In a significant False Claims Act (“FCA”) decision handed down earlier this month, the U.S. Supreme Court held that the scienter element of the FCA (i.e., whether a defendant acted “knowingly”) turns on the defendant’s “knowledge and subjective beliefs – not … what an objectively reasonable person may have known or believed.” United States et al. ex rel. Schutte et al. v. SuperValu Inc. et al. (No. 21-1326) and United States et al. ex rel. Proctor v. Safeway, Inc. (No. 22-111), Slip Opinion (June 1, 2023) at 8. The Court’s decision is likely to have far-reaching consequences for defending FCA cases, including in the health care arena.

At issue in SuperValu and Safeway were qui tam claims brought under the FCA. The respective claims alleged that the retail pharmacies each overcharged Medicare and Medicaid when seeking reimbursement for prescription drugs because they each overstated their “usual and customary” charges to the public (“U&C”) for such drugs. Both pharmacies engaged in discount programs – which comprised the majority of their respective sales for many drugs to their cash-paying customers. However, when submitting claims to Medicare and Medicaid, the pharmacies each submitted their higher, non-discounted prices as their U&C. Because reimbursement from the government programs was based on the lesser of U&C or other amounts, by submitting the higher prices as their U&C, the pharmacies each allegedly received greater reimbursement than they should have.

The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s grant of summary judgment to the pharmacies in both cases. The Seventh Circuit’s rationale for doing so was based on the fact that a “two-step” inquiry applied in determining whether the defendant acted “knowingly” under the FCA. The first step required the court to consider whether a defendant’s acts were consistent with any “objectively reasonable interpretation of the relevant law that had not been ruled out by definitive legal authority or guidance.” Slip Opinion at p. 7. Only if the defendant’s acts were not consistent with any objectively reasonable interpretation would the Court then proceed to the second step: considering what the defendant actually, subjectively thought.

The Supreme Court consolidated the cases, and, in a unanimous decision, reversed and remanded, finding that the FCA’s scienter element (i.e., whether the defendant acted “knowingly”) is not grounded on what an objectively reasonable person may have known or believed about the law at issue, but rather, on what the defendant subjectively believed. The Court’s decision left open the possibility that, on remand, the pharmacies could be found liable under the FCA. More significantly, however, the decision appears to have eliminated “after-the-fact,” legally created, defenses to FCA claims grounded in what an objectively reasonable person may have believed. Put another way, the Supreme Court’s decision in SuperValu/Safeway circumscribes a defendant’s opportunity to defend an FCA case by eliminating the opportunity for a defendant to argue that its actions were objectively reasonable – and thus were not undertaken “knowingly” – regardless of the defendant’s subjective beliefs.