By ANDREW SPARKS
Dickinson Wright
A recent decision by the Supreme Court clarified the required intent for a defendant to be held liable under the False Claims Act. According to the Court, the FCA’s scienter requirement refers to a defendant’s knowledge and subjective beliefs – not what an objectively reasonable person might have known or believed. This ruling removes potential defenses for FCA defendants and makes the dismissal of FCA claims on the basis of scienter much less likely before discovery has been completed.
Background
The consolidated cases involved allegations that two pharmacies defrauded Medicare and Medicaid by selling drugs at a lower rate to the public, while receiving reimbursement at a higher rate from the government. See United States et al. ex rel. Schutte et al. v. Supervalu Inc., et al, No. 21-1326, and United States et al. ex rel. Proctor v. Safeway, Inc.,, No. 22-111.
A brief explanation of the payment system is helpful to understanding this ruling. State Medicaid plans offer outpatient prescription drug coverage to qualifying people. However, the Center for Medicare and Medicaid Services has issued regulations that limit pharmacies’ reimbursement rates to the lower of either the (1) actual acquisition cost plus a dispensing fee or (2) the provider’s usual and customary charges to the general public. Likewise, through Medicare Part D, qualifying individuals may also receive prescription drug coverage. The pharmacies’ reimbursements from Medicare are typically limited to the “usual and customary price.” Here, the issue was determining the meaning of the pharmacies’ “usual and customary charge” to the public.
According to the Petitioners, SuperValu and Safeway began offering price-match programs to meet the prices offered by competitors. These programs proved to be popular. According to the Petitioners, the discounted prices comprised a majority of sales for many drugs to customers who paid cash (rather than paid through insurance). For example, the Petitioners alleged that Safeway charged $10 for 94% of its cash sales for a cholesterol drug. Yet Safeway allegedly reported prices as high as $108 for the drug were “usual and customary” when it sought reimbursement from Medicare and Medicaid. This was based upon the regular retail price instead of the discount program price. Additional information was obtained in discovery that seemingly indicated the pharmacies knew the “usual and customary” prices were the discount, rather than the retail, prices.
The district court dismissed the lawsuits, finding that the pharmacies could not have acted “knowingly” given the ambiguous meaning of “usual and customary.” The court reasoned that it was possible to believe the higher retail prices, rather than the discount prices, were the “usual and customary” prices. The Seventh Circuit affirmed, applying a two-step inquiry to determine whether a defendant acted knowingly or recklessly. First, the Seventh Circuit asked whether a defendant’s acts were consistent with any objectively reasonable interpretation of the law. This step applied regardless of whether the defendant actually believed such an interpretation at the time of submitting its claims. Only if the defendant’s acts were not consistent with any objectively reasonable standard would the court proceed to step two, to consider the defendant’s actual subjective believe. Thus, under the Seventh Circuit’s approach, a claim would have to be objectively unreasonable to be false, regardless of whether the defendant thought it was false when the claim was submitted. What mattered was not the individual defendant’s intent at the time of submission, but whether someone else, standing in the defendant’s shoes, may have reasonably thought that the claims were not false. Because an objective person may have thought the pharmacies’ retail prices were the “usual and customary prices,” there could have been no fraud in seeking this higher reimbursement, even if the pharmacies subjectively knew the usual and customary price was the discount price.
The Decision
The Supreme Court reversed the Seventh Circuit, unanimously holding 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.” The Court determined that “the focus is not, as respondents would have it, on post hoc interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.” Critically, the Court noted that the Seventh Circuit did not hold that the pharmacies made an honest mistake as to the definition of “usual and customary.” Instead, “it held that because other people might make an honest mistake, defendants’ subjective believes became irrelevant to their scienter.”
The Court concluded that under the FCA, petitioners may establish scienter by showing that respondents (1) actually knew that their reported prices were not their “usual and customary” prices when they reported those prices; (2) were aware of a substantial risk that their higher, retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway. If petitioners can make that showing, then it does not matter if some other, objectively reasonable interpretation of “usual and customary” would support submitting the higher prices for reimbursement. “For scienter, it is enough if respondents believed that their claims were not accurate.”
The Takeaways
If the Seventh Circuit’s reasoning had stood, False Claims Act petitioners would have been required to prove that no objectively reasonable interpretation of the law existed. If one did – regardless of whether the defendants actually believed this interpretation – there could be no liability. Put differently, a defendant could offer a post hoc explanation that rendered their claims accurate, even if they were knowingly submitted with fraudulent intent. Under SuperValu, courts are directed instead to examine the FCA defendant’s subjective belief at the time the claim was submitted.
This decision will likely limit a FCA defendant’s ability to successfully file a motion to dismiss on the basis of scienter. Rather, the defendant’s subjective belief will be key, which will require discovery in most cases.