Case Law Update: The United States Supreme Court Provides Guidance On The False Claims Act
As we have previously discussed, the False Claims Act (“FCA”) provides a mechanism for private parties to bring lawsuits in the name of the United States against those who allegedly defrauded the government. Recently, the United States Supreme Court provided further guidance related to the scienter (Latin for “knowingly”) element of the FCA. Justice Clarence Thomas authored the opinion on behalf of a unanimous court in United States ex rel. Schutte, et al. v. Supervalu Inc. 1 The Court provided an overview of the FCA and imparted valuable guidance for litigants involved in these important cases. This blog post will discuss the opinion and its impact moving forward.
In Schutte, the Court addressed two cases against pharmacies Supervalu and Safeway. The Petitioners (the Relators below) alleged that the pharmacies (Respondents) “overcharged Medicare and Medicaid programs for years when seeking reimbursement for prescription drugs that the programs covered.”2 The Court provided a thorough overview of the requirements for reimbursement for Medicare and Medicaid; in short, both entities require pharmacies to seek reimbursement for the “usual and customary” price for the relevant drug.3 The Relators alleged that the pharmacies reported higher prices to Medicare and Medicaid than the ones they “usually and customarily” charged to other customers.4 Supervalu and Safeway adopted price-match programs that lasted until 2016 and 2015, respectively.5 Supervalu would match the lower price of a competitor and apply that price to future refills.6 Safeway had a membership program that allowed customers to obtain low-cost prescriptions for generic drugs.7 The Relators argued that these discounted prices were the pharmacies’ “usual and customary” prices given the popularity of the programs.8 One example the Court provided was that “Safeway charged just $10 for 94% of its cash sales for a 90-day supply of a cholesterol drug between 2008 and 2012. Yet Safeway apparently reported prices as high as $108 as ‘usual and customary’ during that time.”9 The Relators presented evidence that both pharmacies were informed that the lower prices were the “usual and customary price,” that the companies believed that the lower prices were the “usual and customary price,” and that both entities tried to hide the discounted prices from Medicare and Medicaid.10 The Relators provided evidence to support this theory, including notices from a pharmacy benefit manager about the “usual and customary price” being the discounted price; comments made by executives related to the programs; and documents directed to Safeway employees instructing them not to put the price match guarantee in writing.11
As Justice Thomas succinctly stated, “[T]wo essential elements of an FCA violation are (1) the falsity of the claim and (2) the defendant’s knowledge of the claim’s falsity.”12 The District Court granted summary judgment in favor of the pharmacies (ending the case at that level), holding that they did not act “knowingly,” and the Seventh Circuit (the court of appeals) affirmed.13 The Court noted that it was not reviewing the meaning of “usual and customary” or to settle factual matters.14 Instead, the Court answered the question, “If respondents’ claims were false and they actually thought that their claims were false—because they believed that their reported prices were not actually their ‘usual and customary’ prices—then would they have ‘knowingly’ submitted a false claim within the FCA’s meaning?”15
In answering that question, Justice Thomas noted that “[w]hat matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”16 Under the FCA, “either actual knowledge, deliberate ignorance, or recklessness will suffice” to “knowingly” present a fraudulent claim.17 Justice Thomas emphasized that although the phrase “usual and customary” is not the model of clarity, the ambiguity “does not preclude respondents from having learned their correct meaning—or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.”18 The Court summarized its holding by stating, “For scienter, it is enough if respondents believed that their claims were not accurate.”19 The Court vacated the judgments below and remanded the cases to the Seventh Circuit.20
To illustrate the holding of this opinion, it is helpful to consider a hypothetical. Teresa and Danielle own several pharmacies that receive funds from both Medicare and Medicaid. Teresa and Danielle decide that they are going to charge customers who pay cash $10 for a 30-day supply of common heart medication. The program became so popular that 99% of the customers for that medication pay cash, while the other 1% of the customers are on Medicare. Teresa and Danielle report to Medicare that the usual and customary price they charge for the medication is $200. Dolores, who acts as CFO of the company, warned Teresa and Danielle that this conduct is likely illegal. Likewise, they received a warning from a benefit manager regarding the illegality of the practice. Employee Melissa, who is upset about this practice (and indeed has complained about it and suffered a demotion), decides to seek counsel. Ultimately, Melissa’s counsel determines there are grounds to pursue an FCA action. Under Schutte, the scienter requirement would likely be met (given these facts), although the other elements of the cause of action would also have to be proven for the claim to succeed.
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1 The slip opinion can be found at https://www.supremecourt.gov/opinions/22pdf/21-1326_6jfl.pdf (last visited June 5, 2023).
2 Id., at *2.
3 Id., at *3.
4 Id., at *4
8 Id., at *5.
11 Id., at *5-6.
12 Id., at *6.
14 Id., at *8.
15 Id., at *7.
16 Id., at *2.
17 Id., at *9.
18 Id., at *12.
19 Id., at *16.
20 Id., at *17.