Supreme Court Again Tightens FCA Intent, But Tricky Questions Linger

Factual Background and the Court’s Opinion

SuperValu and Safeway operate pharmacies nationwide that sell and dispense retail pharmaceutical drugs. Id. at 2. Whistleblowers brought forth allegations that both companies violated federal law by overcharging Medicare and Medicaid through their submissions for reimbursement. Id. at 5. More specifically, under federal law, the companies were limited to seeking reimbursement for drug sales to government beneficiaries at the “usual and customary charges” that they otherwise charged to the general public and beneficiaries of private health plans. See 42 C.F.R. §447.512(b)(2) (2021). But according to the whistleblowers, SuperValu and Safeway concealed and then intentionally misreported those standard charges (typically discount prices) when submitting their claims to the federal government. Id. at 5-6.

At trial and on appeal, the companies asserted that the phrase “usual and customary” in drug pricing is ambiguous and open to multiple, reasonable interpretations when objectively considered. According to that argument, even though a claim’s “falsity” element could be established, a defendant could not “knowingly” submit a false claim if its conduct may have been lawful under a different reading of the statute or regulation. The U.S. Court of Appeals for the Seventh Circuit held that the companies could not have acted with the requisite scienter on that basis, applying a standard outlined in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007).

Safeco, however, involved the requisite intent under the Fair Credit Report Act (FCRA), not the FCA. Moreover, the FCRA – unlike the FCA – is not a fraud-based statute and necessarily contemplates a different degree of intent. The Supreme Court rejected the Seventh Circuit’s reasoning on those grounds, holding that no objective reasonableness standard exists in the FCA’s plain language or its historical roots. Slip Op, at 16. Rather, actual knowledge of a claim’s falsity, deliberate ignorance of falsity, or “reckless disregard” of a “substantial and unjustifiable risk” of falsity, are the appropriate measures of FCA scienter. Id. at 8-9.

Unanswered Questions and Impacts on Future Claims

The Court provided a clear answer on the use of a subjective analysis to determine liability under the FCA. At the same time, however, the Court did not provide any context to litigants or lower courts regarding how to factually determine whether a defendant “recklessly disregarded” a risk of falsity.

A close examination of the opinion reveals a glancing (at best) discussion of that liability category. See id. at 10. The Court first defines the category as occurring when “defendants … are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.” Id. Relying upon the language of the FCA and a small handful of other sources,[1] it further explains that “a defendant may be called ‘reckless’ for acting in the face of an unjustifiably high risk of illegality that was so obvious that it should have been known, even if the defendant was not actually conscious of that risk.” Id. at 10, n.5. The Court provided no other guidance on the spectrum of potential conduct which could trigger heavily fact-dependent terms like “substantial and unjustifiable risk” and “reckless.”

The proverbial “rub” with this aspect of the Court’s opinion is that individuals and companies faced with a coin-flip decision on the legality of their conduct are left in the dark regarding potential FCA liability. While the Court rejected SuperValu and Safeway’s attempt to rely upon interpretive ambiguity (though notably by largely assuming the veracity of the whistleblowers’ allegations), there is a plethora of thorny hypothetical scenarios which could, and likely will, arise in the near future.

For example, when a company conducts due diligence into its prospective conduct ex ante, and is later sued under the FCA based upon that conduct, could its internal inquiry – and the results thereof – be deemed prior knowledge of liability? Or assume the company elected against conducting an inquiry for that reason – is that an unjustifiable disregard of the risk of falsity or a theory of liability under the deliberate ignorance category (or both)? There will be many cases with complex factual records in which the correct result is unclear.[2]

In the interim, best practices for individuals and companies can include, but are not limited to:

• Creation and retention of structured and vetted business rules and procedures;
• Strict adherence to those rules and procedures;
• Ensure all employees, including C-suite level, have regular training and refreshing of those rules and procedures;
• Monitor updates and changes in law that could affect the scope, propriety, and viability of those rules and procedures; and
• Ensure that in-house counsel, preferably well-versed in regulatory and enforcement law, is consistently consulted and kept in the loop of the business’s activities.

Takeaways and Recommendations

This case presented an opportunity for the Court to clarify ambiguities in the recklessness standard for liability under the FCA. Because it did not, however, we expect the issue to continue to percolate in the lower courts. This opens up the possibility of complicated circuit splits, varying treatment of what conduct constitutes liability under the recklessness standard, and difficult decision-making for executives at companies as well as individuals that deal in heavily FCA-impacted industries such as health care and government contracting, among others. Until the Court grants certiorari in a case to directly address the issue – which could be years away – individuals and businesses must tread carefully and consult legal counsel in the face of any uncertainty.

[1] The opinion cites Black’s Law Dictionary, as well as one case, Farmer v. Brennan, 511 U.S. 825 (1994), which involved a Bivens action brought by a federal prisoner against prison officials for alleged “deliberate indifference” regarding the prisoner’s gender status.

[2] During oral argument of the case, Justice Kavanaugh attempted to broach that issue but quickly conceded that it was not yet ripe for the Court’s full consideration.

JUSTICE KAVANAUGH: What if there’s a situation where “U&C charges,” there are three different ways you can interpret that. Let’s say A, B, and C, and A is clearly in the safe zone, B is a little more aggressive, and C is, you know, pushing the envelope, but, you know, we still think it’s a reasonable interpretation, and we’re going to go with C because our job is to make money, and so we’re going to go with C because we think that’s objectively reasonable interpretation. It turns out later on that’s ruled wrong. You’re using the word “false.” So that’s false. Why liability in a situation like that, or is there liability in a situation like that?

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JUSTICE KAVANAUGH: And we should decide the case as it came to us and leave for another day, I think, the question of if at the time you considered these various options.