Oral arguments are scheduled for April 18, 2023, in the Supreme Court case combining two Seventh Circuit Court of Appeals cases U.S. ex rel. Schutte v. SuperValu, Inc. (“SuperValu”) and U.S. ex rel. Thomas Proctor v. Safeway, Inc. (“Safeway”). The Supreme Court will be deciding how the word “knowingly” should be interpreted under the scienter prong of the False Claims Act. While their decision will dictate whether SuperValu and Safeway successfully make off with taxpayer money, there is much more at stake. The Supreme Court’s decision will either solidify the False Claims Act as one of this country’s greatest anti-fraud tools or cripple its ability to prosecute and deter fraud.

The False Claims Act reaches every industry where government programs can be defrauded, but the Supreme Court’s decision will have the most significant impact on the health care industry. In 2022, the Department of Justice recovered more than $2.2 billion from judgments and settlements under the False Claims Act.^[1] Over $1.7 billion of this was recovered^[2] from matters involving the health care industry.^[3] This is especially meaningful because enforcement of the False Claims Act in the health care industry also “deters others who might try to cheat the system for their own gain, and in many cases, also protects patients from medically unnecessary or harmful actions.”^[4]

The False Claims Act

The False Claims Act was originally enacted in 1863 to combat defense contractor fraud during the Civil War.^[5] Relevant here, the Act creates liability for any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” by the government.^[6] The Act has notoriously “draconian” civil penalties and qui tam provisions that have shaped it into the United States’ fiercest anti-fraud tool.

Accounting for the Federal Civil Penalties Inflation Adjustment Act of 1990,^[7] offenders are “liable to the United States Government for a civil penalty of not less than [$13,508] and not more than [$27,018]” plus “three times the amount of damages which the Government sustains because of the act of that person.”^[8] To put this into perspective, if a pharmacy knowingly submits a mere 45 false claims to Medicare for reimbursement, they could be liable for up to $27,018 per claim ($1,215,810) plus three times that amount ($3,647,430), for a maximum civil penalty of $4,863,240. From October 1, 1986 to September 30, 2022, actions under the False Claims Act have resulted in a total of $72,578,696,300 in settlements and judgments.^[9]

While the United States can pursue fraudsters on its own, the False Claims Act also “allows private citizens to file suits on behalf of the government (called ‘qui tam’ suits) against those who have defrauded the government.”^[10] These qui tam provisions empower whistleblowers (also known as “qui tam relators”) to report fraud and rewards them with a share of recovered funds.^[11] Of the $2.2 billion recovered under the False Claims Act in 2022, 86% was recovered from qui tam suits initiated by whistleblowers.^[12] Qui tam actions also accounted for 69% of the $72,578,696,300 recovered from October 1, 1986 to September 30, 2022.

The False Claims Act has proven extremely effective in recovering defrauded taxpayer money and is believed to be even more effective as a fraud deterrent. As health care economist Jack Meyer has noted, “[w]e don’t know exactly how much fraud is being deterred by the False Claims Act, but the number is almost certainly many billions of dollars a year more than is simply being recovered.”^[13]

The Supreme Court Case – What part of the False Claims Act will the Supreme Court be ruling on?

To be found liable under the False Claims Act, two prongs need to be satisfied: falsity and scienter. The falsity prong requires that the claims submitted to the government for payment are actually false or fraudulent.^[14]

In the two Seventh Circuit cases, Supervalu and Safeway (“Respondents”) are pharmacies that submitted reimbursement claims to Medicaid and Medicare for prescription drugs. Regulations set by the Centers for Medicare and Medicaid Services (“CMS”) required the pharmacies to report their usual and customary (“U&C”) prices for the government to pay. In both cases it is undisputed that the pharmacies submitted false claims because instead of reporting their U&C prices, they submitted claims reporting their retail prices, which resulted in the government overpaying them. Satisfaction of the falsity prong is not disputed in either case.

At the heart of this case and truly central to the strength of the False Claims Act, the scienter prong requires the fraudster knowingly submitted a false claim to the government for payment. The Act defines “knowing” or “knowingly” to mean that a person, with respect to information “(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.”^[15]

Although Respondents did overcharge the government by submitting false claims to Medicare and Medicaid for payment, they argue the scienter prong cannot be satisfied because they did not do it knowingly. Respondents assert that the relevant CMS regulations were ambiguous and did not clearly specify how the U&C prices should have been calculated. In determining whether Respondents acted “knowingly,” the Supreme Court is tasked with deciding whether they should evaluate Respondents’ objective or subjective intent.

Respondents want the Supreme Court to agree with the Court of Appeals for the Seventh Circuit and rule that Respondents did not act knowingly if they acted under an objectively reasonable understanding of an ambiguous legal obligation and their understanding was not previously warned against by official guidance. Simplified, Respondents insist they could not have acted knowingly if the Court only looks at their objective intent. Respondents did, in fact, come up with objectively reasonable understandings that have not been warned against.

Conversely, the Government and Relators (“Petitioners”) want the Supreme Court to look at Respondents’ subjective intent in deciding whether they acted knowingly. This would allow the Supreme Court to evaluate evidence that speaks to what Respondents themselves actually knew at the time they acted rather than what an objectively reasonable person might have known. In both cases, there is evidence such as internal emails showing Respondents were actually aware of the correct interpretations of the CMS Regulations when they acted. This evidence demonstrates that Respondents knew properly complying with the U&C price regulations would cost them tens of millions of dollars, and Respondents intentionally took “stealthy” approaches to keep overcharging the government and evade False Claims Act liability.

The Court of Appeals for the Seventh Circuit’s Holding – What decision must the Supreme Court affirm or reverse?

Finding for Respondents and the objective intent standard, the Seventh Circuit Majority granted summary judgment despite the existence of genuine issues of material fact. Further, it was not disputed that the Seventh Circuit should look to the common law for guidance on how to interpret “knowingly,” but Petitioners and Respondents argued in favor of different common law definitions.

Petitioners argued the Circuit Court should look to the common law of fraud, which is based on a subjective intent standard.^[16] However, urged by Respondents, the Seventh Circuit followed a Supreme Court case interpreting the meaning of “willful” under the Fair Credit Reporting Act (NOT “knowingly” under the False Claims Act) and decided to apply an objective intent standard based on the definition of “reckless disregard” in the context of physical safety (physical safety is typically not relevant in fraud litigation).^[17]

While the False Claims Act lists “reckless disregard” as one of three separate standards that can be considered “knowledge,” the Seventh Circuit held that meeting the objective “reckless disregard” standard is actually a threshold matter and must also be met in order to prove that a defendant had actual knowledge of the information or acted in deliberate ignorance of the truth or falsity of the information. In effect, this interpretation mushes the three possible kinds of “knowledge” into one and limits courts to only evaluating evidence of a defendant’s objective rather than subjective intent.

Implications Beyond the Supreme Court Case

The implications of the Supreme Court’s decision cannot be understated. As previously mentioned, the False Claims Act is the greatest anti-fraud tool of all time. If the Supreme Court affirms the Seventh Circuit’s decision, the Act’s intimidating penalties and extremely effective qui tam suits will be diluted beyond judicial repair.

Every industry in the United States functions under countless laws and regulations that are put in place as safeguards. It is very common that a law or regulation might not be crystal clear, yet an actor in the industry properly interprets it. If a court may only look at objective intent to determine knowledge in a False Claims Act case, evidence that a defendant actually knew what a regulation meant will be meaningless as long as they have a crafty lawyer who can come up with an objectively reasonable interpretation of such ambiguous regulation that the government has not already dreamed up and warned against yet. This will make it significantly more difficult for the government to successfully prosecute these fraud cases, and the loss will absolutely be felt by taxpayers when the DOJ’s annual recoveries under the False Claims Act dwindle.

Whistleblowers initiate the most False Claims Act cases by far, and therefore bring in the most money recovered under the Act. As the National Whistleblower Center (“NWC”) emphasized in its amicus brief submitted to the Supreme Court in support of Petitioners, affirming the Seventh Circuit’s decision would lead to a decline in relators coming forward because “[w]histleblowers will be discouraged if they risk their livelihood to provide clear evidence of a company’s subjective bad faith, only for that company to evade liability with post hoc arguments. Letting such fraudsters profit from their deceit will undermine the faith of the public in the rule of law.”^[18]

With the governments’ diminished ability to obtain settlements and judgments, as well as the presumable decline in whistleblowers coming forward, the Act will become far less formidable to fraudsters, and its ability to annually deter billions of dollars in fraud will be hampered, too.

The NWC brief also quotes Judge Hamilton, the one dissenting judge in both SuperValu and Safeway, stating “if and to the extent the federal courts tolerate such deception, we enable more fraud in the present and future. We also place at a competitive disadvantage the other businesses that resisted the temptation to cheat the government.”^[19]