Objectively Reasonable Interpretation Saves Pharmacies from FCA Liability

On July 1, 2020, the U.S. District Court for the Central District of Illinois granted summary judgment in favor of a number of pharmacy defendants who argued that they could not be liable under the False Claims Act (“FCA”) because their interpretation of an applicable law was objectively reasonable, though incorrect, at the time that the alleged violation occurred. In U.S. v. SuperValu, Inc., relators alleged that the defendants submitted false claims to various state Medicaid agencies, pharmacy benefit managers (“PBMs”) and other federal health care programs. The District Court agreed with the relators that the claims were false because the defendants sought payment of “usual and customary” drug charges comprised of the standard retail price rather than the discounted price available through the defendants’ price-matching programs. Despite this, the Court held that the defendants’ interpretation of “usual and customary” as the retail price was objectively reasonable and they therefore lacked the requisite knowledge for the false claims to be actionable.

This case adds to a growing body of case law that shields from FCA liability conduct that is based on a reasonable interpretation of the law, even if it is later determined that the interpretation is incorrect.

Case Background

From 2006 until 2016, the defendant pharmacies offered price-matching discounts to their pharmacy patients in response to competition from a few big box stores that offered severely discounted generic and prescription drugs. If the patient simply asked, the pharmacies would match the lowest drug price offered by any local competitor.

This practice implicated the pharmacies’ PBM contracts and their legal obligations to Medicaid and federal health care programs, all of which required the pharmacies to charge those payors no more than the “usual and customary” drug prices as defined by law or, in the case of PBMs, by contract.

In July 2016, the Seventh Circuit in Garbe[1] faced a similar fact pattern and held that a reduced price given under a price-matching program—and not the standard retail price—constitutes the “usual and customary” price of those drugs. Following that precedent, the District Court here had previously granted partial summary judgment against the defendants, finding that they submitted false claims to Medicare and other payors entitled to the “usual and customary” price when those claims exceeded the price-matched charge. The question for the District Court now was whether the defendants submitted those false claims knowingly.

Legal Standard & Analysis

The FCA prohibits any person from knowingly submitting a false claim for payment to a government health care program.[2] The term knowingly is referred to as the ‘scienter’ element of the FCA and is an objective standard that includes “actual knowledge . . . deliberate indifference . . . or . . . reckless disregard of the truth or falsity of the information” submitted in a claim.[3] There is no requirement that the Defendant have a “specific intent to defraud.”[4] However, honest mistakes or inaccurate claims submitted through mere negligence are not enough to satisfy the scienter element of the FCA.

In this case, if the defendants’ interpretation of “usual and customary price” was objectively reasonable at the time of their price-match program—for instance, if there was more than one reasonable interpretation of “usual and customary price” and defendants’ interpretation was consistent therewith—then the defendants would not be treated as knowing or reckless violators.[5]

Adopting U.S. Supreme Court precedent in an analogous context,[6] the District Court reasoned that “[if] there was no authoritative guidance warning [defendants] away from what before Garbe was an objectively reasonable position, the Relator could not satisfy [the] objective scienter standard and thus could not meet the FCA’s ‘knowing’ element as a matter of law.”[7]

The objective scienter standard was articulated by the U.S. Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), where the Court analyzed the common law definition of recklessness as applied to the Fair Credit Reporting Act (“FCRA”). Like the FCA, the FCRA has a scienter element that imposes liability for violations committed with “reckless disregard” of the law. Although the Seventh Circuit has not yet adopted the Safeco scienter standard in the FCA scienter context, every other circuit to consider the matter has adopted it and the District Court applied the standard here.

In Safeco, the Supreme Court held that Safeco’s reading of the law “‘was not objectively unreasonable’ and fell well short of constituting reckless disregard”[8] because the defendant did not have “the benefit of guidance from the courts of appeals or the Federal Trade Commission (FTC) that might have warned it away from the view it took.’”[9] The only guidance available was “a letter ‘written by an FTC staff member to an insurance company lawyer,’” which was not enough.[10]

Applying this reasoning, the District Court held that the defendants’ reading of “usual and customary” pricing also fell well short of reckless disregard, and granted summary judgment for the defendants. Because the Garbe decision was not issued until 2016, the final year the defendants’ price-matching programs existed, and the Supreme Court did not deny a petition for certiorari until January 9, 2017, “Garbe could not have warned the defendants away from the view they took” on usual and customary pricing.[11] “Unless there was some other guidance such as a contract, binding agency rule or court of appeals decision prohibiting Defendants’ interpretation of the ‘usual and customary’ price at the time of their Price Matching Programs, then Defendants[’] conduct would have been objectively reasonable and not knowingly false.”[12] “In order for the conduct to be ‘knowingly’ or ‘recklessly’ illegal, therefore, an authoritative interpretation must exist stating that it is.  Here, there does not appear to be any such authoritative interpretation.”[13]

The only warning defendants received concerning their errant interpretation was an email from a PBM representative stating that the PBM interpreted the parties’ contract to require that a price-matched charge be reported as the usual and customary price. Based on internal reporting, the defendants determined that if they matched all prices for all drugs to the best price available from their competitors, they stood to lose millions of dollars. Despite the notification from the PBM, the defendants still interpreted their PBM contracts and the laws applicable to government health care programs not to require reporting of a price match discount as the usual and customary price. The District Court found this email was not an authoritative interpretation warning defendants against their otherwise objectively reasonable view, and in fact disagreed with the PBM’s interpretation of the contract.

The District Court held that the defendants did not knowingly submit false claims to their PBM because the usual and customary charge as defined by their contract was unaffected by their price-matching programs. Moreover, the Court held that the defendants did not knowingly submit false claims to Medicaid, Medicare or any other government payor because they did not have the benefit of any judicial or agency guidance warning them against claiming the regular retail cash price of their drugs as the usual and customary price.[14] 

Practical Takeaways

• In general, pharmacies’ price-matching discount drug programs have in recent years been the subject of litigation or other scrutiny on the “usual and customary” pricing issue presented here, and the outcome, in this case, suggests that for pharmacies in Wisconsin, Illinois and Indiana, price-matching programs that were discontinued before the Supreme Court denied certiorari review of Garbe (January 9, 2017) are unlikely to trigger FCA liability.
• For other claims under the FCA, a law’s ambiguity or a defendant’s objectively reasonable interpretation of the law may not shield the defendant from FCA liability if there is authoritative guidance warning the defendant away from its view.
• Health care providers should keep abreast of changing case law, especially in areas affecting government payment. Even if a provider is unaware of judicial or agency guidance interpreting a legal requirement for submitting claims to government payors, scienter is an objective standard and the existence of such guidance can convert what was once an objectively reasonable interpretation of the law into an objectively unreasonable one, satisfying the scienter element and triggering liability.

If you have any questions, please contact:

• David Honig at (317) 977-1447 or dhonig@hallrender.com;
• Heather Mogden at (414) 721-0457 or hmogden@hallrender.com;
• James Junger at (414) 721-0922 or jjunger@hallrender.com; or
• Your regular Hall Render attorney.

Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.