U.S. Supreme Court Unanimously Rules on False Claims Act Subjective vs. Objective Standard
- The U.S. Supreme Court recently ruled in U.S. ex rel. Schutte v. SuperValu Inc. that in terms of the False Claims Act (FCA), a defendant's own subjective belief is relevant to scienter and not what an "objectively reasonable" person may have concluded.
- A key SuperValu takeaway is that courts should look to an FCA defendant's subjective belief only at the time claims are submitted, not "post hoc interpretations that might have rendered their claims accurate."
- It is believed that this decision likely will impair the efforts of future defendants to obtain early dismissal of FCA cases on the basis of scienter.
The U.S. Supreme Court on June 1, 2023, unanimously settled a pivotal dispute over the subjective versus objective standard for scienter under the False Claims Act (FCA). In this case, U.S. ex rel. Schutte v. SuperValu Inc., the Supreme Court relied heavily on the plain text and common law roots of the FCA in holding that a defendant's own subjective belief is relevant to scienter, not what an "objectively reasonable" person may have concluded. Additional details are provided in a previous Holland & Knight blog.
The primary takeaway from the recent SuperValu decision is that courts should look to an FCA defendant's subjective belief only "at the time they submitted their claims," not "post hoc interpretations that might have rendered their claims accurate." Subsequently learned facts or analysis may be insufficient to save a then-subjectively unreasonable belief as to the falsity of a claim.
Writing for a unanimous court, Justice Clarence Thomas narrowly summarized the question presented as "whether [defendants] could have the scienter required by the FCA if they correctly understood [the relevant legal] standard and thought that their claims were inaccurate." (emphasis added). In answering that question in the affirmative, he summarized the key inquiry as "whether the defendant knew the claim was false. Thus, if [defendants] correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false." (emphasis added).
The case before the Supreme Court was consolidated from two lower court decisions involving allegations that pharmacies operated by SuperValu and Safeway defrauded federal healthcare programs – Medicare and Medicaid – by offering discounted prescription drugs to customers without properly reporting those discounted prices when reporting their "usual and customary" prices. The pharmacies implemented programs to match lower prescription prices of competitors but did not report the resulting prices under these programs in calculating their "usual and customary" charges.
The case involved interpretation of the "reckless disregard" standard in the FCA. The decision notably defines this standard as "captur[ing] defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway." Given the connection between the falsity of a claim and the ultimate knowledge of that falsity, this may be viewed as an expansion of the reckless disregard standard, which often occurs when legal requirements are ambiguous.
On this point, the court further noted that facial ambiguity in and of itself is not sufficient to preclude a finding of scienter. In the underlying cases that were ultimately consolidated before the Supreme Court, the FCA defendants received notice that their interpretation of a key term – "usual and customary" charge – was incorrect. And, according to the relators, the defendants "then tried to hide their discounted prices" as they did not comport with the definition of "usual and customary" as it was explained to them. Therefore, as the court noted, "then perhaps [the Defendants] actually knew what the phrase meant; or perhaps [the Defendants] were aware of an unjustifiably high risk that the phrase referred to their discounted prices. And, if that is true, then [the Defendants] may have known that their claims were false." In this way, the court found the fact that the term "usual and customary" was ambiguous on its face "does not by itself preclude a finding of scienter under the FCA."
This decision is likely to impair defendants' efforts to obtain early dismissal of FCA cases on the basis of scienter. This could result in additional discovery as to an FCA defendant's subjective beliefs at the time claims were submitted, which is necessarily a fact- and document-intensive endeavor. It also may place a high burden on defendants to demonstrate they did not take unjustifiable risk in submitting claims.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.