U.S. ex rel. Schutte v. SuperValu – Victory for False Claims Act Plaintiffs at the Supreme Court
By Leah Judge
Last week, the Supreme Court dealt a blow to False Claims Act defendants, unanimously holding that the FCA’s scienter requirement for a “knowing” violation is met when a defendant subjectively believes its claims are false, even if the defendant later offers an objectively reasonable interpretation of law that would make the claims permissible. The decision will give greater leverage to both the Department of Justice and private plaintiffs (relators), eliminating a key defense strategy for disposing of cases before discovery begins.
The opinion, United States ex rel. Schutte v. SuperValu Inc., 8 U. S. ____ (2023), reversed two Seventh Circuit panel decisions that had all but gutted the FCA’s statutory scienter requirement. Liability under the FCA requires proof that the defendant “knowingly” defrauded the government. Since 1986, the FCA has expressly defined knowingly to “mean that a person, with respect to information (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” In SuperValu and its companion case United States ex rel. Proctor v. Safeway, Inc., the Seventh Circuit effectively excised two-thirds of the FCA’s statutory scienter definition, reading out the two subjective prongs of “actual knowledge” and “deliberate ignorance.”
In the two consolidated cases before the Court, SuperValu and Safeway, relators had alleged that the defendant pharmacies reported to Medicare and Medicaid knowingly false “usual and customary” drug prices, causing the government to reimburse defendants at much higher rates for the drugs than they were entitled to receive. Both SuperValu and Safeway argued that they their reported prices could not have been “false” because the term “usual and customary” was ambiguous, there was no definitive guidance about the meaning of that term, and their interpretations were objectively reasonable, even if mistaken. For their part, relators had adduced evidence that the defendants’ executives contemporaneously and subjectively believed that the drug prices they reported to the government were not “usual and customary” but were inflated. In both cases, defendants prevailed at summary judgment, plaintiffs appealed, and the Seventh Circuit affirmed.
In SuperValu, the Seventh Circuit held that a defendant does not “knowingly” submit false claims if it can offer a post-hoc, “objectively reasonable” interpretation of the law that justified its prior behavior—even when the evidence shows the defendant subjectively believed it was breaking the law. Departing from the text of the FCA, the Seventh Circuit grafted onto the statute the Supreme Court’s interpretation of the Fair Credit Reporting Act’s scienter standard in Safeco Insurance Company of America v. Burr. The FCRA imposes liability on those who act “willfully,” but unlike the FCA’s treatment of “knowingly,” the FCRA provides no further definition of the term. Under Safeco, an FCRA defendant does not act “willfully” if its interpretation of the relevant law was objectively reasonable. The Seventh Circuit held that Safeco’s interpretation of the FCRA applied with equal force to the FCA as well, and thus an FCA defendant does not “knowingly” submit a false claim if there is an objectively reasonable (albeit erroneous) interpretation of the law under which the defendant’s behavior would have been permissible. The Seventh Circuit reasoned that, in the absence of clear guidance about what a statute or regulation requires, a “defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.”
In a terse, 15-page decision, a unanimous Supreme Court gave short-shrift to both the defendants’ and the Seventh Circuit’s reasoning. Looking to the “FCA’s statutory text and its common-law roots,” the Supreme Court held that “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” Although the Court disposed of the three key arguments proffered by defendants, the Court’s complete rejection of the Seventh Circuit’s application of Safeco to the FCA was perhaps most significant. The Court deemed this an argument that “fai[ed] twice over”; Safeco not only analyzed a completely different statutory scienter requirement, but it also did not purport to create “a purely objective safe harbor” in the FCA.
The Court’s decision put to rest a growing trend in the Circuits to look to Safeco for guidance when addressing the FCA’s intent requirement. That trend had threatened to severely curtail the ability of the government to investigate and prosecute fraud in government programs involving complex and often ambiguous regulatory schemes, most notably in the healthcare sector. Indeed, in fiscal year 2022 alone, the government recovered more than $1.7 billion in FCA matters involving healthcare. With Safeco out of the FCA picture, defendants will no longer be able to quickly dispose of cases on a motion to dismiss by showing that their conduct was objectively reasonable as a matter of law. Instead, expect many more cases to proceed to discovery and survive motions for summary judgment, leaving juries to make the fact-intensive determination of intent.