On June 1, 2023, as had been widely forecast based on the tenor of the oral argument, the Supreme Court reversed the Seventh Circuit Court of Appeals decision in United States ex rel. Schutte v. SuperValu Inc. and firmly rejected the notion that a defendant’s actual knowledge and beliefs are irrelevant when assessing scienter under the False Claims Act.
The case is important because, in recent years, lawyers for defendants in False Claims Act cases and investigations commonly argued that, even if there was evidence that the defendants knew what they were doing was wrong, the relevant regulatory regime was sufficiently ambiguous that an objectively reasonable person could have believed that the conduct at issue was not wrong. The Supreme Court’s decision, which was unanimous, soundly rejected this type of argument, holding that a regulatory standard’s “facial ambiguity alone is not sufficient to preclude a finding that respondents knew their claims were false.” What mattered in this case, the Court held, was the defendant’s state of mind at the time of its conduct, and not whether a smart defense lawyer could argue after the fact that the standard was insufficiently precise.
The False Claims Act imposes liability only when a defendant engages in fraud “knowingly;” in other words, Congress did not intend it to be a vehicle of recovery for a mere breach of contract. The Act defines “knowingly” to mean “that a person, with respect to information— (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b). The SuperValu Court observed that this definition derives from “the traditional common-law scienter requirement for claims for fraud.” Under both the False Claims Act and the common law of fraud, the Court held, the focus is on what the defendant “thought and believed.”
Crucially, the Court held that scienter under the False Claims Act “encompasses defendants who are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement’s truth or falsity,” as well as “defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.” This is necessarily a “subjective test,” the Court noted, and “the focus is not . . . on post hoc interpretations that might have rendered [the defendant’s] claims accurate.”
In the underlying SuperValu case, the question is whether the defendant pharmacies understood the phrase “usual and customary charges” to include discounted prices they charged cash-paying customers, because the “usual and customary” price determined the maximum reimbursement they could receive from Medicaid and Medicare. The plaintiffs’ evidence showed that the defendants commonly charged low prices to cash-paying customers, but reported much higher “usual and customary” prices to the Federal health care programs. The Court acknowledged that “the phrase ‘usual and customary’ on its face appears somewhat open to interpretation,” but also noted that, according to the plaintiffs’ allegations, the pharmacies “were informed that their lower, discounted prices were their ‘usual and customary’ prices, believed their discounted prices were their ‘usual and customary’ prices, and tried to hide their discounted prices from regulators and contractors.” The Court held that such allegations, if supported by evidence, could establish liability under the False Claims Act, even though the pharmacies’ lawyers were able to conjure a hypothetical situation where an “objectively reasonable” person could have had a different understanding of the rules than these pharmacies did.
Ultimately, the Court admonished, “[b]oth the text [of the False Claims Act] and the common law . . . point to what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it.” To wit, facts matter, and clever lawyering does not always win the day. The SuperValu decision is a resounding victory for the government and whistleblowers who pursue fraud cases involving complex regulatory regimes that sophisticated corporations well understand.
Gregg Shapiro of Gregg Shapiro Law