Supreme Court Clarifies Scienter Standard For False Claims Act Liability
Government/Regulatory Enforcement
This links to the home page
  • Supreme Court Clarifies Scienter Standard For False Claims Act Liability

    On June 1, 2023, the Supreme Court issued a unanimous decision in the consolidated cases United States v. SuperValu Inc. and United States v. Safeway, Inc. holding that the False Claims Act’s (“FCA”) scienter element refers to a defendant’s knowledge and subjective beliefs—not what an objectively reasonable person would have known or believed.  No. 21-1326 (June 1, 2023).

    The Court’s decision arose out of two consolidated Seventh Circuit cases concerning national supermarket chains’ submissions to Medicare and Medicaid programs for reimbursement.  The Federal Centers for Medicare and Medicaid Services (“CMS”) has promulgated regulations that limit the reimbursement for many drugs to the “usual and customary charges [for the drug] to the general public.”  Between 2006 and 2016, the supermarkets implemented price matching programs with their competitors that caused them to offer many prescription medications at discounted prices.  Rather than submit the discounted prices to CMS for reimbursement, both supermarkets allegedly submitted the higher, non-discounted prices to CMS.  Through this period, various individuals and executives at these companies also allegedly raised questions regarding the meaning of “usual and customary” when viewed in the context of the supermarkets’ use of discounted prices.

    The Seventh Circuit affirmed summary judgment rulings in favor of the supermarkets.  In doing so, the Seventh Circuit ruled that Safeco v. Burr, 551 U.S. 47 (2007) mandated a two-step inquiry as to whether a defendant acted “recklessly or knowingly”:  (1) whether defendant acted consistent with any objectively reasonable interpretation of the relevant law and if not (2) what were defendant’s actual subjective thoughts.  After applying this test, the Seventh Circuit affirmed summary judgment for the supermarkets holding that the term “usual and customary” was ambiguous and that an objectively reasonable person could interpret it to mean the non-discounted price.  Thus, the Seventh Circuit need not, and did not, consider the supermarkets’ actual knowledge regarding the truth of their submissions to CMS.

    Writing for the Court, Justice Thomas addressed only the narrow question of the meaning of scienter in FCA cases.  Looking first to the text of the FCA, the Court explained that the statute references three “types” of potential knowledge:  (1) “actual knowledge,” i.e. whether a person is aware of the information in question; (2) “deliberate ignorance,” i.e. defendants who are aware of a risk their statements are false, but avoid taking steps to confirm the statement’s validity; and (3) “reckless disregard,” i.e. defendants who are “conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.”  The Court concluded that any one of these three types of knowledge was sufficient to satisfy the scienter element under the FCA.

    The Court also disclaimed the applicability of Safeco.  The case was inapplicable on two grounds:  (1) it interpreted a different statute—the Fair Credit Reporting Act (“FCRA”); and (2) the FCRA has a different mens rea standard—“willfully” as compared to “knowingly or recklessly.”

    The Court’s unanimous ruling thus avoided the paradoxical situation in which a defendant could have actual knowledge of its false claims but otherwise avoid liability by arguing that they did not act knowingly because an objectively reasonable person may have interpreted the regulations similarly.  Accordingly, the Court vacated the judgments below and remanded the cases for further proceedings, including a renewed assessment of the facts at issue in light of the clarified standard.  While the Court’s decision given the narrow issue presented was straightforward, it remains to be seen how lower courts will apply this formulation of the FCA scienter requirement to the thousands of FCA cases filed annually with varied fact patterns and involving myriad regulatory schemes across a range of industries.

Links & Downloads