Supreme Court’s Decision in SuperValu May Benefit Defendants in False Claims Act Cases

Last month in United States ex rel. Schutte, et al. v. SuperValu Inc. et al, the Supreme Court unanimously held (with Justice Thomas writing the opinion) that the False Claims Act’s (FCA) scienter element refers to a defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed. Refer to our previous blog post for more information on this decision.

Interestingly, in issuing that opinion, the Court may have opened the door to what will ultimately become intense disagreement between the Government and relators on the one hand and FCA defendants on the other as to the meaning of the term “knowingly” as used in the FCA and, in particular, the term “reckless disregard” as it relates to “knowingly.” Determinations on this meaning may have subsequent important implications in FCA litigation.

The FCA imposes liability on those who “knowingly” present a false or fraudulent claim for payment or approval with respect to an item or service under the Medicare or Medicaid Programs.

The SuperValu Case

In SuperValu, a whistleblower/relator sued pharmacies under the FCA alleging that they knowingly presented false claims when they claimed their non-discounted prices were their “usual and customary charges” as permitted by Medicare and Medicaid, rather than the discounted prices they often charged.

The defendants argued that notwithstanding that, they may have, in fact, believed the non-discounted charges were not their “usual and customary” charges, they did not act “knowingly” because their actions were consistent with an objectively reasonable interpretation of that phrase.

The Court rejected that argument, concluding instead that for purposes of determining whether a person acted “knowingly,” what matters is the person’s subjective intent.

In his opinion, Justice Thomas explains that the FCA defines the term “knowingly” as encompassing 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. He writes: “[I]n short, either actual knowledge, deliberate ignorance, or recklessness will suffice.”

At the end of the opinion, having concluded that it is subjective intent that ultimately matters, he states that the petitioners may establish scienter by showing that respondents either:

  • Actually knew that their reported prices were not their “usual and customary” prices when they reported those prices (e., actual knowledge)
  • 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 (e., deliberate ignorance), or
  • Were aware of such a substantial and unjustifiable risk but submitted the claims anyway (e., reckless disregard)
Brewing Disagreement

In the aftermath of the decision in SuperValu, where the disagreement is now likely to center on the question of whether the Court has, as a result of SuperValu, defined “reckless disregard,” i.e., recklessness for purposes of the FCA’s “knowingly” requirement as requiring that the relator, or as applicable the Government, establish that the defendant was aware of a substantial and unjustifiable risk that a claim would be false.

The significance of this follows from the fact that, in many FCA cases, it is difficult to establish that a defendant acted with actual knowledge or deliberate ignorance and, accordingly, liability often turns on whether there was recklessness on the part of the defendant.

The Government clearly does not want to be locked in to what it views as too restrictive a definition of recklessness. Defendants, on the other hand, are likely to grab hold of that definition and seek to place the burden on the Government to establish that there was awareness of such a substantial and unjustifiable risk, recognizing also that those terms themselves are open to interpretation.

We are already seeing the battleground taking shape.

Most recently, in a case involving allegations that Cigna submitted false and invalid patient diagnosis codes to artificially inflate the payments it received for providing insurance coverage to its Medicare Advantage plan members, U.S. ex. rel. Cutler v. Cigna, Cigna, responding to a Notice of Supplemental Authority filed by the Government relating to the implications of SuperValu, asserted that the Government’s legal falsity claims failed because the Government failed to plead facts that SuperValu holds are essential — namely, facts showing that Cigna either actually knew or consciously disregarded a “substantial and unjustifiable risk” that its claims were false.

Similarly, in a case involving price reporting rules and rebates to the Medicaid program, U.S. ex rel. Miller et al v. Reckitt Benckiser Group, the defendant states that that the court in SuperValu held that, where a defendant reasonably interprets an ambiguous statute, the Government or a relator must show that the defendant consciously disregarded a substantial and unjustifiable risk that its claims were false.

Not surprisingly, the Government has immediately and vigorously taken exception to these characterizations of the recklessness standard as articulated in SuperValu. In Benckiser, a case in which the Government did not intervene, it nonetheless recently filed a Statement of Interest relating to the SuperValu decision.

With particular reference to the defendant’s assertion that the Government, or the relator as applicable, must show that the defendant consciously disregarded a substantial and unjustifiable risk that its claims were false for purposes of establishing recklessness, the Government asserted that the Supreme Court did not limit the type of evidence that can be used to prove that a defendant acted with reckless disregard or impose a heightened standard for evaluating such evidence.

[T]he Court certainly did not establish a new “three-part test” for reckless disregard. Instead, the Court simply stated the “straightforward” point 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.” … By summarizing each of the three elements in the FCA definition of “knowledge” — actual knowledge, deliberate ignorance, and reckless disregard — the Court clearly did not intend to place new limitations on them.

The Cigna and Benckiser cases may ultimately be decided on the question of falsity as presented in both cases and not own the question of scienter. Notwithstanding that, the defendants’ statements in those cases regarding scienter under SuperValu, and the Government’s quick and emphatic response, makes it quite clear that battle lines are being drawn. How this now plays out in these and future cases will undoubtedly have important ramifications for the prosecution and defense of FCA cases going forward.