Supreme Court Makes Quick, Unanimous Work of Seventh Circuit’s Interpretation of False Claims Act Scienter Requirement

June 8, 2023By John W.M. Claud & Faraz Siddiqui

As we move into the heat of the summer, we can look forward to the annual June deluge of opinions coming from the Supreme Court.  Last week, the Court ruled on a pair of combined cases that potentially impacts many of our blog readers in the pharmaceutical, device, and biologics space that benefit from reimbursements from Federal health care programs.

The court handed down its decision in cases colloquially referred to as SuperValu, which readers may recall from our coverage of another, related circuit court decision and the Supreme Court oral arguments.  The case pitted whistleblowers against chain pharmacies SuperValu and Safeway, both accused of overbilling Federal programs for reimbursements on prescription drugs.  The cases were both brought under the False Claims Act (FCA), the Civil War-era law that the government uses to claw back funds it pays out to parties that overbill federal programs.

The False Claims Act is an important tool for the Federal government to recoup misspent taxpayer dollars, used across numerous agencies to recapture billions of dollars each year.  Doing business with the federal government comes with numerous restrictions and special provisions in exchange for the benefit of having access to Federal reimbursements.  When recipients of federal funds violate those terms, whistleblowers can file a suit that the Department of Justice can take up to reclaim some of those lost taxpayer dollars.

The FCA incentivizes whistleblowers to come forward by awarding them a cut of any recovery.  They are entitled to receive one third of any claw back, which can result in multi-million-dollar awards.  Additionally, the FCA explicitly allows for treble damages, meaning that companies that overbill the federal government may be liable for up to three times the amount of their disallowed reimbursements.

What was SuperValu all about?

The FCA also has a scienter requirement, that is, a requirement to show intent to defraud.  It’s not a often viewed as a high evidentiary bar, as the FCA is a civil statute written and interpreted to sweep in a wide range of fraudulent intent in order to protect Federal funds.  The scienter requirement stated in the statute includes proof of actual knowledge, deliberate ignorance, or recklessness.  In this case, the Supreme Court provided greater clarity on how to interpret that requirement.

In SuperValu, whistleblowers accused the two nationally known retail pharmacies of overbilling the Centers for Medicaid and Medicare Services (CMS) for reimbursements for prescription drugs.  According to the suit, the pharmacies improperly collected the full price for drugs from CMS that they dispensed to consumers under a discounted pricing plan.  The whistleblowers alleged that the pharmacies were entitled only to claims for the discounted prices, and the full claims were therefore improper.

This case made it to the Supreme Court because the pharmacies defended the whistleblower claims by arguing that their practices amounted to an “objectively reasonable interpretation” of one of those aforementioned restrictions on doing business with the Federal government.  CMS requires payees to bill only for “usual and customary” prices of drugs.  Borrowing from a scienter standard set in the Fair Credit Reporting Act (FCRA), the chain pharmacies asserted that was exactly what they were doing.

According to their defense, CMS had not made clear that they had to discount their reimbursement claims to the same degree that they discounted prices to patients. Under their argument, billing the full price was objectively reasonable in the face of lacking guidance from CMS.  The Seventh Circuit accepted the pharmacies’ take in a 2-1 vote that resulted in a summary judgment victory for the pharmacies, and the dismissal of the whistleblowers’ suits.

The Supreme Court Decision

The unanimous Supreme Court was having none of it.  Justice Clarence Thomas authored the court opinion, which promptly dismissed the pharmacies’ strategy and the use of the FCRA’s “objectively reasonable” standard in FCA cases.  The FCA rises and falls on subjective intent of the overbilling party, the Court ruled, an idea now enshrined in the Supreme Court ruling in addition to the words of the statute.  Thomas wrote:

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. And, even though the phrase “usual and customary” may be ambiguous on its face, such facial ambiguity alone is not sufficient to preclude a finding that respondents knew their claims were false.

This was the long-predicted outcome, as the pharmacies received a frosty reception at the oral argument earlier in the term.  SuperValu will now go back down to the Seventh Circuit for reconsideration, where the evidence of the pharmacies’ intent will presumably face a less forgiving re-evaluation.

The “objectively reasonable” standard was a potential boon for companies overbilling the government, as it would have allowed them to produce any sort of reasonable excuse well after the billings took place and use that as a shield against enforcement.  But the real loss here is for companies that, on a daily basis and with the blessing of CMS (see, e.g., footnote 16 of this guidance), are required to make reasonable assumptions in the hugely complex and often ambiguous rules for reporting average sales price, average manufacturer price, and best price.

This ruling tells these companies that an objectively reasonable interpretation of an ambiguous requirement may not always protect them from whistleblower and government scrutiny.  SuperValu is undoubtedly a victory for whistleblowers, and a shot over the bow for recipients of government reimbursements.