False Claims Act: Businesses Should Consider How to Document Their Interpretations

On April 18, 2023, the U.S. Supreme Court heard oral argument in the consolidated cases of U.S. ex rel. Schutte v. SuperValu and U.S. ex rel. Proctor v. Safeway Inc. The Court was asked to review the scienter standard for False Claims Act (FCA) cases. The justices’ commentary during oral argument, discussed below, suggests that even in the face of an objectively reasonable interpretation of the applicable law, and the lack of any contrary authoritative guidance to that interpretation, a party’s subjective understanding of its conduct may still matter.

Background on the cases at issue

In U.S. ex rel. Schutte v. SuperValu, the relator alleged that the defendants, a group of retail pharmacies, charged Medicare Part D and Medicaid programs their retail cash prices as their “usual and customary” prices for drugs rather than the prices offered through competitor price-match discount programs. The U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of the complaint, holding that the defendants’ interpretation of the law at issue was objectively reasonable, without any contrary authoritative guidance, so the defendants could not be shown to have acted “knowingly” as required under the FCA.

In the nearly identical case of U.S. ex rel. Proctor v. Safeway Inc., the Seventh Circuit came to the same conclusion as it did in SuperValu and further explained when guidance is “authoritative.” In order for guidance to be “authoritative,” it must “come from a source with authority to interpret the relevant text.” Accordingly, the Seventh Circuit held that a single footnote in a lengthy manual that can be revised at any time is not authoritative guidance.

In rendering these decisions, the Seventh Circuit joined the Third, Eighth, and Ninth Circuits in applying the Supreme Court’s reasoning in the Safeco Ins. Co. v. Burr decision, a case involving the Fair Credit Reporting Act. There, the Supreme Court held that a defendant who acts under an incorrect interpretation of a relevant statute or regulation does not act with the requisite “reckless disregard” scienter if the interpretation is objectively reasonable and no authoritative guidance cautioned the defendant against it. A defendant might “suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements of the claim are unknown.” As a result, it determined that a defendant’s subjective intent is “irrelevant.”

In an action consolidating SuperValu and Safeway, the petitioners asked the Supreme Court to answer “whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the [FCA].”