Whistleblowers Want High Court to Cut Fraudulent Claim ‘Excuses’

Two whistleblowers on Tuesday will ask the US Supreme Court to revive their False Claims Act cases, contending a lower court applied an improper knowledge standard when it rejected their claims that a pair of supermarkets overcharged the government for prescription drugs.

The companies, SuperValu Inc. and Safeway Inc., didn’t knowingly overcharge because they followed an objectively reasonable interpretation of the law, the US Court of Appeals for the Seventh Circuit ruled in the two cases.

The Seventh Circuit relied on an improper interpretation of the FCA’s scienter standard by holding that a defendant that intentionally defrauds the government doesn’t act “knowingly” as long as they can later rationalize the misconduct, the whistleblowers’ brief said.

How the Supreme Court views FCA scienter—and what makes a company’s approach to a regulation reasonable—could have a profound impact on FCA litigation, where billions of dollars are at stake each year.

The grocery chains are accused of telling Medicaid and Medicare they sought reimbursement at their “usual and customary” price for the drugs, even though retail customers paid less.

According to the whistleblowers, the cases should be reopened because SuperValu and Safeway “believed” they were improperly billing the government programs when they sought reimbursement. A misrepresentation made without belief in its truth is fraudulent, they said.

“The plaintiff’s bar is worried, and more importantly, everyone should be worried if the Supreme Court upholds this case,” said Tony Munter, a whistleblowers’ attorney with Price Benowitz LLP in Washington.

“The idea that you can know you are lying to the government, take the government’s money, and then later come up with an excuse which is wrong, but try to claim that excuse is either reasonable or objective is an attempt to avoid liability we should all abhor,” he said.

The FCA doesn’t include a knowledge definition that allows for “excuses after the fact when somebody lies to get money from the government,” said Munter, who’s not involved in the cases.

Fair Notice

SuperValu and Safeway have urged the Supreme Court to view FCA scienter in a way that recognizes how difficult it can be to interpret ambiguous regulations without clarifications from the government.

Punishment can’t be imposed on entities that lacked fair notice of legal requirements, the companies told the Supreme Court.

They want the high court to adopt a standard which provides that a regulated entity can’t be a knowing or reckless violator if it acts consistently with an objectively reasonable interpretation and authoritative guidance didn’t warn it away from such an interpretation.

There’s a 4-4 circuit split over how the scienter requirement works in FCA cases where a defendant’s claims are false because the defendant violated an ambiguous legal requirement, one of the petitions for certiorari said.

The supermarkets’ approach “most closely aligns with the underlying purpose of the FCA—and common sense,” said defense attorney Jaclyn Unis Whittaker with Morgan, Lewis & Bockius LLP in Philadelphia. “If the Seventh Circuit is affirmed, I think we’ll see defendants increasingly framing scienter arguments in the language of objective falsity, and we’ll see more dismissals at the motion to dismiss stage.”

“Scienter arguments are common, but the framing can vary and courts will frequently punt on decisions until the summary judgment phase. A test based on objective reasonableness is more amenable to resolution on a motion to dismiss, so we’ll see more action there,” Whittaker said.

It seems clear that the Seventh Circuit got it wrong, said David Chizewer, who represents whistleblowers with Goldberg Kohn in Chicago.

“If a government contractor submits a claim for payment and correctly believes that it is not entitled to the full amount sought, then the contractor has knowingly submitted a false claim and is liable under the FCA,” he said. “There is no statutory exception or defense in that situation based on objectively reasonable conduct.”

Split Decisions

In United States ex rel. Schutte v. SuperValu Inc., the Seventh Circuit court affirmed rejection of a suit filed by pharmacists Tracy Schutte and Michael Yarberry in an August 2021 split decision. The circuit rejected similar pricing fraud claims raised by pharmacist Thomas Proctor against Safeway in April 2022, in another split decision, in United States ex rel. Proctor v. Safeway Inc.

The US government supports reversing the Seventh Circuit.

Sparacino PLLC, Aschemann Keller LLC; Goode Casseb Riklin Choate & Watson; Helmer, Martins, Tate & Garrett Co. LPA; Law Office of Glen Grossenbacher; Idell PLLC; and Anderson LLC represent the whistleblowers. Kirkland & Ellis LLP and Sidley Austin LLP represent the defendants.

The case is United States ex rel. Schutte v. SuperValu Inc., U.S., Nos. 21-1326, 22-111, oral argument 4/18/23.