Unanimous Supreme Court clarifies False Claims Act scienter standard in landmark case
On June 1, 2023, the United States Supreme Court resolved a hotly contested dispute over the meaning of the FCA’s scienter requirement in U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway Inc., consolidated cases from the Seventh Circuit. See 598 U.S. ___ (2023). The FCA imposes liability on anyone who “knowingly” submits a false claim to the government. 31 U.S.C. § 3729(a). In a unanimous opinion, the Court held that this scienter element looks to the defendant’s “knowledge and subjective beliefs – not what an objectively reasonable person may have known or believed.”
Schutte and Proctor arrived at the Supreme Court after the defendants, two large retail pharmacy chains, won at the Seventh Circuit. The private whistleblowers in these cases alleged the defendants “knowingly” submitted false claims to Medicare and Medicaid by reporting inflated “usual and customary” prices – a key factor determining federal reimbursement under the relevant regulations. According to the whistleblowers, the pharmacies offered most consumers deeply discounted prices, but then reported higher, non-discounted prices to federal health care programs. The whistleblowers claimed that the pharmacies knew they were misreporting their “usual and customary” prices and, for this reason, defendants allegedly took steps to hide their discounted prices from regulators.
The district court granted summary judgment for the pharmacies based on lack of required scienter, and the Seventh Circuit affirmed. In the Seventh Circuit’s view, the pharmacies could not have acted “knowingly” within the meaning of the FCA because – regardless of their subjective beliefs – an “objectively reasonable person” could have believed that the phrase “usual and customary” referred to the pharmacies’ retail prices, not their discounted prices. And this was so “even if the phrase, correctly understood, referred to their discounted prices.” In other words, what mattered was “that someone else, standing in respondents’ shoes, may have reasonably thought that the retail prices were what counted.”
The Supreme Court reversed the Seventh Circuit in a unanimous opinion authored by Justice Clarence Thomas, who characteristically looked to the plain text of the FCA, as well as the common law, to answer the question presented. According to Justice Thomas, the FCA’s scienter element “encompasses three mental states:” “actual knowledge of the information,” “deliberate ignorance of the truth or falsity of the information,” and “reckless disregard of the truth or falsity of the information.” This three-part test aligns with the “traditional common-law scienter requirement” for fraud claims and focuses primarily on what the defendant thought and believed when submitting a false claim – “not what the defendant may have thought after submitting it.” (Emphasis in original.) For these reasons, it does not matter what some other, objectively reasonable person might think or believe; “[f]or scienter, it is enough if respondents believed that their claims were not accurate.”
The Supreme Court’s decision may have significant implications for companies that operate in highly regulated industries that routinely defend FCA lawsuits. It is not uncommon for these companies to grapple with highly technical regulations laden with ambiguous provisions and limited (or nonexistent) guidance from courts or government agencies to light the way. Even when companies do their best to comply, they often find themselves confronted with qui tam lawsuits brought by private individuals (and their lawyers) who take a contrary view of what the law requires. Had the Supreme Court adopted the Seventh Circuit’s interpretation of “knowingly,” these companies would be better situated to defeat FCA cases at the motion to dismiss or summary judgment stages of litigation by demonstrating that the company’s approach was an objectively reasonable one.
The Supreme Court’s interpretation, on the other hand, focuses on each defendant’s subjective intent, which may present a disputed factual question for a jury to decide, unless a defendant can demonstrate a pattern and record of good-faith subjective belief. To that end, such companies should consider implementing processes to document, in real time, good-faith interpretations that reflect subjective intent.
If more of these cases survive beyond Rule 12 and Rule 56 motions practice, this will not only increase the costs of defending these cases but will increase settlement pressure on defendants who may not be willing to risk a loss at trial due to the FCA’s draconian financial consequences, including treble damages and large per-claim civil penalties.
Learn more about the implications of this case by contacting any of the authors or your usual DLA Piper relationship attorney.
