Important SCOTUS Decision for Providers On False Claims Act Cases: When Do You Know Submitting Claims Is Wrong?

Under federal law, what must the state of mind of a health care provider be when submitting a false claim to the government in order to impose False Claims Act (FCA) liability on that provider? In other words, what is meant by the term “knowingly” in the statute?

The FCA is a federal statute that sets out the civil and criminal penalties against those “who knowingly submits, or cause to submit, false claims to the government.” (31 U.S.C. §3729-3733). Additionally, the FCA allows private parties (whistleblowers) to bring lawsuits known as qui tam actions in the name of the government against anyone who defrauds the government. Until recently, the “knowingly” requirement was interpreted as an objective standard, where the courts analyzed what a reasonably objective person in the position of the defendant believed when the claims were submitted.

However, on June 1^st, 2023, the United States Supreme Court unanimously held in United States ex rel. Schutte et al., v. Supervalu Inc. et. al., and United States ex. rel. Proctor v. Safeway Inc., that the term “knowingly” referred to a defendant’s individual, subjective belief at the time of the alleged false claim and not an objective reasonable person’s belief. The Supreme Court held that a defendant’s subjective belief is always relevant to the FCA’s “knowingly” requirement, regardless of what an objectively reasonable person may have believed.

Whistleblowers brought an action against Safeway and SuperValu Inc., two pharmaceutical companies, claiming that the two companies misrepresented the “usual and customary” retail prices of their products. Typically, the “usual and customary” price that pharmacies disclose refers to their lowest retail amount. Both Safeway and SuperValu had a discounting program that matched customers’ prices with other competitors such as Walmart. Instead of reporting the discounted prices, both defendants reported their highest retail prices. For instance, Safeway only charged $10 for “94% of its cash sales for a 90-day supply of a cholesterol drug between 2008 and 2012,” and yet they reported prices as high as $108 for the same drug during those years.

The Seventh Circuit sided with the two companies. On appeal, the U.S. Supreme Court referred to evidence submitted against the defendants that point out that the two companies knew the term “usual and customary” referred to their discounted prices. Next, the Court clarified that the term “knowingly” in the FCA meant the defendants’ subjective belief. Based on these two analyses, the Supreme Court concluded that the subjective belief standard must be used for FCA liability accountability and vacated the judgement of the Seventh Circuit.

While this decision appears to be a victory for whistleblowers at first glance, a deeper look proves that this is a win for health care providers as well. Even though it was customary for many courts to look at the objective standard first, the subjective intent standard has always been present under the FCA, as whistleblowers are required to show that the provider defendant had either (1) actual knowledge of the information, (2) acted in deliberate ignorance of the truth, or (3) acted in reckless disregard of the truth. This decision simply solidifies the subjective standard. Moreover, the Supreme Court emphasized that under its “substantial and unjustifiable risk” test, the defendant’s awareness of the risks must be proven. It is easy for a whistleblower to allege the subjective intent of the defendant, but it can be very difficult to prove the consciousness behind said intent.

Providers should consider working with legal counsel to interpret regulatory standards that are ambiguous and to keep a record of those interpretations to prove good faith, in case issues such as the ones in this decision arise. Where a provider is unsure as to the meaning of a term or phrase, SuperValu suggests that the safest course of action is to either adopt the more conservative interpretation or make a good faith attempt to inquire with the relevant regulatory oversight agency as to the “correct” interpretation. Such an approach could help to mitigate enforcement risk given the relevance of subjective intent and the present lack of clarity on how courts will view subjective intent’s interplay with ambiguous terms or phrases.

Additionally, providers that have a well-established and effective compliance program will minimize their risks of being subject to successful FCA whistleblower lawsuits.

For more information, please contact David R. Ross, Esq., Shareholder, at dross@olaw.com or at (518) 312-0167. Mr. Ross handles all aspects of federal and state False Claims Act cases.

Krishika Sureshwaran, Law Clerk, contributed to this article.