Supreme Court Rules That Scienter in False Claims Act Cases Can Be Satisfied Solely Based on the Subjective Belief of Falsity

June 8, 2023

By: Stephen B. Stern

     In United States v. Schutte, 598 U.S. ____, 143 S. Ct. 1391 (2023), the United States Supreme Court weighed in on what is meant to “knowingly” submit a false claim to the United States Government under the False Claims Act (“FCA”), 31 U.S.C. § 3729, et seq., and concluded that it is sufficient to satisfy the scienter element if a claimant only demonstrates the defendant had a subjective belief of the falsity of the claim, in which case it is not necessary to demonstrate knowledge of falsity was objectively reasonable.  

     In Schutte, the plaintiffs brought two separate lawsuits against companies that operate hundreds of retail drug pharmacies across the country (collectively, the defendants in one case were referred to as “SuperValu” and, in the other case, they were referred to as “Safeway”), contending that the defendants overcharged and, thus, defrauded, the Medicare and Medicaid programs for years when they sought reimbursement for prescription drugs that were covered by the programs.

     The Supreme Court provided some background about the FCA and each of the programs at issue.  It noted that the Centers for Medicare and Medicaid Services (“CMS”) promulgated regulations that limit the amount the programs may reimburse companies for certain drugs.  In this regard, reimbursement is limited to the lower of two amounts, one of which is the healthcare provider’s “usual and customary charges [for the drug] to the general public.”  Most state Medicaid agencies as well as private plan sponsors (under Medicare Part D) similarly limit reimbursement typically to the “usual and customary” charge to the public.  In this case, the plaintiffs alleged the defendants did not disclose their “usual and customary” charges for drugs and reported higher prices when seeking reimbursement from the Government.

     According to the plaintiffs, in 2006, SuperValu and Safeway adopted “price-match programs” pursuant to which their pharmacies would match a competitor’s lower prices at a customer’s request.  SuperValu would automatically apply that lower “matched” price to refills and Safeway adopted a “membership” program which would give the discounted rate to its members.  According to the plaintiffs, in 2012, 44 of SuperValu’s 50 top selling prescription drugs were made at discounted prices and, in 2014, 88% of Safeway’s cash sales for its top 20 generic drugs were made at discounted rates.  The defendants, however, sought reimbursement from the programs at much higher prices according to the plaintiffs, and, in doing so, knowingly failed to disclose their usual and customary prices.  

     Besides the frequency with which the defendants applied their discounted rates, the plaintiffs contended there was substantial additional evidence that the defendants knowingly submitted false claims to the Government by not reporting the discounted rates as their “usual and customary” prices.  For example, both defendants received a 2006 notice from a pharmacy benefit manager that stated the “usual and customary” rates referred to discounted rates.  In addition, the plaintiffs contended that executives from each company expressed concerns about letting state agencies and pharmacy benefit managers discover their discounted prices.  In this regard, there were emails where SuperValu executives described their discount program as a “stealthy approach,” and they expressed concern for the “integrity” "of their U&C price” claims.  Similarly, a Safeway executive wrote that “[w]e may have some issues with U&C” and that “if you [match a] price offer, that becomes your usual and customary [price] for that day.”  Other documents showed that Safeway employees were instructed not to “put any of this in writing to stores because our official policy is we do not match.”      

     The Court noted that two essential elements of a claim under the FCA are (1) the falsity of the claim and (2) the defendant’s knowledge of the falsity of the claim.  In granting certiorari after the United States Court of Appeals for the Seventh Circuit affirmed the district court’s dismissal of the lawsuits at summary judgment, the Supreme Court noted that it was not reviewing the meaning of the phrase “ usual and customary,” whether the defendants’ claims were in fact inaccurate or otherwise false, whether the phrase “usual and customary” referred to the discounted prices, or whether there were any factual disputes as to what the defendants believed or did not believe regarding their submissions to the Government.  Although the Court specifically noted that it was not analyzing any of those issues, it did note elsewhere in its opinion that the phrase “usual and customary” on its face was “somewhat open to interpretation.”

     The Supreme Court concluded that the “FCA’s scienter element refers to respondents’ knowledge and subjective beliefs – not to what an objectively reasonable person may have known or believed.”  In addition, although the phrase “usual and customary” “may be ambiguous on its face, such facial ambiguity alone is not sufficient to preclude a finding that respondents knew their claims were false.”  

     In reaching this conclusion, the Court focused on the text of the FCA, which defines “knowingly” to encompass three mental states:  (1) “that the person ‘has actual knowledge of the information[;]’” (2) “that the person ‘acts in deliberate ignorance of the truth or falsity of the information[;]’” and (3) “that the person ‘acts in reckless disregard of the truth or falsity of the information.’”  The Court found that these mental states track the common law requirements for proving scienter in common law fraud cases, where, according to the Court, the “focus [is] primarily on what respondents thought and believed.”  The Court explained that “actual knowledge” refers to whether a person is “aware of” information, “deliberate ignorance” refers to 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,” and “reckless disregard” refers to defendants “who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.”  In short, according to the Court, each of these elements “depends on a subjective test” and “what the defendant knew when presenting the claim,” not post hoc interpretations.

     Again noting that the terms “usual and customary” may be vague on their face, the Court nevertheless concluded that such “ambiguity does not preclude respondents from having learned their correct meaning – or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.”  In this regard, the Court noted that the plaintiffs alleged that the defendants had received notice that the phrase “usual and customary” referred to their discounted prices and they even comprehended that meaning by trying to hide their discounted prices.  If this allegation was in fact true, the Court concluded the defendants “actually knew what the phrase meant; or perhaps respondents were aware of an unjustifiably high risk that the phrase referred to their discounted prices[,]” in which case the “respondents may have known that their claims were false.”  

     The Court quickly dispatched two additional arguments asserted by the defendants – one that concerned an interpretation of Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), which the Court found inapplicable because it interpreted language from a different statute, the Fair Credit Reporting Act (“FCRA”), and the other being that, at common law, misrepresentations of law are not actionable, a principle the Court assumed without deciding was incorporated into the FCA, but which had significant limitations and which did not apply in the context of the instant case.  

     In ultimately concluding that it was enough for the plaintiffs to demonstrate scienter by showing the defendants “believed their claims were not accurate,” the Court also noted that “it does not matter whether some other, objectively reasonable interpretation of ‘usual and customary’ would point to respondents’ higher prices.”  The Court then vacated the judgments below and remanded the cases to the Seventh Circuit for further proceedings consistent with its decision.

     The significance of the Supreme Court’s decision in Schutte is unclear at this point.  On the one hand, the Court’s decision arguably makes it more difficult to prevail on FCA claims by holding proof of scienter to be a subjective element, and it is often difficult to prove what a defendant was actually thinking at the time of the alleged misconduct (although, in this case, there seemed to be substantial facts that demonstrated what the defendants knew and were thinking).  At the same time, it is not entirely clear that the focus on subjectivity precludes proving scienter with objectively reasonable evidence.  Even though the Court commented that proof of scienter is “not . . . what an objectively reasonable person may have known or believed[,]” the Court potentially limited the scope of its ruling by stating, “[i]f petitioners can make that showing [meaning subjective knowledge of falsity], then it does not matter whether some other, objectively reasonable interpretation” can be shown.  In other words, a plaintiff does not need to show both subjective and objective knowledge of falsity, because “it is enough” if only subjective knowledge of falsity is proven.  By stating "it is enough" to prove scienter with subjective knowledge of falsity, however, the Court arguably left open the possibility that a plaintiff may still have the opportunity to satisfy the scienter element when bringing a FCA claim if it proves scienter only with objectively reasonable evidence of the defendant’s knowledge of falsity.  This issue likely will play out in future FCA cases.