Justices will consider false claims in two pharmacy cases

The False Claims Act has for decades been the governments primary anti-fraud statute. The Department of Justice has used the law to recover more than $70 billion since 1986, largely in cases related to health care and defense contracting. Under the FCA, a defendant is liable for submitting a false claim to the government for payment if it acted knowingly, which the statute defines as acting with actual knowledge, deliberate ignorance, or reckless disregard. On Tuesday, the justices will hear arguments in a pair of cases on whether a defendant can be found to have acted knowingly if it believed its conduct was unlawful but its conduct represented an objectively reasonable interpretation of the relevant legal requirement.

Significantly, FCA cases frequently involve complex rules defendants frequently seek to challenge the governments position on the legal requirements at issue, and the government regularly points to evidence that defendants were aware they were breaking the rules. A ruling for the defendants here would eliminate an important weapon from the governments arsenal unless it could first show that the defendants alternative interpretation had already been foreclosed by authoritative guidance warning it away from the view it took.

The two consolidated cases U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway involve similar allegations. The plaintiffs are whistleblowers suing under the FCAs qui tam provision that is, on behalf of the government. They allege that SuperValu and Safeway, which operate hundreds of retail drug pharmacies nationwide, violated the FCA by overcharging Medicare, Medicaid, and the Federal Employee Health Benefits Program for prescription drugs. Under the rules of those programs, pharmacies cannot collect more from the government than the usual and customary price for a drug, which is defined as the cash price charged to the general public. The whistleblowers alleged that the pharmacies overbilled the government by millions of dollars when they began offering discounted prices to customers under a price-match program designed to compete with other pharmacies and a membership discount program) but did not adjust the usual and customary prices that they charge the government. The dispute arises from substantial evidence developed by the whistleblowers that SuperValu and Safeway executives believed at the time that they were obligated to reduce the usual and customary price and made efforts to hide the discounts they were giving under the programs from payors to avoid doing so.

In both cases, split panels of the 7th Circuit affirmed the district courts judgment for the pharmacies. They held that even if a defendant might suspect, believe, or intend to file a false claim, [] it cannot know that its claim is false if the requirements for that claim are unknown [because the legal requirement is ambiguous]. As a result, the 7th Circuit found the pharmacies subjective intent irrelevant a position the government, which filed a friend of the court brief supporting the whistleblowers, argues would allow defendants who intentionally submit false claims for payment to the government to escape FCA liability based on concededly incorrect post hoc justifications. The dissent in the 7th Circuit similarly warned that the majoritys framework would create[] a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.

At the Supreme Court, the pharmacies argue that the government must address any regulatory ambiguity through clear notice before any lawsuits are filed. Otherwise, they say, there is a real risk that defendants will be unfairly penalized with severe FCA penalties for failing to divine which of multiple reasonable interpretations [] would ultimately be declared the winner.

The companies urge the justices to follow the 7th Circuit in applying to the FCA context the Supreme Courts 2007 decision in Safeco Insurance Co. v. Burr, a Fair Credit Reporting Act case holding that an erroneous interpretation was not reckless as a matter of law because it was not objectively unreasonable when made.

The whistleblowers counter that the intent requirements of the FCRA and the FCA are different, with the FCAs definition intentionally designed to be broad. At a minimum, they ask the court to limit the objectively reasonable interpretation defense to cases in which the defendant was relying on the interpretation when it acted rather than it solely being an after-the-fact rationale.

Senator Charles Grassley (R-Iowa), the FCAs long-time champion,  filed a friend of the court brief in support of the whistleblowers in which he described the FCA as the governments most important anti-fraud statute. Grassley warned that if the court follows the 7th Circuits analysis, it will not be long before the centerpiece of the governments anti-fraud arsenal becomes unusable. Echoing arguments from the government and the whistleblowers regarding the FCAs intent, Grassley argues that the law was intentionally designed with a broad and comprehensive definition of scienter that is, knowledge of wrongdoing.  

Given the strong interest Grassley has shown in the dispute, a ruling in favor of the pharmacies could lead to attempts in Congress to again amend the FCA. A bipartisan group of senators led by Grassley have thus far unsuccessfully attempted to do so in the wake of the courts landmark 2016 decision in Universal Health Services v. United States ex rel. Escobar.

While much of the argument is likely to focus on the meaning of knowingly in the FCA and elsewhere, also central to the case are opposing views on the governments obligation to explicitly foreclose potential regulatory interpretations more favorable to entities submitting claims to the government for payment. The 7th Circuit held that only circuit court precedent or guidance from the relevant agency is sufficiently authoritative to give notice that a claim is false. If the justices are willing to adopt the Safeco-like objective reasonableness standard, a key question will become what guidance the court deems authoritative going forward. Noting those concerns, a group of 33 states argued in a friend of the court brief in support of the whistleblowers that the pharmacies position would leave states at risk of losing public funds to fraud if they do not issue guidance that is both authoritative and sufficiently specific to every billing scenario, while entities billing the government would be rewarded if they put on blinders, take the publics money, and ask questions (or seek forgiveness) later.

The justices decision in the case is likely to affect not only what evidence is admissible at trial, but also the scope of discovery. The 7th Circuits interpretation would make it easier for defendants to prevail at the pleading stage, foreclosing discovery into what companies or contractors believed and intended when the claims were submitted.

Notably, this is the second FCA case the court is considering this term. On Dec. 6, the justices heard argument in U.S. ex rel. Polansky v. Executive Health Resources, a case on the relationship between the government and whistleblowers, whose lawsuits have largely driven the governments enforcement efforts under the FCA. In that case, the government argued against the whistleblower and on the same side as the corporate defendant. On Tuesday, the government will return to its more typical role alongside the whistleblowers and against the corporate defendants.