Supreme Court rejects “objectively reasonable” defense in False Claims Act cases

by Ben Vernia | June 4th, 2023

On June 1, the Supreme Court issued its decision in United States ex rel. Schutte v. Supervalu, Inc., in which a qui tam relator appealed the Seventh Circuit’s affirmance of summary judgment, premised on the defendant pharmacy’s claims that its interpretation of the phrase “usual and customary” was objectively reasonable, despite evidence that the company had been warned off of the lenient interpretation it advanced in its defense.

Medicare and Medicaid rules limit drug reimbursement, and under certain cases, this limit is set at the pharmacist’s “usual and customary” charge for the drug. The relator in the case sued a grocery chain that provided pharmacy services, alleging that the company routinely provided drugs at a significant discount to match competitors’ prices, but then charged federal healthcare programs the undiscounted rate as its “usual and customary” one.

In opposing the grocery chain’s motion for summary judgment, the relator produced evidence that the company (and another, similarly situation defendant whose suit was consolidated before the Supreme Court) “were informed that their lower, discounted prices were their ‘usual and customary’ prices, believed their discounted prices were their ‘usual and customary’ prices, and tried to hide their discounted prices from regulators and contractors.”

The Seventh Circuit had ruled in favor of the defendants, reasoning that it first must answer whether the “defendant’s acts were consistent with any objectively reasonable interpretation of the relevant law that had not been ruled out by definitive legal authority or guidance” — whether or not the defendant had actually believed that interpretation when it submitted the claims. Finding that the defendants’ actions were consistent with an objectively reasonably interpretation of “usual and customary,” the Seventh Circuit affirmed the District Court’s grant of summary judgment to the grocery stores on that basis.

The Supreme Court reversed in a unanimous opinion written by Justice Thomas.

He first noted that the three-part text of the False Claims Act’s scienter provision “largely tracks the traditional common-law scienter for claims of fraud.” These “standards focus primarily on what respondents thought and believed.” Under this subjective standard, the defendant’s post hoc beliefs are irrelevant.

Justice Thomas then acknowledged the lack of clarity in the phrase “usual and customary,” but noted that the defendants were not arguing that they had mistakenly interpreted the phrase. The Court then rejected each of the defendants’ three arguments for an objectively reasonable, rather than subjective standard for scienter under the Act.

  • First, the phrase is ambiguous, but that did not prevent the defendants from learning its correct meaning. Justice Thomas noted that they had received notice that their discounted prices were the “usual and customary” ones. So, they either knew what the phrase meant, or proceeded despite knowing of an unacceptably high risk.
  • Second, the Court rejected the defendants’ (and Seventh Circuit’s) reliance on Safeco Ins. Co. of America v. Burr, 511 U.S. 47 (2007), which required under the Fair Credit Reporting Act that a defendant’s interpretation of the Act be shown to have been objectively unreasonable. The laws at issue were different (the FCRA employed a willful standard), and its incorporation of an objective standard into its definition of recklessness did not create a “purely objective safe harbor that [the companies] invoke.”
  • Finally, the grocery chains’ argument that their representations were legal, not factual, and therefore not actionable, was unavailing. The claims may involve some legal analysis, but they remain actionable because they also imply facts justifying the legal conclusion. Justice Thomas wrote: “Rather than saying, ‘this is what “usual and customary” means,’ respondents essentially said, ‘this is what our “usual and customary” prices are.'”

In conclusion, Justice Thomas wrote:

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. §3729(b)(1)(A). If petitioners can make that showing, then it does not matter whether some other, objectively reasonable interpretation of “usual and customary” would point to respondents’ higher prices. For scienter, it is enough if respondents believed that their claims were not accurate.

Comment: Overall, this is a surprisingly good result for whistleblowers and their counsel. A great many qui tam founder because defendants and their attorneys make exaggerated post hoc claims that even clear requirements are nevertheless too vague to satisfy an “objectively reasonable” standard. Many — perhaps most — of these arguments never become public, because the government declines to intervene in the qui tam suit in which they arise, and the relator dismisses the case rather than litigate it under such a cloud.

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