Parties litigating False Claims Act (FCA) cases have long struggled with a thorny question around the essential element of scienter (the defendant’s intent, or state of mind): What/how much does a contractor need to know when submitting an invoice for payment for the related claim to be considered knowingly false when made? When that question arises in FCA litigation, a court’s determination of that essential element of scienter/knowledge often pivots on what the judge believes matters more:
(A) The defendant’s subjective belief at the time a claim is made; or
(B) An objective textual reading of what a person may have known or believed when a claim is made.
In last week’s resounding and unanimous decision, U.S. ex rel. Schutte v. SuperValu Inc., the U.S. Supreme Court definitively answered that question for trial courts that have struggled with this issue for many years. It’s (A). The Court explained that the FCA’s scienter element refers to a defendant’s personal knowledge and subjective beliefs at the time a claim is made, and not to what an objectively reasonable person may have known or believed. In other words, even an objectively reasonable interpretation of law or regulation is not sufficient to negate intent if there is evidence that the defendant knew or should have known that a claim was false (or was likely false) when made.
In this case, whistleblowers sued Safeway Inc. and SuperValu Inc. for allegedly offering prescription drugs at discounted prices to ordinary pharmacy customers, while simultaneously and improperly charging non-discounted rates to the government. Both Medicare and Medicaid require pharmacies to seek reimbursement at the same prices as the general public under the pharmacy’s “usual and customary” rates. The Supreme Court acknowledged that the key phrase usual and customary is ambiguous on its face and not well defined by statutes. Nevertheless, the Court held that such facial ambiguity is not sufficient to preclude a finding that the pharmacy defendants knew that their claims for reimbursement at their “retail” rates—and not their “discounted” rates—were false for at least two reasons:
- The facial ambiguity of the phrase usual and customary does not preclude a finding of scienter because the pharmacies could have learned its correct meaning. Indeed, the relators presented evidence that the companies had received written guidance that the phrase referred to their discounted prices charged to most customers, that the pharmacies fully understood those notices, and that they took steps to conceal their discounted prices when submitting claims for reimbursement. The “ostrich” defense is no defense here.
- The Court also rejected the defendants’ reliance on Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), which held that a defendant cannot be liable if a legal obligation allows for more than one reasonable interpretation. In its defense, the defendants followed one such interpretation, claiming that no authoritative guidance warned them away from that interpretation. Justice Thomas distinguished Safeco’s interpretation of the common law standards for “knowing” or “reckless” on the grounds that Safeco’s decision addressed a different statute with a different mens rea (intent) standard—in that case, the standard was “willful.” What mattered more in this decision was not a post-hoc rationalization or any alternative interpretation of ambiguous language in a regulation, but rather that “…these cases involve defendants who may have correctly understood the relevant standard and submitted inaccurate claims anyway.” In short, the focus of the scienter inquiry is not whether any reasonable interpretation may support a claim for reimbursement, but rather on what the defendant knew or believed when presenting the claim.
Thus, the Court concluded that under the FCA, the petitioners may establish scienter by showing that the pharmacy defendants:
- Actually knew that their reported prices were not their usual and customary prices when they reported them for federal reimbursement,
- Were aware of a substantial risk that their higher, retail prices were not their usual and customary prices but intentionally avoided learning whether their requests for reimbursement were accurate, or
- Were aware of such a substantial and unjustifiable risk but submitted the reimbursement claims anyway. “For scienter, it is enough if [the pharmacies] believed that their claims were not accurate.”
The impact of this decision on FCA cases going forward will be profound and goes far beyond the interpretation of the specific “usual and customary” language explored in this case. Perhaps most importantly, this precedent will likely add to the burdens and costs of defending these suits in several ways. In the first instance, it will make defendants’ efforts to obtain early dismissal of FCA cases on the basis of scienter much more difficult. In addition, it will likely promote additional discovery into a defendant’s subjective beliefs at the time claims were submitted, which is necessarily a fact- and document-intensive endeavor. It also may place a higher burden on defendants (in summary judgment and/or at trial) to demonstrate they did not take unjustifiable risk(s) in submitting claims. And, finally, it reduces the chances that clever lawyering or strained interpretations of the law might provide an excuse for fraudulent conduct.
For federal contractors and recipients of federal monies,the SuperValu decision should serve as the harbinger of immediate change, and a warning to complete any necessary compliance checks and resolve any potential issues well before hints and allegations devolve into a FCA suit. As always, compliance matters, but now compliance will need to be reasonably informed. The SuperValu decision creates risk in the shadow of a contractor’s concern or uncertainty that the rules are being followed correctly. Put more simply, it is the contractor’s awareness of a “substantial risk” that appears capable of establishing scienter. As most (all?) federal contractors know, substantial risk is inherent in all contracts with the federal government. Accordingly, the SuperValu decision appears to forcefully remind contractors to understand the laws, regulations, terms and conditions resident in their contracts. Failure to do so may find contractors one step closer to falling victim to FCA allegations.