By Andy Liu, Robert Rhoad, Michael Bhargava, Haaleh Katouzian

On June 1, 2023, the Supreme Court issued a major, but narrow, victory for plaintiffs in False Claims Act cases.  It held that defendants can be held liable when they subjectively know that they submit false claims to the government, even if they can later identify an “objectively reasonable” justification for their actions.

The False Claims Act creates liability for those that knowingly submit false or fraudulent claims for payment to the federal government, and it allows private citizens, i.e., “relators,” to initiate “qui tam” suits on behalf of the government and to share in any proceeds recovered through the action.  Here, the question before the Supreme Court was how to interpret the word “knowingly,” which has divided lower courts.  The disagreement stemmed around whether “knowingly” should be interpreted as a subjective or objective standard.

In the two cases before the Court—United States ex rel. Proctor v. Safeway, Inc. and United States ex rel. Schutte v. SuperValu Inc.—relators separately sued retail drug pharmacy chains operated by SuperValu and Safeway, alleging that they knowingly overcharged Medicare and Medicaid when seeking reimbursement for prescription drugs.  Pharmacies are permitted by regulation to charge the government their “usual and customary” drug prices. SuperValu and Safeway interpreted the vague phrase to mean their standard retail price for drugs, even though the large majority of certain drugs were sold at steep discounts.  Relators sued on the theory that the pharmacies were knowingly overcharging the government at the retail price, which violated regulations because the discounted price was the “usual and customary” price.  To meet the “knowingly” requirement, relators presented evidence showing that 1) the pharmacies had been informed as early as 2006 that they were overcharging for the drugs, and 2) that the pharmacies tried to conceal their approach so as not to raise concerns.

Both the district court and the Seventh Circuit held that the SuperValu and Safeway submitted false claims to the government because, when seeking reimbursement, they should have done so based on their discounted prices.  Those courts nevertheless granted summary judgment to the pharmacies, holding that even though they both knew that their requests for payment were fraudulent, the phrase “usual and customary” could have been interpreted by an “objectively reasonable” person as permitting the submission of the higher retail prices.  In doing so, the Seventh Circuit adopted an objective standard for interpreting the False Claims Act scienter requirement, unlike the subjective standard adopted by other courts that looked only at what the defendants actually believed.

Last Thursday, the unanimous Supreme Court opinion overturned the Seventh Circuit decisions.  It held that the appeals court erred in adopting the objective standard from the Supreme Court’s prior decision in Safeco Insurance Co. of America v. Burr, 551 U. S. 47 (2007), because that case involved a different statute and a different scienter standard (“willfully,” not “knowingly”).  The Court noted that the False Claims Act and its roots in common-law fraud standards create liability when a defendant has actual knowledge of the falsity, acts in deliberate ignorance of the falsity, or acts in reckless disregard of the falsity.  All of these require an analysis of the defendant’s subjective intent, the Court held.  As the Court explained, the False Claims Act and the common law “point to what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it . . . . As such, 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.”

Because the Supreme Court’s decision was narrow and only resolved the broad issue of objective versus subjective intent, lower courts will be left to puzzle through how to implement the Court’s new direction.  This includes some language that may prove favorable to defendants.  For example, the Court explained that the “reckless disregard” standard—the lowest level of scienter required to establish liability under the False Claims Act—“captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.”  Because this is a new formulation of the reckless disregard standard, and because this standard is commonly asserted by plaintiffs as it is the easiest to prove, this will almost certainly spawn future litigation battles over what constitutes a “substantial and unjustifiable risk.”