In a previous blog post, the attorneys at Chilivis Grubman wrote about two consolidated cases that were pending before the U.S. Supreme Court (“SCOTUS”), U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway, relating to the proper scienter standard in False Claims Act (“FCA”) cases. Based on the justices’ comments and questions at oral argument, we predicted that SCOTUS was likely to preserve the “subjective belief” theory of liability in FCA cases and reverse the Seventh Circuit’s ruling that endorsed an “objective belief” theory.
On June 1, 2023, Justice Thomas, writing for a unanimous Court, did just that. The Court clearly and unequivocally held that “[w]hat matters for an FCA case is whether the defendant knew the claim was false.” The Court explained that the FCA is largely a fraud statute and looked to the common law scienter requirement for claims of fraud to guide its analysis. The Court explained, “Based on the FCA’s statutory text and its common-law roots, the answer to the question presented is straightforward: The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”
The consolidated cases were brought by whistleblowers who alleged that SuperValu and Safeway each adopted price-match programs pursuant to which their pharmacies would match a competitor’s lower price at a customer’s request. Per regulations promulgated by the Centers for Medicare and Medicaid Services (“CMS”), Medicare and Medicaid will only reimburse certain drugs at the “usual and customary” rate that the provider offers to the general public. The plaintiffs alleged that the discounted rates that SuperValu and Safeway offered pursuant to their price-match programs were considered their “usual and customary” rates, and that they knew this but nonetheless told Medicare and Medicaid that their “usual and customary” rates for these drugs were much higher.
The district court granted summary judgment to SuperValu and Safeway, holding that they did not act “knowingly.” The Seventh Circuit affirmed, looking to the Supreme Court’s opinion in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), a Fair Credit Reporting Act case, for guidance. The Seventh Circuit held that if a defendant’s acts were consistent with any objectively reasonable interpretation of the relevant law or regulation, regardless of whether the defendant subjectively believed such an interpretation at the time of his claims, he could not have acted knowingly under the FCA.
SCOTUS reversed. It explained that looking to Safeco was improper, because the FCA is a fraud statute and tracks the common law. The “FCA’s standards focus primarily on what respondents thought and believed.” The FCA defines “knowingly” as “actual knowledge,” “deliberate ignorance,” or “reckless disregard,” and this statutory definition is essentially the same as the common-law fraud definition of knowledge. The Court provided the following definitions of those phrases:
- First, the term “actual knowledge” refers to whether a person is “aware of” information.
- Second, the term “deliberate ignorance” encompasses defendants who are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement’s truth or falsity.
- And, third, the term “reckless disregard” similarly captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.
The FCA focuses “on what the defendant knew when presenting the claim.” The Court limited its ruling to answering only this narrow legal question and remanded to the Seventh Circuit for further proceedings.
The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with False Claims Act investigations and litigation. If you need assistance with such a matter, please contact us today.