Whistleblowers Tee Up High Court Fight Over False Claims Intent

A pair of supermarket pharmacists have won the chance to convince the Supreme Court that enforcement of the federal False Claims Act, intended to prevent businesses from bilking the US government, should consider subjective understanding or belief when considering if a defendant knowingly engaged in wrongdoing.

Safeway Inc. and SuperValu Inc. each stood accused by the whistleblowing pharmacists of over-charging Medicaid and Medicare for prescription drugs. Each successfully persuaded first a trial court judge, and then a federal appeals court, that the whistleblowers’ FCA suits must fail because the pricing arose from a reasonable regulatory interpretation.

Asserting that the supermarkets should have been found liable for violating the FCA if they subjectively knew or believed—or had reason to know or believe—their conduct was unlawful, the pharmacists asked the US Supreme Court to review the two rulings handed down by the US Court of Appeals for the Seventh Circuit. Last week, the justices agreed to take up and consolidated the matters.

Their reversal of the lower court’s rulings could have the biggest impact on FCA litigation since the high court’s unanimous 2016 ruling in Universal Health Servs. Inc. v. United States ex rel. Escobar, which said in part that an FCA suit could fail for lack of materiality if an agency continued to pay a contractor despite knowledge of fraudulent conduct. That ruling prompted legislation in 2021 aimed at making it more difficult for a defendant to argue immateriality, but the measure didn’t pass before Congress went out of session.

SuperValu and Safeway both say the Supreme Court’s 2007 ruling in Safeco Ins. Co. v. Burr should be followed. It provides that a defendant beats a case if a legal obligation allows for more than one reasonable interpretation, the defendant followed one such interpretation, and no authoritative guidance warned it away from such an interpretation, they say.

But the “Safeco standard would create a get out of jail free card for fraudsters,” said Jason Zuckerman of Zuckerman Law in Washington, which represents whistleblowers. He’s not involved in the pharmacists’ cases.

“A company could knowingly steal from the government and then avoid any accountability by having attorneys create post-hoc justifications to argue that the conduct is defensible,” he told Bloomberg Law. “It would significantly undermine the FCA and incentivize contractors to overcharge and otherwise steal from the government.”

Reduce Leverage

If an alleged fraudster actually believed that what they were doing was wrong when they did it, the scienter analysis should stop there, said Julie K. Bracker, who represents whistleblowers with Bracker & Marcus LLC in Atlanta.

The rule should be that “when an alleged fraudster has actual knowledge that it is behaving in a way that violates regulations, it has ‘actual knowledge’ that it is committing fraud and should be held accountable. That ruling would be a great boon to whistleblowers, who are typically insiders with personal insight into what defendants knew at the time of the fraud,” she said.

And yet, a pro-business faction of the Supreme Court could prove to be sympathetic to defendants trying to operate in spite of ambiguous government regulations, said Elisha Kobre, who represents FCA defendants with Bradley Arant Boult Cummings LLP in Dallas.

Application of the Safeco standard to the current cases would substantially reduce leverage for whistleblowers and decrease FCA recoveries, he said.

“That is particularly so because the objective Safeco standard, applied in this context, largely obviates the intensive, and often costly, discovery relating to subjective intent. The cost of engaging in discovery can often result in an early settlement,” he said.

Winston Y. Chan of Gibson, Dunn & Crutcher said the Supreme Court should reiterate that the FCA scienter requirement means that defendants must have had notice that their conduct would violate the requirement at issue. “Otherwise the FCA, with its draconian penalties, effectively would become a strict liability statute,” the San Francisco-based lawyer said.

If the government interprets a regulation in a certain way, it should make people aware of the interpretation so they can act accordingly, said Jennifer A. Short of Blank Rome LLP in Washington. “People should not have to guess at what the law or provision means, and they do not behave with ‘reckless disregard’ simply because they adopt a reasonable view that is to their advantage,” she said.

Safe Harbor

The Supreme Court’s Jan. 13 order consolidated the two Seventh Circuit cases.

In United States ex rel. Schutte v. SuperValu Inc., the appellate court affirmed rejection of a suit filed by pharmacists Tracy Schutte and Michael Yarberry, in an August 2021 split decision. According to their petition, the Seventh Circuit embraced an extreme interpretation of Safeco, which will create a safe harbor for defendants that intended fraud.

“Under the Seventh Circuit’s rule, even a defendant that believes it is presenting, wants to present, and actually does present a false claim is not liable under the FCA if its lawyers can later concoct a reasonable interpretation of the law that covers its conduct,” their petition said.

In United States ex rel. Proctor v. Safeway Inc., the Seventh Circuit rejected similar pricing fraud claims raised by pharmacist Thomas Proctor against Safeway in April 2022, also in a split decision. The definition of “usual and customary price” was open to multiple reasonable interpretations for the relevant time period, the opinion said.

Proctor’s petition said the Seventh Circuit improperly found that Safeway’s conduct fell within a reasonable interpretation of usual and customary, even if Safeway didn’t believe its interpretation to be correct when it submitted its claims for payment.

Sparacino PLLC represents the whistleblowers. Kirkland & Ellis represents the defendants.

The case is United States ex rel. Schutte v. SuperValu Inc., U.S., No. 21-1326, 1/13/23.