High Court False Claims Ruling Underscores Communication Is Key

Federal contractors should avoid taking unjustifiable risks when interpreting regulations—and then submitting bills to the US government— if they want to stay out of False Claims Act trouble.

That’s one of the takeaways from Justice Clarence Thomas’ June 1 opinion in United States ex rel. Schutte v. SuperValu Inc., which reinstated FCA suits alleging the SuperValu and Safeway Inc. grocery chains overcharged Medicare and Medicaid for prescription drugs.

The unanimous opinion had law firms that represent FCA defendants sending out client alerts, saying to prepare for less success in motions to dismiss. But the opinion doesn’t appear to be a pro-plaintiff game-changer beyond being a reprieve from what would have been a devastating defeat for those that try to uncover fraud, attorneys told Bloomberg Law.

This is “going to generally be a fact question that isn’t susceptible to a resolution on a motion to dismiss,” said Reuben A. Guttman of Guttman, Buschner & Brooks PLLC, a firm that represents whistleblowers.

But “I don’t think the opinion changed the rules of the game” for litigating FCA cases. “The opinion is true to the statute and consistent with the common law of fraud,” he said.

The dual cases arrived from the US Court of Appeals for the Seventh Circuit, which had rejected the two suits for lack of scienter because SuperValu Inc. and Safeway had offered a reasonable regulatory interpretation. And the companies had unsuccessfully urged the Supreme Court to find that intent must be lacking if their interpretation of an ambiguous rule was objectively reasonable.

Writing for a unanimous court, Thomas said the Seventh Circuit improperly failed to consider evidence of subjective intent—that the companies believed they were wrongly seeking payments from the government.

The whistleblowers who brought the suits could establish scienter by showing that the companies knew they were charging more than their “usual and customary” prices, intentionally avoided learning if their reports were accurate, or that they “were aware of such a substantial and unjustifiable risk but submitted the claims anyway.”

If those can be proven, “then it does not matter whether some other, objectively reasonable interpretation of ‘usual and customary’ would point to respondents’ higher prices,” the opinion said.

The opinion “returned sanity to the analysis,” said Julie K. Bracker, who represents whistleblowers with Bracker & Marcus LLC.

Under the decisions Thomas overturned, a jury “was not to be shown evidence that the defendant actually knew it was violating the law,” she said.

‘Part of the Landscape’

But don’t expect significant changes in how defendants discuss their regulatory interpretations, Guttman said. Statements about legal compliance and risk are going to be matters of public record, like SEC 10-K filings, he said.

“Look at, for example, PharMerica’s 2016 10k, made within the False Claims Act’s 10 year statute of limitations, where it makes statements about its risks under the Anti-Kickback Statute,” Guttman said. “We read SEC filings daily; it is what we do.”

It’s not clear that the ruling will change how defendants act because the opinion restored a “common sense” definition of knowledge, and “re-established the status quo,” said H. Vincent McKnight Jr., who represents FCA whistleblowers at Sanford Heisler Sharp LLP.

Contractors and the government “routinely debate contract terms and conditions to reach a meeting of the minds. Moreover, companies meet at conferences and exchange ideas on regulations and contract procurement,” he said.

“I think these types of discussions are part of the landscape,” McKnight said.

Open lines of communication on regulatory interpretations could go a long way toward avoiding misunderstandings that lead to litigation.

This ruling has “increased the advisability of a contractor ensuring that the government is contemporaneously aware of the contractor’s interpretation of an arguably ambiguous legal requirement,” said Jason N. Workmaster, who represents FCA defendants with Miller & Chevalier Chartered.

If that happens, a contractor may be able to stop an FCA case through an early motion for summary judgment on the basis that the government knew about the contractor’s interpretation and continued to pay the contractor’s claims, he said. Doing so could negate scienter and materiality, Workmaster said.

Defendants have often argued—since the Supreme Court’s 2016 ruling in Universal Health Services Inc. v. United States ex rel. Escobar —that FCA suits can’t advance for lack of materiality if the government knew about alleged misconduct and continued to make payments.

‘High bar’

Ultimately, whistleblowers and the government will still face challenges when trying to demonstrate that a defendant knew of a substantial and unjustifiable risk about a claim’s falsity, and still submitted it.

FCA plaintiffs will have to plausibly plead that defendants “consciously chose to ignore” risks about the falsity of their claims for payment, said Eric W. Sitarchuk, who represents FCA defendants with Morgan, Lewis & Bockius LLP. “That’s a high bar even under Rule 8(a)’s plausibility standard,” he said.

Unjustifiable risk has to be looked at in the larger context of the Supreme Court’s definition of reckless disregard, which is “the lowest of the FCA’s three scienter standards and thus the friendliest to FCA plaintiffs,” said Christopher E. Babbitt, who represents FCA defendants with Wilmer Cutler Pickering Hale & Dorr LLP.

But requiring plaintiffs at the pleading stage to allege conscious disregard of a risk that is both substantial and unjustified “could prove to be an insurmountable barrier to those who lack inside knowledge of a corporate defendant’s internal risk assessment and decision-making,” he said.

The case is United States ex rel. Schutte v. SuperValu Inc., U.S., Nos. 21-1326, 22-111, 6/1/23.