SCOTUS Clarifies Scienter Standard for False Claims Act Cases

In U.S. ex rel. Schutte v. SuperValu Inc., 598 U. S. ____ (2023), the U.S. Supreme Court held that the False Claims Act’s scienter element — which asks whether a defendant “knowingly” submitted a “false” claim to the government — refers to a defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed. The Court’s decision was unanimous.

Facts of the Case

The petitioners filed a lawsuit alleging that respondents—SuperValu and Safeway—defrauded two federal benefits programs, Medicaid and Medicare. Both Medicaid and Medicare offer prescription-drug coverage to their beneficiaries, and both often cap any reimbursement for drugs at the pharmacy’s “usual and customary” charge to the public. However, according to petitioners, SuperValu and Safeway for years offered various pharmacy discount programs to their customers—yet reported their higher retail prices, rather than their discounted prices. Petitioners also presented evidence that the companies believed their discounted prices were their usual and customary prices and tried to prevent regulators and contractors from finding out about their discounted prices. In sum, petitioners claim that the evidence shows that respondents thought their claims were inaccurate yet submitted them anyway.

In analyzing the two essential elements of an FCA violation — the falsity of the claim and the defendant’s knowledge of the claim’s falsity — the District Court ruled against SuperValu on the falsity element. It found that its discounted prices were its usual and customary prices and that, by not reporting them, SuperValu submitted false claims. However, the court granted SuperValu summary judgment based on the scienter element, holding SuperValu could not have acted “knowingly.”

In a separate case, the court granted Safeway summary judgment on that same basis. The Seventh Circuit Court of Appeals affirmed in both cases, relying heavily on Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), in which the Court interpreted the term “willfully” in the Fair Credit Reporting Act. As the Seventh Circuit read Safeco, the companies could not have acted “knowingly” if their actions were consistent with an objectively reason- able interpretation of the phrase “usual and customary.” Thus, the Seventh Circuit concluded, the companies were entitled to summary judgment even if they actually thought that their discounted prices were their “usual and customary” prices (and thus thought their claims were false).

Supreme Court’s Decision

The Supreme Court reversed. It held that the FCA’s scienter element refers to a defendant’s knowledge and subjective beliefs rather than what an objectively reasonable person may have known or believed.

“The question presented is…whether respondents could have the scienter required by the FCA if they correctly understood that standard and thought that their claims were inaccurate,” Justice Clarence Thomas wrote. “We hold that the answer is yes: What matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”

In support of its decision, the Court cited the FCA’sstatutory text and common-law principles, emphasizing that the FCA’s text and common-law roots demonstrate that the FCA’s scienter element refers to a defendant’s knowledge and subjective beliefs. The Court noted that both the text and the common law also point to what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it. “[T]he focus is not, as respondents would have it, on post hoc interpretations that might have rendered their claims accurate. It is instead on what the defendant knew when presenting the claim.”

The Supreme Court further found that even though the phrase “usual and customary” may be ambiguous on its face, such facial ambiguity alone is not sufficient to preclude a finding that respondents knew their claims were false. According to Justice Thomas, “That is because the Seventh Circuit did not hold that respondents made an honest mistake about that phrase; it held that, because other people might make an honest mistake, defendants’ subjective beliefs became irrelevant to their scienter.”

The Supreme Court remanded the case back to the Seventh Circuit Court of Appeals for further proceedings.