States, on June 1, 2023, Justice Clarence Thomas issued a decision clarifying the knowledge requirement for cases brought pursuant to the False Claims Act (FCA). In overturning the consolidated cases of United States ex rel. Schutte et al. v. SuperValu Inc., et al. and United States ex rel. Proctor v. Safeway, Inc., the Supreme Court rejected the Seventh Circuit’s focus on the objectively reasonable interpretation of an ambiguous rule or regulation. Instead, the Court held that the FCA’s scienter requirement refers to the defendant’s subjective knowledge and belief at the time the claim is submitted.
Both Medicare and Medicaid limit reimbursement for prescription drugs to the pharmacy’s “usual and customary charge” for the general public. In the consolidated cases, relators brought a qui tam suit alleging that both pharmacies failed to disclose “usual and customary” drug prices when submitting claims for reimbursement to Medicare and Medicaid.
Relators alleged that both SuperValu and Safeway offered price-match programs to match competitor pricing for generic drugs, which were significantly lower than the pharmacies’ disclosed “usual and customary prices.” Rather than submit the lower prices for reimbursement, the pharmacies submitted the higher, non-discounted prices.
The District Court held that the pharmacies should have disclosed the lower, discounted amounts as the “usual and customary prices” and, by not doing so, submitted false claims. Despite finding that the claims were false, the District Court held that the pharmacies could not have acted “knowingly” because the phrase “usual and customary” was ambiguous and the pharmacies had a lack of subregulatory guidance or authority differing from the “objectively reasonable interpretation” of the phrase.
The Seventh Circuit agreed, relying on the two-step inquiry for determining scienter as articulated in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), a case analyzing the term “willfully” in the Fair Credit Reporting Act (FCRA). The Seventh Circuit held that a “claim would have to be objectively unreasonable, as a legal matter, before a defendant could be held liable for ‘knowingly’ submitting a false claim, no matter what the defendant thought.”
The Supreme Court rejected the Seventh Circuit’s reliance on Safeco, in part because the FCA’s intent standard is distinct from the standard articulated in the FCRA. The FCA is rooted in common law fraud and the “knowing” standard specifically contemplates a subjective, not objective, belief. Further clarifying the intent standard, the Court noted, “What matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”
The Court further rejected the pharmacies’ contention that a lack of subregulatory guidance and ambiguity regarding the meaning of “usual and customary” precluded establishing the requisite scienter: “ambiguity does not preclude respondents from having learned their correct meaning—or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.” Because the District Court did not focus on the pharmacies’ subjective intent, the Court vacated and remanded the decisions.
Proving an FCA violation requires establishing that defendants acted with the required scienter based on the defendant’s subjective beliefs. As many know, FCA scienter includes “actual knowledge” of falsity, “deliberate ignorance” or “reckless disregard” of the truth. In the decision, Justice Thomas noted that acting with “reckless disregard” does include defendants “who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.” The Court did not provide a concrete definition of what constitutes “substantial and justifiable risk.”
To the extent scienter requires a fact-specific analysis into what the defendant knew at the time claims were submitted, the Supreme Court’s decision may impact the resolution of some cases at the pleading stage.
The decision provides some opportunity for defendants who are making good faith efforts through compliance programs, interpreting vague contractual provisions and relying on counsel for regulatory guidance. Although, as the Court was aware, defendants may be required to waive privilege to establish their subjective understanding. To mitigate that risk, companies confronted with unclear obligations may be well served by methodically, and carefully, documenting their clear, consistent interpretation in a non-privileged manner. Being prepared to provide contemporaneous documentation of the subjective―even if mistaken―understanding and decision-making at an earlier stage may also assist the government in more fully evaluating whether to decline to intervene―or dismiss―a qui tam action.
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