On June 1, 2023, in United States ex rel. Schutte, the United States Supreme Court held that, to impose liability on an employer for “knowingly” submitting a false claim to the government for payment, it is sufficient for the plaintiff to prove that the employer knew or suspected that the submission was false, even if an objectively reasonable person may have known or believed otherwise. Reviewing two FCA decisions of the Seventh Circuit, the Court held that an FCA violation can occur because of a defendant’s actual “knowledge and subjective beliefs” —not what an objectively reasonable person may have known or believed. Parties litigating FCA claims should promptly and thoroughly re-assess their factual and legal positions in light of the Court’s decision. Employers that regularly submit claims to the government for payment should ensure that they are not violating the statute by failing to fully understand the factual and legal basis for the claims submitted.
Background
The FCA imposes liability on anyone who “knowingly” submits a “false” claim to the government. The statute permits private parties to bring lawsuits in the name of the United States against those who have allegedly defrauded the federal government. The Supreme Court’s holding arose from two FCA decisions by the Seventh Circuit that affirmed summary judgment in favor of companies facing FCA claims. Based upon its analysis of what “knowingly” means in the context of the FCA, the Supreme Court vacated those decisions and remanded the cases to the Seventh Circuit for further consideration.
Plaintiffs sued the two companies under the FCA, alleging that their retail pharmacies defrauded Medicaid and Medicare by failing to report pharmacy discount programs as part of the “usual and customary” price of pharmaceutical products. Specifically, plaintiffs alleged that the companies offered pharmacy discount programs to their customers but reported only the higher retail prices for federal reimbursement. Such a practice would tend to artificially inflate the price of the drugs. The legal question is whether the phrase “customary and legal” was meant to include the pharmacy discount programs. Plaintiffs alleged that the companies knew their discounted prices should have been included in “usual and customary prices” submitted to the government for reimbursement.
The companies moved to dismiss on the ground that their reimbursement claims were consistent with an objectively reasonable interpretation of the relevant law—specifically, the phrase “usual and customary”—that had not been ruled out by definitive legal authority or guidance. The Seventh Circuit agreed, holding that the objectively-reasonable-person analysis applied, regardless of whether the companies actually believed this interpretation was correct at the time they submitted the claims. The Supreme Court noted that “under the Seventh Circuit’s approach, a claim would have to be objectively unreasonable, as a legal matter, before a defendant could be held liable for ‘knowingly’ submitting a false claim, no matter what the defendant thought.” The Seventh Circuit’s standard made it easier for defendants to avoid liability early in FCA cases by establishing a lack of scienter, or fraudulent intent.
The Supreme Court agreed to review the Seventh Circuit’s decision in order to decide the following legal question about the scienter required by the FCA: “If respondents’ claims were false and they actually thought that their claims were false—because they believed that their reported prices were not actually their ‘usual and customary’ prices—then would they have ‘knowingly’ submitted a false claim within the FCA’s meaning?”
Supreme Court’s Rationale
The Supreme Court first analyzed the FCA’s text and “common-law roots.” The Court noted that the statute’s three-part definition of “knowingly” largely tracks the traditional common-law scienter requirement for claims of fraud: actual knowledge, deliberate ignorance, or recklessness. The Court emphasized that each of these phrases focuses on “what a defendant thought when submitting a claim—not what a defendant may have thought after submitting it.”
The Court then noted that, while 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.” The companies could have learned the correct meaning of the phrase “usual and customary,” the Court said, particularly since they had been notified that their interpretation of the phrase was incorrect and also since the plaintiffs had alleged that they attempted to hide evidence that contradicted their alleged interpretation of the phrase. The Court said the companies could not rely on a prior Supreme Court interpretation of the words “knowing” and “reckless” where that case had interpreted a statute other than the FCA.
“What matters for an FCA claim,” the Supreme Court concluded, “is whether the defendant knew the claim was false.” In other words, the defendant’s actual belief is determinative of this issue, even if an objectively reasonable person may have known or believed something different. On this basis, the Supreme Court vacated the Seventh Circuit’s decisions and remanded the cases for further proceedings.
Key Takeaways for Employers
Employers that are regularly submitting claims to the government or navigating ambiguous statutory, regulatory, or contractual provisions involving reimbursement should consider documenting the factual and legal basis for decisions and actions related to those claims. What will most effectively negate a finding of scienter under the FCA is evidence of an employer’s actual knowledge and subjective belief about its decision-making at the time it submits claims to the government, not plausible interpretations devised years afterward to ward off FCA claims.