U.S. Supreme Court Clarifies False Claims Act Scienter Requirement
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U.S. Supreme Court Clarifies False Claims Act Scienter Requirement

Brownstein Client Alert, June 8, 2023

On June 1, 2023, in United States ex rel. Schutte v. SuperValu, Inc., the U.S. Supreme Court unanimously held that the scienter requirement of a claim brought under the False Claims Act (FCA) is evaluated based on the defendant’s own knowledge and subjective beliefs—not what an objectively reasonable person may have known or believed. This ruling underscores the need for health care providers to carefully evaluate ambiguous terms in government payor billing guidelines before submitting claims for payment, because an objectively reasonable interpretation of those billing guidelines will not provide a defense if the defendant knew or believed there was a risk its interpretation could be fraudulent.

In Schutte, whistleblowers brought FCA suits against retail pharmacies alleging that the pharmacies overbilled Medicare and Medicaid for certain prescription drugs. The case considered the Federal Centers for Medicare and Medicaid Services (CMS) regulations which, as relevant to the case, limited reimbursement to the “usual and customary” price for the dispensed drug. 

The whistleblowers alleged that the pharmacies offered a discount program to match a competitor’s lower prices. The discount program proved popular, and the vast majority of the pharmacies’ cash sales were for drugs sold at the discounted rate. But, the pharmacies continued to report to Medicare and Medicaid that their “usual and customary” prices were the higher, non-discounted prices.

The whistleblowers contended that the discounted prices were the pharmacies’ “usual and customary” prices for the drugs and that the pharmacies’ submission of reimbursement claims to Medicare and Medicaid for the non-discounted drug prices were therefore false claims for purposes of the FCA. 

The Supreme Court acknowledged that “[t]o be sure, the phrase ‘usual and customary’ on its face appears somewhat open to interpretation.” On the one hand, the pharmacies’ “normal,” non-discounted prices could be considered “usual and customary.” But on the other hand, because the majority of their cash sales were under the discounted prices, practically speaking, their discounted prices could also be considered “usual and customary.”

Importantly to the Court, there was evidence that the pharmacies’ employees subjectively believed that the phrase “usual and customary” meant the discounted prices, and that the pharmacies had received notice from a pharmacy benefit manager and Medicaid that “usual and customary” referred to discount prices. But, the pharmacies nevertheless continued to submit the non-discounted prices to Medicare and Medicaid as the “usual and customary” prices. Accordingly, while the pharmacies’ interpretation of the ambiguous phrase “usual and customary” to refer to the non-discounted prices was objectively reasonable, there was evidence that they believed their interpretation was incorrect and that their resulting claims were false. 

The sole question before the Supreme Court was which standard controlled when determining whether a party “knowingly” submitted a false claim, as required by the FCA. The Seventh Circuit had sided with the pharmacies, reasoning that an objectively reasonable interpretation of an ambiguous billing requirement could not knowingly be false. 

But the Supreme Court reversed, unanimously holding that the “FCA’s [knowledge] element refers to [the defendant’s] knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” As a consequence, the Supreme Court revived the lawsuit against the pharmacies for further proceedings. 

Importantly for those of us in the Tenth Circuit, neither the Tenth Circuit nor any of the district courts within the Tenth Circuit had apparently adopted the Seventh Circuit’s standard. The only court to consider it, the District of Utah, had rejected it.

In rejecting the objective standard, the Supreme Court removed a pretext for fraudulent behavior. However, the Schutte decision likely will have the unintended effect of increasing litigation because discovery on the scienter element will be critical. Hence, FCA cases will be less capable of early resolution.

This decision also underscores the importance of understanding and analyzing ambiguous billing requirements before submitting claims for payment. Health care entities and providers that submit claims to government payors also would be well-advised to address ambiguous billing requirements head-on prior to submitting such claims, including in some instances either documenting the entity’s subjective understanding of an ambiguous billing requirement and why the entity believes its interpretation is correct and does not violate the FCA or obtaining a legal opinion on the issue. Such documentation may prove critical in the event of a threatened FCA action.

This document is intended to provide you with general information regarding United States ex rel. Schutte v. SuperValu, Inc. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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