On June 1, 2023, the U.S. Supreme Court in U.S. ex rel. Schutte v. SuperValu, Inc. held that the mental state required by the False Claims Act (“FCA”) refers to the defendant’s actual knowledge and subjective beliefs about the truth of claims for payment submitted to federal payors. This decision overturns the growing body of case law precluding FCA liability when a defendant’s interpretation of the applicable law was objectively reasonable regardless of the defendant’s actual knowledge. Liability under the FCA now focuses on what a defendant actually believed about the validity of their claims at the time of submission.
Case Background
For nearly ten years, the respondent-pharmacies offered price-matching discounts to their pharmacy patients in order to compete with big box stores that offered severely discounted generic and prescription drugs. At the patient’s request, the pharmacies would match the lowest drug price and apply that discounted price to future refills for these patients.
This practice implicated the pharmacies’ contracts with Pharmacy Benefit Managers (“PBMs”) as well as Medicaid and other federal health care programs. These contracts limited payment to the pharmacies’ “usual and customary” drug prices as defined by law or, in the case of PBMs, by contract.
The central issue was whether the pharmacies “knowingly” submitted false claims when they reported their “usual and customary” drug prices as the rates charged before the price-matching discount was applied. The district court granted summary judgment for the pharmacies, holding that their reporting of pre-discount prices as the “usual and customary” price was objectively reasonable, despite being incorrect.[1] The Seventh Circuit affirmed, finding it irrelevant that the pharmacies knew that their “usual and customary” prices should have been reported as the after-discount price.[2] The Supreme Court granted certiorari to determine whether the pharmacies violated the FCA when—assuming for purposes of appeal—they subjectively believed that they were underreporting their “usual and customary” prices, even though it was objectively reasonable to believe the pre-discount price could be the proper price to report.[3]
FCA Requires Subjective Knowledge of and Belief in Falsity of Claims
The FCA prohibits an individual from knowingly submitting a false claim for payment to a government health care program.[4] The term knowingly is referred to as the “scienter” element and is interpreted to include three mental states: “actual knowledge,” “deliberate indifference” or “reckless disregard” of the truth or falsity of the claim.[5] There is no requirement to prove “specific intent to defraud,”[6] and honest mistakes or inaccurate claims submitted through mere negligence do not violate the FCA.
In SuperValu, the Supreme Court clarified that the FCA’s scienter element refers to a defendant’s actual knowledge and subjective beliefs about the truth of their claims at the time of submission.[7] This decision corrects several circuit courts’ application in the FCA context of an objective scienter standard borrowed from the Fair Credit Reporting Act (“FRCA”) context.[8]
In Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), the U.S. Supreme Court interpreted the common law standards for knowing conduct under the FCRA. Like the FCA, the FCRA imposes liability for violations committed with reckless disregard of the law—the lowest level of culpability that will still satisfy the knowledge requirement. In Safeco, the Supreme Court found, in part, that Safeco’s reading of the law was not “objectively unreasonable,” and therefore it could not constitute reckless disregard of the statutory rule at issue there.[9]
The Supreme Court clarified that the standard articulated in Safeco is not purely objective, and moreover, its interpretation was specific to the particular text of the FCRA.[10] The Court explained that under the FCRA, someone can “willfully” violate the statute by either an objective or subjective standard—that is, “the common law of recklessness contained an objective standard because it encompassed actions involving ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’”[11]
Under the FCA, a purely subjective test is more consistent with common law interpretations of the scienter required for fraud, which has ordinarily been determined by a “subjective test” of a defendant’s “culpable state of mind.”[12] Additionally, within the text of the FCA, the word “knowingly” modifies the present-tense verb “presents,” which, the Court noted, inherently rejects post-hoc interpretations that might have rendered the claims accurate.[13]
Key to the Court’s articulation of the subjective scienter standard, and a focus in oral argument, was the Court’s emphasis on the fact that respondent-pharmacies’ knowing submission of false claims was presumed in the issue before the Court. In oral argument, Justice Kagan pointed out that although the respondent presented an interpretation of “usual and customary” price reporting that was objectively reasonable, the respondent also “thought that this interpretation was wrong, they knew it was wrong.”[14] Justice Kagan made clear that the Court was asked to rule on the very limited question of whether someone can be found liable under the FCA when their interpretation of the law “was objectively reasonably even though it was wrong” and “they knew it was wrong.” Justice Sotomayor rephrased the issue even more curtly as, “whether the intent of someone to make a false statement is actionable even if later they come up with a different – an objectively reasonable argument” that their statement could possibly have been permissible. Justice Kavanaugh further distinguished “the hypothetical of the person who at the time thought about these different [interpretations] as opposed to the person who only later came up with the legal interpretation” that would have supported their claims.
The Court further rejected the Government’s attempt to push the argument beyond any evaluation of an objectively reasonable interpretation of a statute or rule. The Justices responded strongly to the Government’s argument that an error caused by a misunderstanding of relevant law is also false and that choosing the most aggressive of several objectively reasonable interpretations was actual knowledge of falsity if that interpretation were ultimately held improper. Justice Kavanaugh responded with a simple, “Wow,”[15] and Justice Gorsuch pointed out, “I would have thought that … where there’s some reasonable good-faith basis …, that at most that would be reckless and probably maybe not even reckless if objectively there was enough evidence out there in the law to support your claim,” but the issue before the Court “isn’t that.” [16]
Again, the facts before the Court included a presumption that the respondent submitted claims that were false and that it believed them to be false at the time of submission. Despite the parties’ attempts to present broader hypotheticals, this presumption is key to the narrow ruling of the Court—that an objectively reasonable post-hoc interpretation will not save a party from the ramifications of knowingly submitting a false claim. It is important to note that the Court’s opinion does not exceed this limited ruling.
Practical Takeaways
- The FCA’s scienter standard focuses on a defendant’s subjective belief about the validity of claims at the time of submission, and defendants can no longer argue after-the-fact that an interpretation of the law exists that would have rendered their submission of false claims merely negligent.
- Providers may be held liable under the FCA if they suspect their claims to be false at the time of submission, even though an objectively reasonable—though probably inaccurate—interpretation of the law supports their claims. Thus, it’s important to seek legal counsel to resolve concerns about statutory or regulatory non-compliance.
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; or
- Your primary Hall Render contact.
Special thanks to Samuel R. Nennig, Summer Associate, for his assistance in the preparation of this article.
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.
[1] U.S. ex rel. Shutte v. SuperValu, Inc., 598 U.S. __ (2023) (decided together with No. 22–111, U.S. ex rel. Proctor v. Safeway, Inc.).
[2] Id. at *6-7
[3] Id.
[4] 31 U.S.C. § 3729(a).
[5] Id. § 3729(b)(1)(A).
[6] Id. § 3729(b)(1)(B).
[7] SuperValu, supra, at *6.
[8] Id. at *2.
[9] Safeco Insurance Co. of Am. v. Burr, 551 U.S. 47, 70 (2007).
[10] SuperValu, supra, at *13.
[11] Id. at *14 (emphasis in original).
[12] Id. at *11(quoting Restatement (Third) of Torts § 10, Comment a).
[13] Id. (quoting 31 U.S.C. § 3729(a)(1)(A)).
[14] Supreme Court Oral Argument Transcript, April 18, 2023, p. 15, available at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2022/21-1326_5iek.pdf, last viewed June 6, 2023.
[15] Id. at 41.
[16] Id. at 43.
