United States ex rel. Schutte v. Supervalu Inc.

Supreme Court of the United States
598 U. S. ____ (2023) (2023)

ELI5:

Rule of Law:

Under the False Claims Act (FCA), a defendant's subjective belief about the falsity of their claim is sufficient to establish the scienter element, regardless of whether an objectively reasonable person might have interpreted the relevant law or regulation differently.

Facts:

Federal regulations for Medicare and Medicaid often limit prescription drug reimbursements to a pharmacy's 'usual and customary' charge to the public.
To compete with a competitor's low prices, retail pharmacies SuperValu and Safeway created discount programs, such as price-matching and membership clubs, which offered significantly lower drug prices to cash-paying customers.
For many drugs, the majority of cash sales at these pharmacies were eventually made at these discounted prices.
When seeking reimbursement from Medicare and Medicaid, SuperValu and Safeway reported their higher, non-discounted retail prices as their 'usual and customary' prices, not the lower prices offered through their discount programs.
SuperValu and Safeway had received notices from pharmacy benefit managers and state Medicaid agencies indicating that 'usual and customary' prices included their discounted prices.
Internal communications from both companies showed concern that their discount programs could cause issues with their 'usual and customary' price reporting and revealed efforts to conceal the discount programs from regulators.

Procedural Posture:

Petitioners, acting as whistleblowers, filed two separate 'qui tam' lawsuits under the False Claims Act against SuperValu and Safeway in federal district court.
In the SuperValu case, the district court found the claims were factually false but granted summary judgment to SuperValu, holding that the company could not have acted 'knowingly' due to ambiguity in the term 'usual and customary.'
The district court subsequently granted summary judgment to Safeway on the same basis.
Petitioners appealed both decisions to the U.S. Court of Appeals for the Seventh Circuit.
The Seventh Circuit affirmed summary judgment in both cases, holding that a defendant cannot act 'knowingly' if their conduct is consistent with an objectively reasonable interpretation of the relevant law, regardless of their subjective belief.
The U.S. Supreme Court granted certiorari to review the Seventh Circuit's ruling.

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Issue:

Does the scienter element of the False Claims Act, which requires a defendant to have 'knowingly' submitted a false claim, depend on the defendant's subjective beliefs, or can a defendant defeat liability by showing that their interpretation of the law was objectively reasonable, regardless of what they actually believed?

Opinions:

Majority - Thomas, J.

Yes, the False Claims Act’s scienter element refers to a defendant’s knowledge and subjective beliefs, not what an objectively reasonable person might have believed. The Court reasoned that the FCA's text, which defines 'knowingly' as 'actual knowledge,' 'deliberate ignorance,' or 'reckless disregard,' focuses on the defendant's mental state. This definition tracks the common law of fraud, which also employs a subjective test based on the defendant's culpable state of mind. The Court rejected the argument that ambiguity in a legal term like 'usual and customary' automatically precludes a finding of scienter, explaining that a defendant can still be aware of the term's correct meaning or a substantial risk of its meaning, especially if they have been put on notice. The Court distinguished the precedent of Safeco Ins. Co. of America v. Burr, noting it interpreted a different statute with a different mens rea standard and did not create a purely objective safe harbor that would ignore a defendant's actual knowledge. Finally, the Court dismissed the idea that these were non-actionable misrepresentations of law, concluding that by reporting a price, the pharmacies were implicitly asserting facts about their pricing, not just offering a legal opinion.

Analysis:

This decision resolves a circuit split by clarifying that the FCA's scienter standard is subjective, focusing on the defendant's actual beliefs at the time a claim is submitted. It rejects the 'objectively reasonable' defense that allowed defendants to escape liability by positing a plausible, post-hoc interpretation of an ambiguous regulation, even if they internally believed their conduct was fraudulent. This ruling strengthens the FCA as an anti-fraud tool by making it easier for plaintiffs to survive summary judgment, as they can now proceed by introducing evidence of a defendant's subjective awareness of wrongdoing. The case will likely have a significant impact in highly regulated industries where companies might otherwise attempt to exploit legal ambiguities.

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