Supreme Court’s False Claims Ruling Leaves Plenty to Litigate

The US Supreme Court’s holding in United States ex rel. Schutte v. SuperValu Inc. makes clear that a party shouldn’t submit claims to the government where it’s aware there is a “substantial and unjustifiable risk” that the claims are false, but provides little guidance as to what this standard means in practice.

The court’s unanimous ruling in the most-watched False Claims Act ruling of the year leaves open many questions about scienter and will likely cause more protracted litigation for defendants.

On June 1, the high court held in SuperValu Inc. that scienter under the FCA turns on a person’s subjective beliefs, not what an objectively reasonable person may have believed—rejecting a standard set by the US Court of Appeals for the Seventh Circuit and embraced by four other circuits.

Path to Supreme Court

The FCA provides that any person who knowingly presents a false claim to the government for payment is liable for treble damages and civil penalties for each claim.

The whistleblowers here alleged that the pharmacy chains violated the FCA by overcharging the government for prescription drugs because they failed to incorporate discount programs when reporting their “usual and customary” prices to Medicare and Medicaid.

In both cases, the district court concluded that the pharmacies had submitted false claims because their UCR prices should have reflected their discount programs but granted summary judgment to the pharmacies on the basis that they had not acted “knowingly” as required by the FCA.

The Seventh Circuit affirmed, relying on Safeco Insurance Co. of America v. Burr to hold that the pharmacies didn’t act knowingly because they made an “objectively reasonable” interpretation of the law that had not been ruled out by definitive legal authority or guidance, and that it doesn’t matter if the pharmacies believed their claims were false at the time they submitted them. Granting certiorari on the issue of scienter, the Supreme Court held that to establish scienter under the FCA, a plaintiff must show the defendant:

Actually knew their claim was false
Was aware of a substantial risk that their claim was false and intentionally avoided learning whether the claim was false, or
Was aware of such a substantial and unjustifiable risk but submitted the claims anyway

Litigation Coming on Scienter Issues

This case impacts anyone who does business with the federal government and is faced with complying with an ambiguous statute or regulation. Here, the defendants argued that they couldn’t “know” their claims were false because the obligation to report UCR prices was ambiguous.

Unpersuaded, the court concluded that the ambiguity did not prevent defendants from learning the correct meaning of the terminology, “or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.”

The court found that a party has the requisite scienter if they are aware of a “substantial and unjustifiable risk” that their claims are incorrect and submits them anyway, shifting the focus from ambiguity to whether others have coalesced around a particular meaning.

To illustrate, the court offered an example: A driver observes a sign labeled “Drive Only Reasonable Speeds.” A police officer informs the driver that speeds over 50 mph are “unreasonable,” and the driver observes others going only 48 mph. According to the court, driving over 50 mph in this context presents “an unjustifiably high risk.”

This example raises many questions:

Would the risk be unjustifiable if there had been no statement from the officer?
Does it matter if the officer’s statement was only made to one individual?
Does it matter if the officer’s statement was approved by superiors?
What if different officers expressed different views including the situational “reasonableness” of speeds exceeding 50 mph?

Enhanced Significance of Subjective Knowledge

While the driver in the court’s example faces a speeding ticket, in the real-world context of complex regulations, stakeholders who conduct business with the government face treble damages, per-claim penalties, reputational damage, and legal expense.

Trying to discern actionable guideposts presents a significant challenge as stakeholders consider how to incorporate the court’s framework into their legal and compliance operations.

At a minimum, given the emphasis on subjective and contemporaneous knowledge in FCA liability, stakeholders should take steps to ensure that discussions regarding potential legal ambiguities are protected by attorney-client privilege

They should also consider developing a contemporaneous record memorializing their understanding of the requirements and representations when submitting a claim.

Authoritative Guidance’s Role Unclear

Strikingly absent from the court’s discussion is the concept of authoritative guidance. In rejecting Safeco, the court sidestepped the issue of what qualifies as authoritative guidance in the FCA context and the role it plays in assessing scienter.

The court’s silence on this point is particularly notable given the recent and significant focus on use of guidance documents in FCA cases.

Litigation More Burdensome

Because the court’s scienter standard contemplates a fact-intensive investigation of a party’s subjective intent at the time claims were submitted, it may become more difficult for defendants to secure pretrial dismissals.

Defendants will likely frame arguments derived from the ambiguity of regulatory standards in terms of falsity instead of scienter. Regardless, given the court’s emphasis on contemporaneous subjective intent and the potential exposure to massive damages under the FCA, there may be even greater incentives for FCA defendants to resolve cases earlier in the investigation.

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

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Suzanne Jaffe Bloom, co-chair of Winston & Strawn’s government investigations, enforcement, and compliance practice, represents clients in all aspects of government and internal investigations, related criminal and civil litigation, and regulatory and compliance matters.

Cristina Calvar, a partner in Winston’s government investigations, enforcement, and compliance practice, focuses on white collar matters, regulatory enforcement, complex internal investigations, and parallel civil proceedings.

Amy Kearbey, a partner in Winston’s government investigations, enforcement, and compliance practice, focuses her work on health care regulatory counseling, compliance, and defense.

Marisa Manzi, a litigation associate at Winston & Strawn, contributed to this article.