In Supervalu, Fair Business Should Win Against Fraudsters

The United States is the largest economy in the world. Its national pride is shaped by ideals of honest, hard-working people who pull themselves up by their bootstraps. As the story goes, this hard work pays off in returns on investment and growth in the marketplace, as capitalism does what it is intended to do. But undercutting this national pride is a dangerous trend of opportunism, dishonesty, and fraud in the marketplace that pits businesses against each other to see who among them can be the most unethical and unfair without getting caught. This term the Supreme Court is considering how far these bad actors can go under the guise of fair business.

Before the Court are two now-consolidated cases, U.S. ex rel. Schutte v. Supervalu, Inc. and U.S. ex rel. Proctor v. Safeway, Inc.,[1] in which the United States Court of Appeals for the Seventh Circuit held that an individual’s or corporation’s subjective belief that what they are doing when they are doing it violates legal requirements is irrelevant to whether they committed fraud, as long as their lawyers can point to some ambiguity in the legal requirements after the fact, and create a so-called “objectively reasonable” (but wrong) interpretation of those requirements that permits the questionable conduct.

If there is such a way to parse and recast the legal requirements to permit their conduct—even if it is not what they actually believed at the time—the alleged bad actor escapes liability unless a Court of Appeals or the regulatory agency has already issued specifically on-point guidance stating that the conduct is impermissible. This is a tall order given the infinite kinds of conduct that give rise to fraud, not to mention the timeline required to hear from a circuit court on appeal, the lengthy duration of federal agencies’ notice-and-comment rulemaking, and the ingenuity of well-paid Defense lawyers to create new and innovative interpretations of their clients’ conduct to avoid application of whatever guidance exists.

Last week, 33 state Attorneys General, Senator Chuck Grassley, the United States, Taxpayers Against Fraud Education Fund (TAFEF), and the National Whistleblower Center filed amicus briefs in the Supreme Court illustrating the legal and practical consequences of the Seventh Circuit’s decisions. The petitioners and amici illustrate how the Seventh Circuit’s interpretation of the False Claims Act’s knowledge requirement diverges from the statutory text, centuries-long understandings of fraud, and the practicalities of public-private contracting to provide necessary goods and services to taxpayers.

But legal and practical arguments aside, these cases turn upside down the notion of fair business play. In addition to taxpayers and government programs, other businesses seeking to do right by the government and the public are also victimized by their competitors’ fraudulent conduct. Those honest businesses are at a significant competitive disadvantage for playing by the rules when other businesses game the system. Under the upside-down logic of the Seventh Circuit’s decisions, rather than reward honesty, businesses are instead encouraged to ignore legal requirements, “put on blinders, take the public’s money, and ask questions (or seek forgiveness) later,” as noted by the state Attorneys General.

The implications of these holdings are especially pertinent for the products the government was buying in these cases – drugs for Medicare and Medicaid beneficiaries.  The government spends  billions of dollars on drugs and biologics every year.  According to the Government Accountability Office, both civilian and defense agencies spend more on drugs and biologics than any other product, totaling $48.4 billion in fiscal year 2021. Fraud has been an ongoing problem in the government’s efforts to provide these life-saving products to our most vulnerable citizens.

There have been numerous examples of successful anti-fraud enforcement against pharmaceutical companies engaging in drug pricing fraud over the years. But the makers of the drugs are not the only ones who engage in fraud when providing drugs to Medicare and Medicaid beneficiaries. Government contractors all along the supply chain have reaped excessive profits by bilking the government. For example, a supplier of pharmaceutical ingredients agreed to pay $22.05 million to resolve allegations that it falsely inflated its ingredients’ Average Wholesale Prices, causing pharmacies to receive greater government reimbursements for compound prescriptions based on the inflated ingredient prices. Then there was McKesson Corporation, a wholesaler, that agreed to return $190 million to resolve allegations it inflated drug prices in prescription drugs paid for by the government.  At the other end of the supply chain, drug retailer Walgreens agreed to pay $60 million to resolve allegations that it overbilled the government by failing to disclose the lower drug prices it offered to customers through a discount program, implicating the same “usual and customary” price regulations at issue before the Supreme Court.

On its face the Seventh Circuit’s holdings give the two drug retailers a “get-out-of-liability-free card” even though those companies believed or understood their conduct violated legal requirements when they made claims for payment to the government. But worse, these holdings, if affirmed by the Supreme Court, would normalize fraudulent conduct in every kind of product sold to the government. This is the exact opposite message to send to government contractors given the scope of fraud on the government that already exists.

Fraud is rampant in healthcare, including Medicare Advantage, defense, and other government spending. President Biden recently acknowledged “a historic degree of outright fraud” also exists in the COVID-19 relief programs meant to help small businesses and unemployed individuals. The Government Accountability Office estimated that federal agencies made an estimated $281 billion in improper payments, including fraudulent payments, in fiscal year 2021.  

If incentives and opportunities for fraud increase across the board, which is the green light the Seventh Circuit’s decision would give, anticompetitive and unfair business conduct will undermine the ability of honest businesses to provide goods at reasonable prices to the government. In a year when the federal government faces unprecedented debt and increasingly urgent alarms to avoid bankrupting the Medicare program, it is more urgent than ever that honest businesses that provide their products at appropriate prices are promoted and celebrated, and fraudsters don’t take more than their fair share because they can hire lawyers after-the-fact to help them get away with it.

The United States will embark on a new, unfortunate reality if the Supreme Court turns on its head the legal processes and accountability mechanisms designed to thwart and deter fraud on the government. The Seventh Circuit’s holdings recast False Claims Act enforcement as rewarding those who ignore legal requirements, avoid seeking clarification, and subjectively believe they are harming the government and the public. Allowing this to stand undermines the very ideals that shaped our country in the first place and made it the largest economy in the world.

Jaclyn Tayabji is a Fellow at Tycko & Zavareei LLP

[1] Safeway, 30 F.4th 649 (7th Cir. 2022); Supervalu, 9 F.4th 455 (7th Cir. 2021).