by Kayla Conti

On June 1, 2023, the Supreme Court issued a unanimous decision[1] in the consolidated case of U.S. ex rel. Schutte v. SuperValu, Inc. (“SuperValu”)[2] and U.S. ex rel. Thomas Proctor v. Safeway, Inc. (“Safeway”),[3] holding that subjective intent is relevant for determining whether a defendant acted “knowingly” under the False Claims Act. The Supreme Court reversed the Seventh Circuit’s decisions in favor of Petitioners, which effectively preserves the False Claims Act as a major tool for both prosecuting and deterring fraud. While whistleblowers, taxpayers, and anti-fraud advocates have ample reason to rejoice, the decision left more to be desired by the Department of Justice and many entities who submit claims for payment to federal programs.

Context

In short, the case concerned how the word “knowingly” should be interpreted under the scienter prong of the False Claims Act. Defendants are liable under the False Claims Act if they knowingly present a false or fraudulent claim to the government for payment or approval.[4] In SuperValu, the Court of Appeals for the Seventh Circuit found that defendants had submitted false claims because they reported their retail prices as their usual and customary prices (“U&C prices”) instead of their discounted prices, essentially overcharging Medicare and Medicaid for reimbursements on certain prescriptions. However, the Seventh Circuit ultimately held that defendants were not liable under the False Claims Act because they did not submit these fraudulent claims “knowingly.”

The Seventh Circuit reasoned that the CMS regulations were ambiguous, and the defendant’s interpretation was objectively reasonable in light of the purported lack of guidance available. On the same grounds, the Seventh Circuit also declined to find defendants liable in Safeway. These decisions were based on Safeco, a 2007 Supreme Court case which focused on objective intent in the context of the Fair Credit Reporting Act.[5] The Seventh Circuit determined that, in line with Safeco, only the defendants’ objective intent was relevant for finding whether they acted knowingly. The appellate court only evaluated the defendants’ objective intent—what an objectively reasonable person could have believed—and found that defendants’ subjective intent—what defendants actually believed at the time they submitted the false claims—was irrelevant.

The Seventh Circuit’s decisions in these two cases were extremely alarming to anti-fraud advocates because Petitioners in both cases had submitted evidence demonstrating that defendants SuperValu and Safeway had properly interpreted the regulations governing U&C prices, yet intentionally took stealthy approaches to keep overcharging the government and evade liability under the False Claims Act. If the Supreme Court had affirmed these decisions, it would have set a profoundly impactful precedent that subjective intent is not relevant under the False Claims Act. In an amicus brief filed in the case, Senator Chuck Grassley (R-IA), who championed 1986 amendments modernizing the False Claims Act, called the Seventh Circuit decision in SuperValu a “radical departure from the statute” and noted that “[i]f it is not set right, it will not be long before the centerpiece of the government’s anti-fraud arsenal becomes unusable.”[6]

Oral Arguments and the Question Before the Court

Petitioners, Respondents, and the United States (represented by DOJ’s Deputy Solicitor General, supporting Petitioners as amicus curiae) were allotted time to make oral arguments before the Supreme Court on April 18, 2023. Based upon the Justices’ lines of questioning, it appeared the Supreme Court had a clear understanding of the False Claims Act and did not need much convincing to find that subjective intent is relevant.     

During oral arguments, there was some contention between the “actual case” and the “hard case.” The “actual case” was the narrow question—whether subjective intent is relevant for determining if a defendant acted “knowingly” under the False Claims Act. The “hard case” referred to arguments made by the United States and Respondents that included additional, more complex facts that were not actually in front of the Supreme Court to decide.

Respondents and the United States explicitly urged the Supreme Court to go beyond the question of whether to evaluate subjective intent. For example, they asked the Justices to address liability in scenarios where defendants contemplated several possible interpretations of ambiguous regulations with varying degrees of certainty about their correctness. Although a few Justices engaged in the hypothetical questions, the Supreme Court as a whole seemed to have a firm understanding that the case in front of them simply required an answer regarding the relevance of subjective intent. On the basis of subjective intent alone, the Justices demonstrated a shared understanding that the False Claims Act is rooted in the common law of fraud, which contemplates subjective intent.

The Decision

The Supreme Court reversed the Seventh Circuit’s decisions in favor of Petitioners, holding that subjective intent is relevant for evaluating a defendant’s knowledge under the False Claims Act. Justice Thomas delivered the opinion for the unanimous Court.

Overall, the opinion was succinct and well-written, leaving no wiggle-room for future similarly situated defendants to claim their subjective intent should not be considered under the False Claims Act:

Based on the FCA’s statutory text and its common-law roots, the answer to the question presented is straightforward: The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed. And, even though 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^.[7]

On behalf of the Court, Justice Thomas addressed the three arguments put forward by Respondents. First, Respondents contended that they could not have “known” what the phrase “usual and customary” meant because it was inherently ambiguous, and, at most, they could only take a correct guess.[8] The Court disagreed, responding that “[a]lthough the terms, in isolation, may have been somewhat ambiguous, that 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.”[9]

Second, Respondents urged the Court to apply the Safeco decision as the Seventh Circuit had.[10] The Supreme Court was not convinced and emphasized that Safeco interpreted a different statute with a mens rea standard that was distinctly different from that of the False Claims Act.[11] Justice Thomas also clarified that the decision in Safeco “did not purport to set forth the purely objective safe harbor that respondents invoke” and reiterated the Supreme Court’s holding in Halo Electronics[12] to find that “we do not look to legal interpretations that respondents did not believe or have reason to believe at the time they submitted their claims.”[13]

Finally, Respondents argued that “[a]t common law, misrepresentations of law are not actionable; only misrepresentations of fact are. Because the FCA incorporates the common law of fraud, it embodies that same limitation.”[14] Respondents asserted that “their reports were not false because of any misrepresentation of fact; to the contrary, their claims would have been false only because of their view of the law.”[15] While this argument was harder to follow, Justice Thomas contrasted it with a simple example of a person who could be found liable for “falsely stating that ‘the plumbing work that I did on your house complied with state law.’ … This is because such a statement says something about both the correct meaning of building codes and the facts about the home’s construction.”[16]

Justice Thomas concluded the opinion by summarizing the three ways Petitioners could establish scienter in this case under the False Claims Act: (1) by showing that Respondents “actually knew that their reported prices were not their ‘usual and customary’ prices when they reported those prices,” (2) by showing that Respondents “were aware of a substantial risk that their higher, retail prices were not their ‘usual and customary’ prices and intentionally avoided learning whether their reports were accurate,” or (3) by showing that Respondents “were aware of such a substantial and unjustifiable risk but submitted the claims anyway.”[17] These three ways mirror the False Claims Act’s three general definitions of what constitutes “knowledge.”[18] Justice Thomas further emphasized that Petitioners would establish scienter if they can make any of those three showings, and it will not matter “whether some other, objectively reasonable interpretation of ‘usual and customary’ would point to respondents’ higher prices. For scienter, it is enough if respondents believed that their claims were not accurate.”[19]

This decision vacates the Seventh Circuit’s decisions in SuperValu and Safeway. These cases have been remanded to the Seventh Circuit for further proceedings that are consistent with the Supreme Court’s decision.[20]

Takeaways

The Supreme Court’s unanimous decision is a massive victory not only for Petitioners, but also for the drafters and enforcers of the False Claims Act, for whistleblowers who drive the Act’s success, and for taxpayers whose hard-earned money is put at risk by fraudsters. The DOJ’s annual statistics on money recovered under the False Claims Act consistently strengthen the belief that the Act is the government’s most powerful tool for combatting fraud and waste.

Moving forward, when courts evaluate whether a company “knowingly” submitted a false claim under the Act, they will have to evaluate the company’s subjective intent pursuant to this precedent. This forecloses a major loophole that had been available to companies seeking to take advantage of ambiguous regulations and escape liability under the False Claims Act. A company that intends to commit fraud can be held liable for doing so even if they are able to claim that they acted under an objectively reasonable interpretation of an ambiguous regulation in the absence of authoritative guidance.

The implications of this case will be seen most prevalently in the healthcare industry. While the False Claims Act reaches every industry where government programs can be defrauded, approximately 80% of money recovered under the False Claims Act is from matters involving the healthcare industry.[21]

Respondents, their supporters, and the DOJ may be disappointed that the Supreme Court did not rule beyond the narrow question of subjective intent. Both parties had varying hopes for the Court to clarify things like (1) the meaning of the phrase “usual and customary,” (2) whether any of Respondents’ claims were, in fact, inaccurate or otherwise false, or (3) whether Respondents actually thought the phrase “usual and customary” referred to their discounted prices.[22] The DOJ and companies who submit claims for payment to federal programs will likely continue to grapple with similar questions stemming from compliance with ambiguous regulations.

Overall, however, the Supreme Court’s unanimous decision should preserve the DOJ’s ability to hold companies accountable for defrauding the government under the False Claims Act. Companies will no longer be able to hide their true intent to defraud the government behind a façade of what could be considered objectively reasonable.

Footnotes

[1] U.S. ex rel. Schutte v. SuperValu, Inc., 598 U.S. ___ (2023), https://www.supremecourt.gov/opinions/22pdf/21-1326_6jfl.pdf.

[2] U.S. ex rel. Schutte v. SuperValu, Inc., 9 F.4th 455 (7th Cir. 2021).

[3] U.S. ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022).

[4] 31 U.S.C. § 3729(a)(1)(A).

[5] Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007).

[6] Brief for Senator Charles E. Grassley as Amicus Curiae Supporting Petitioners at 3, U.S. ex rel. Schutte v. SuperValu, Inc., 598 U.S. ___ (2023) (Nos. 21-1326 and 22-111), https://www.grassley.senate.gov/imo/media/doc/false_claims_act_grassley_amicus_brief.pdf. 

[7] SuperValu, 598 U.S. ___ at 8.

[8] Id. at 12.

[9] Id.

[10] Id. at 13.

[11] Id.

[12] Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93, 106 (2016).

[13] SuperValu, 598 U.S. ___ at 14.

[14] Id. at 15.

[15] Id.

[16] Id. at 15-16 (citing Sorenson v. Gardner, 215 Ore. 255, 261, 334 P. 2d 471, 474 (1959)).

[17] Id. at 16 (citing 31 U.S.C. § 3729(b)(1)(A)).

[18] § 3729(b)(1)(A).

[19] SuperValu, 598 U.S. ___ at 16.

[20] Id. at 17.

[21] Press Release, Dep’t of Just. Off. of Pub. Affs., “False Claims Act Settlements and Judgments Exceed $2 Billion in Fiscal Year 2022” (Feb. 7, 2023), https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-2-billion-fiscal-year-2022. 

[22] SuperValu, 598 U.S. ___ at 8.

Kayla Conti is a Public Interest Law Fellow at Kohn, Kohn & Colapinto.

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