Introduction

In the landmark case United States et al. ex rel. Schutte et al. v. SuperValu Inc. et al. and United States ex rel. Thomas Proctor v. Safeway, Inc., decided on June 1, 2023, the Supreme Court of the United States addressed a pivotal issue concerning the False Claims Act (FCA). The case revolved around whether the scienter element—essentially, the defendant's knowledge and intent regarding the falsity of claims—should be assessed based on the defendant's subjective beliefs or an objective standard of what a reasonable person might understand.

The plaintiffs, private parties invoking the FCA, alleged that SuperValu and Safeway, two major retail pharmacy chains, had submitted inflated pricing claims to federal programs such as Medicaid and Medicare. These claims purportedly reflected the companies' "usual and customary" prices, which plaintiffs argue were , in reality, their discounted prices.

Summary of the Judgment

The Supreme Court unanimously held that the FCA's scienter requirement centers on the defendant's actual knowledge and subjective beliefs about the falsity of their claims, rather than an objective standard of reasonableness. This decision directly overturned the Seventh Circuit's interpretation, which had previously favored an objective assessment, aligning scienter with what any reasonable individual might interpret the term "usual and customary" to mean.

In essence, the Court clarified that for FCA violations, it is sufficient to demonstrate that the defendant knew, or recklessly disregarded, that their claims were false based on their own understanding, irrespective of whether an objective standard would render the claim reasonable.

Analysis

Precedents Cited

The case extensively references Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), which interpreted the term "willfully" under the Fair Credit Reporting Act (FCRA). The Seventh Circuit had applied Safeco's objective standard to the FCA, suggesting that scienter should be based on whether the defendant's interpretation aligns with any reasonable interpretation of the law.

However, the Supreme Court distinguished the current case from Safeco, emphasizing that the FCA's scienter component is rooted in the common-law definitions of fraud, which are inherently subjective. The Court referenced Restatement (Second) of Torts § 526 and Derry v. Peek, 14 App. Cas. 44 (1889) to underscore the focus on the defendant's actual knowledge and intent at the time of the alleged misconduct.

Legal Reasoning

The Court delved into the statutory language of the FCA, highlighting that "knowingly" encompasses three mental states: actual knowledge, deliberate ignorance, and reckless disregard. These align closely with traditional common-law standards for fraud. The Court underscored that the FCA was designed to combat intentional fraud against the government, necessitating a focus on the defendant's state of mind rather than an external objective standard.

Addressing the Seventh Circuit's reliance on Safeco, the Supreme Court clarified that Safeco's interpretation pertained to the FCRA, which has different statutory nuances and should not dictate the scienter analysis under the FCA. The Court emphasized that scienter under the FCA remains a subjective inquiry into the defendant's knowledge and beliefs at the time of the claim submission.

Impact

This judgment significantly impacts future FCA litigation by affirming that plaintiffs must demonstrate defendants' subjective knowledge or reckless disregard of the falsity of their claims. It narrows the pathway for defendants to evade liability by invoking an objective standard of reasonableness. Companies must now ensure that their interpretations and representations to federal programs are not only lawful but also aligned with their actual understanding and intent.

Additionally, the decision empowers whistleblowers and private plaintiffs in FCA cases, as it removes an interpretive barrier that previously favored defendants' reliance on objective interpretations. This could lead to an increase in FCA enforcement actions, promoting greater accountability among entities that contract with the federal government.

Complex Concepts Simplified

False Claims Act (FCA)

The FCA is a federal law that imposes liability on individuals and companies who defraud governmental programs. It enables private parties, known as relators or whistleblowers, to file lawsuits on behalf of the government, potentially earning a portion of any recovered funds.

Scienter

Scienter refers to the intent or knowledge of wrongdoing. In the context of the FCA, it pertains to the defendant's awareness that their claims submitted to the government are false. This can be established through actual knowledge, deliberate ignorance, or reckless disregard for the truth.

"Usual and Customary" Prices

This term refers to the standard prices a business typically charges for its goods or services to the general public. In this case, the ambiguous interpretation of what constitutes "usual and customary" led to conflicting claims about pricing submitted to federal programs.

Conclusion

The Supreme Court's decision in Schutte v. SuperValu and Proctor v. Safeway reinforces the importance of focusing on the defendant's actual knowledge and intent under the FCA. By rejecting the Seventh Circuit's objective standard, the Court ensures that only those who knowingly or recklessly submit false claims to the government are held liable. This clarification not only strengthens the FCA's deterrent effect against fraud but also streamlines the litigation process by emphasizing the subjective elements of scienter.

Moving forward, businesses operating in sectors that contract with the federal government must exercise greater diligence in understanding and accurately reporting their pricing structures and other claim-related information. Failure to align internal beliefs and external representations can now more clearly result in liability under the FCA.