United States Supreme Court: Look to Defendant’s Subjective Beliefs to Decide Whether It “Knowingly” Submitted False Claim

On June 1, 2023, the Supreme Court issued a decision in United States ex rel. Schutte v. SuperValu, Inc., clarifying when a defendant “knowingly” submits a false claim for payment under the False Claims Act (FCA). The Court held that a defendant that submits a false claim does so knowingly when it subjectively believes the claim is false at the time of submission. We have been tracking this decision in our FCANewsletter and our Government Contracts Insights as it changes the law of several circuits, which had held that an FCA defendant has not knowingly presented a false claim if its claim was consistent with an “objectively reasonable interpretation” of the relevant law, regardless of what the defendant believed about the claim.

Takeaways

• SuperValu holds that FCA defendants who make false claims do so knowingly when they subjectively believe at the time of submission that their claims are false.
• The SuperValu decision changes the law of the Seventh Circuit and four other circuits, which had held that if “a defendant’s [claims] were consistent with any objectively reasonable interpretation of the relevant law,” and that interpretation “had not been ruled out by definitive legal authority,” the defendant did not knowingly present a false claim.
• Some companies are concerned that this subjective standard might expose them to costlier litigation, but heightened pleading standards for fraud and other tools could mitigate this.

Background

The False Claims Act (FCA) holds defendants liable for knowingly presenting to the government false claims for payment. 31 U.S.C. § 3729(a)(1)(A). To establish an FCA violation, a plaintiff needs to demonstrate that (1) the defendant’s claim for payment was false and (2) the defendant knew the claim was false—i.e., the defendant acted with “scienter.” FCA liability also requires a false claim to be material, but materiality was not at issue in the case.

In SuperValu, relator-plaintiff Schutte sued supermarket chain SuperValu under the FCA on behalf of the United States. Schutte alleged that SuperValu, which operated pharmacies, knowingly presented false claims for prescription-drug reimbursements to Medicare and Medicaid. Under Medicaid regulations and many Medicare contracts, pharmacies could only request reimbursement for prescription drugs at their “usual and customary” price.

According to Schutte, SuperValu normally charged a default retail price for most prescription drugs. But when a customer requested a price match, SuperValu would discount its drugs and match the competitor’s price, for both the customer’s current purchase and subsequent refills. Schutte presented evidence that SuperValu sold a substantial part of its drugs at the discounted rate.

Schutte asserted that SuperValu submitted false claims by requesting reimbursement at a price higher than its “usual and customary price,” satisfying the first element of FCA liability. Schutte argued that SuperValu’s discount price, not the higher, retail price, was its “usual and customary price.” But, Schutte alleged, when it requested Medicaid and Medicare reimbursement, SuperValu reported the higher retail price. Thus, Schutte argued, SuperValu had presented false claims for payment. The district court agreed, and SuperValu did not contest this finding on appeal.

Schutte then argued that SuperValu knowingly presented false claims, satisfying the scienter element of FCA liability. SuperValu itself believed, according to Schutte, that its “usual and customary price” was its discounted price. Despite believing this, Schutte alleged, SuperValu presented the higher price as its “usual and customary price.” Thus, Schutte argued, SuperValu presented its false claims for payment knowingly.

But the district court and Seventh Circuit disagreed. They held that a claim “would have to be objectively unreasonable . . . before a defendant could be held liable for ‘knowingly’ submitting a false claim, no matter what the defendant thought.” Then the courts found that even if SuperValu itself believed that its higher retail prices were not its “usual and customary prices,” an objectively reasonable person could have concluded that they were. Thus, they held that SuperValu did not present its false claims knowingly.

The Issue in SuperValu: Knowledge of a Claim’s Falsity

The Supreme Court granted certiorari to resolve the issue of whether a defendant that presents a false claim for payment does so knowingly under the FCA when the defendant subjectively believes the claim is false. The Court answered yes: A defendant knowingly makes a false claim when it “believes” that a claim is “not accurate,” even if a reasonable person could have concluded it was accurate.

The Court arrived at this result by examining the common law and the FCA’s text. The Court first noted that “the FCA is largely a fraud statute.” So the Court looked to common-law standards for fraud to determine what “knowingly” meant under the FCA. And in common law fraud cases, what matters is whether the defendant believed his own statements were true, regardless of how objectively reasonable the statement was.  Moreover, the Court noted that the FCA’s text itself pointed to “what the defendant thought when submitting the false claim—not what the defendant may have thought after submitting it.”

Thus, the Court concluded, under the FCA, a defendant that makes a false claim for payment does so knowingly when it subjectively believes its claim is “not accurate.”

Conclusion

This decision was widely expected by Court watchers. Importantly, the Court did not hold SuperValu liable or find that it knowingly presented false claims. The Court remanded the case to the Seventh Circuit, where the parties will continue litigating these issues in light of the Court’s decision.

SuperValu and other businesses worry that this subjective standard—looking to what a company really believed—will subject them to costlier litigation. Before, some FCA cases were dismissed at an early stage under the “objective reasonableness” standard, if the defendant could point to a reasonable legal interpretation that supported its position. Now, they fear, FCA cases may be dragged into lengthy fact discovery, as plaintiffs delve into a defendant’s subjective beliefs about a claim. The Supreme Court declined to address these concerns, which it said “cannot supersede the clear statutory text.”

Nonetheless, defendants may still have tools to defeat frivolous FCA claims. For example, Federal Rule of Civil Procedure 9(b) requires a party alleging fraud to “state with particularity the circumstances constituting fraud.” A plaintiff who fails to do so still risks early dismissal of the case. And, of course, the False Claims Act only applies to claims that are indeed false. Although the Supreme Court has rejected defenses based on an objectively reasonable legal interpretation, a claim that is supported by an objectively correct legal interpretation cannot, by definition, be false.

Justin Folk, a summer associate in Morrison Foerster’s San Diego office, contributed to this client alert.