The case involves government-reimbursed programs for prescription drugs. State Medicaid programs and Medicare Part D each reimburse for covered drugs in part based on the “usual and customary” price pharmacies charge for a drug. The Court recognized that the phrase “usual and customary” could be interpreted in multiple ways.³ It could refer to a pharmacy’s undiscounted retail prices, or if a large enough group of customers receive a discount, it could refer to the discounted prices.

In Supervalu and Safeway, the defendants allegedly submitted claims reflecting their pharmacies’ higher retail prices as their “usual and customary” price, even though there was some evidence suggesting that some of the defendants’ employees thought those stated rates were not the “usual and customary” price and that the discounted price should have been charged instead.⁴ The defendants, and numerous amici including the U.S. Chamber of Commerce and the American Hospital Association, argued that the FCA’s knowledge requirement presents a partially objective standard, at least when the alleged falsity concerns a facially ambiguous statute or regulation. The defendants asserted that because their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary,” relators could not satisfy the FCA’s scienter standard, which entitled the pharmacies to summary judgment.

The Seventh Circuit agreed. It held that defendants do not “knowingly” submit a false or fraudulent claim if their conduct is consistent with an ”objectively reasonable” interpretation of an ambiguous statute.⁵ The court relied in part on the Supreme Court’s decision in Safeco Ins. Co of America v. Burr, 551 U.S. 47 (2007), which the Seventh Circuit understood to incorporate an “objectively unreasonable” standard into the Fair Credit Reporting Act’s term “willfully.”⁶ The Supreme Court granted certiorari to resolve whether the FCA’s “knowingly” requirement is satisfied where a claim is false and the claimant actually thought their claim was false, or – as the Seventh Circuit held – whether the FCA’s scienter requirement cannot be met where a reasonable person could have believed the claim was accurate.

Holding

Justice Thomas, writing for the unanimous Court, rejected the Seventh Circuit’s interpretation of the FCA’s “knowingly” requirement for two primary reasons: (1) by incorporating common-law principles, the FCA’s plain text requires that a defendant’s knowledge turns on the defendant’s subjective beliefs; and (2) the objective ambiguity of the term “usual and customary” is insufficient to preclude the possibility that defendants knew their interpretation was wrong at the time they presented the claims at issue.

The Court reaffirmed that the FCA’s definition of “knowingly” is rooted in common-law fraud scienter requirements.⁷ Tracing the history of the FCA to the time of its enactment during the Civil War, and reasoning that the FCA’s definition incorporates the prevailing common-law standard of scienter for fraud, the Court concluded that FCA’s scienter requirement must also focus on the actor’s subjective beliefs. The Supreme Court rejected the Seventh Circuit’s reliance on Safeco’s interpretation of the term “willfully,” holding that interpretation was tied to a different statute and different standard of scienter.⁸

Next, the Court rejected the pharmacies’ argument that the phrase “usual and customary” was so ambiguous that they could not have definitively known their interpretation was incorrect.⁹ The Court emphasized that “[e]ven if the phrase is ambiguous, respondents could have learned its correct meaning.”¹⁰ The Court held that “it might have been a forgivable mistake if respondents had honestly read the phrase as referring to retail prices, not discounted prices.”¹¹ But, the Court highlighted that
“the Seventh Circuit did not hold that respondents made an honest mistake; it held that, because other people might make an honest mistake, defendants’ subjective beliefs became irrelevant to their scienter.”¹²

The Court held that when a claimant becomes subjectively “aware of a substantial likelihood” of an ambiguous term’s “correct meaning,” and then disregards that meaning, it knowingly submits a false claim.¹³ To illustrate, the Court offered an example about a “hypothetical driver who sees a road sign that says ‘Drive Only Reasonable Speeds.’"¹⁴ That driver, the Court went on, “might have no way of knowing what speeds are reasonable and what speeds are too fast.” But context matters: if a police officer previously told the driver that speeds over 50 mph are unreasonable and that driver sees cars on the road going at 48 mph, then “he might be aware of an unjustifiably high risk that anything over 50 mph is unreasonable.”¹⁵ In short, the Court held that the “facial ambiguity” of a given phrase “does not by itself preclude a finding of scienter under the FCA.”¹⁶ The FCA’s scienter standard “can be satisfied by a defendant’s subjective awareness of the claim’s falsity or an unjustifiable risk of such falsity.”¹⁷

Implications

The decision is no doubt disappointing to the defendants in this particular case, but it does not represent a significant departure from the prevailing scienter standard applied by most courts. The defendants have lost access to a possible new SafeCo defense, but the law remains similar to a pre-SafeCo landscape.

The decision does, however, leave many questions unanswered. For starters, future litigants will almost surely argue over what constitutes an “unjustifiable risk” when interpreting ambiguous regulations. For example, if a claimant believes that there is a 50 percent chance that its interpretation is correct, is that enough to show that the claimant’s interpretation is justifiable? What if the claimant believes there is a 70 percent chance its interpretation is correct, leaving a 30 percent risk that the claimant’s interpretation is wrong? Is that enough to insulate the claimant from liability? These kind of interpretive efforts are far from theoretical, particularly in the area of complex health care regulations and guidance, which are often fraught with ambiguity for providers and manufacturers.

Here, the Court has held that claimants may not knowingly take “substantial” or “unjustifiable” risks that their interpretation of an ambiguous provision is incorrect, but it did not take the opportunity to offer any guideposts for deciding how much risk is acceptable.

Moreover, measuring the risk of an incorrect interpretation is rarely a perfect calculation. Applicable agency guidance will not always be as clear as the signs were for the Court’s hypothetical automobile driver, and the opportunity to seek clarifying guidance from an authoritative source rarely exists for participants in many government programs. Indeed, the Court provided no direction on the open – and recurring – question of how to treat agency silence in the face of evident confusion in the regulated community.

The opinion also does not address what quantum of proof of scienter is required to overcome a motion to dismiss or motion for summary judgment. Of course, at summary judgment, relators are required to present evidence that the defendants knew their claims were false, but is one person’s doubt within a company enough to imply that the company subjectively believed their actions to be false? The Court’s decision leaves unclear whether a modicum of evidence is sufficient to survive such motions, or if the relator has a more meaningful burden. In the future, relators will undoubtedly argue that the burden of proof of a “knowing” violation is satisfied whenever a defendant did not seek formal guidance before adopting its interpretation of an ambiguous provision.

Even more troubling, this subjective-only standard may discourage open dialogue within companies out of fear that internal disagreement about how to proceed could be sufficient to show a subjective belief that a particular practice is false. Relatedly, Schutte’s implications may also extend to – and thereby undermine – the protections afforded by the attorney-client privilege. The Court’s decision makes it more important for companies to memorialize contemporaneous justification for their interpretation of ambiguous regulations, sometimes with the help of outside counsel. As respondents noted in oral argument, companies could be forced to waive privilege in order to “show their work” that they believed their interpretation was correct.

Finally, the Court’s increasingly skeptical views toward Chevron deference may create even more opportunities for future plaintiffs. Currently, companies may rely on an agency’s interpretation of ambiguous statutes and regulations. But if the Court discards Chevron, such interpretations would carry little, if any, independent weight. That could leave the door open for relators to argue that a company had knowledge that its interpretation of an ambiguous provision was false even if that interpretation follows express agency guidance. 

The post-SuperValu landscape will provide clarity on these issues as other courts interpret the Supreme Court’s opinion. The Hogan Lovells team will continue to provide comprehensive analysis as the law evolves.

Authored by: Thomas Beimers, Jonathan Diesenhaus, Jessica Ellsworth. Gejaa Gobena, Michael Theis, Matthew Higgins, and Clara Troyer.