August 2023 Legal Intelligencer article by Lamb McErlane partner and Health Law Chair Vasilios J. (Bill) Kalogredis.*

On June 1, 2023 the Supreme Court released its ruling regarding the necessary intent under the False Claims Act[1] (“FCA”). In consolidated cases United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc., Justice Thomas, writing for a unanimous Court, explained that the scienter requirement under the FCA is satisfied by a defendant’s subjective beliefs about the accuracy of their claims – not the objective standard of what a reasonable person may have believed.

While this decision is regarded as a win for whistleblowers, the Court addressed only one question, creating some ambiguity about FCA lawsuits going forward. Here, the Court only defined “knowledge” under the FCA. This holding leaves relators uncertain about what facts, and how many, are necessary to establish that a defendant “knew” its claims were false.

Factual and Legal Background

The FCA imposes liability on one who “knowingly” submits a “false” claim to the Government. The FCA allows private individuals, or “relators,” to bring qui tam lawsuits on behalf of the United States against those who have submitted false claims.

In the case before the Court, Petitioners filed suit against a group of companies known as Safeway and SuperValu. Safeway and SuperValu are pharmacies that sell drugs to the general public. Petitioners alleged that Safeway and SuperValu submitted false claims under Medicare and Medicaid for reimbursement of drugs covered by the programs. The Federal Centers for Medicare and Medicaid regulate reimbursements on certain drugs. These regulations typically limit reimbursements only to the “usual and customary” amount which a pharmacy charges the general public for a specific drug.

Petitioners alleged that the Respondent pharmacies reported higher prices than their “usual and customary” charges. Both Safeway and SuperValu adopted discount programs that significantly reduced drug costs for customers. Petitioners alleged that while the drugs were most often sold at a discounted price to the public, the Respondents sought reimbursement from Medicare and Medicaid at the non-discounted rate, and thus failed to seek reimbursement at their “usual and customary” discounted rate as required by the programs.

Notably, Petitioners presented facts to establish that the Respondents received information in 2006 alerting them that “usual and customary” prices included the discounted rates that constituted a majority of their sales. However, the Court did not address the meaning of “usual and customary.” Instead, the Court addressed only the requisite state of mind to satisfy “knowledge” under the FCA.

Defining “Knowledge”

The Court granted certiorari to resolve one legal question: “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?” The Court held yes; believing a reported claim is false satisfies “knowledge” under the FCA.

The Court further clarified that “knowledge” encompasses three mental states: 1) the person has “actual knowledge of the information” 2) the person “acts in deliberate ignorance of the truth . . . ” or 3) the person “acts in reckless disregard of the truth . . . .” The Court explained that knowledge reflects what a defendant thinks and believes.

“Actual knowledge” refers to a person’s actual awareness of information. “Deliberate ignorance” occurs when a defendant is aware of a substantial risk but intentionally avoids taking steps to determine the truth or falsity. “Reckless disregard” occurs when a defendant is aware of a substantial and unjustifiable risk of their claim’s falsity, yet submit them anyway. Each definition emphasizes that “knowledge” hinges on a defendant’s belief.

Remaining Ambiguities

While the Court clarified the meaning of “knowledge” under the FCA, other aspects of an FCA claim for both relators and defendants are still open to interpretation.

The Court established that each of the three mental states that satisfy knowledge under the FCA depend on the subjective state of mind of the defendant. While Petitioners celebrated a win in this case, the reality remains that relators will need to present specific facts related to a defendant’s internal operations to satisfy this subjective burden. Now it may be more difficult for relators to surpass the initial pleadings phase if a relator is not in a position to access the necessary information regarding a defendant’s state of mind. Thus, this holding may not create the “slam dunk” kinds of cases Petitioners might have imagined. Instead, a successful FCA lawsuit will require more information and more discovery to satisfy this subjective burden of proof.

The positive news for relators is that even if an organization acts reasonably, it can still be held liable if the organization knew its claims were false. While this requires relators to present evidence of a defendant’s subjective intent, relators are no longer barred from bringing claims against defendants whose actions may have been objectively reasonable. Thus, the effect of this ruling is that it will likely be easier for relators to engage in broader discovery to establish knowledge after surpassing the initial pleading phase.

Additionally, defendants may struggle with internal compliance regarding Medicare and Medicaid claims because the Court declined to define “usual and customary.” Justice Thomas even opined that the phrase “usual and customary” is “on its face, less than perfectly clear.” This ambiguity, however, does not preclude entities, like Respondents, from determining what the phrase means, or at a minimum, “becoming aware of a substantial likelihood of the terms’ correct meaning.” This suggests that facts, such as those presented by Petitioners alleging that Respondents were made aware in 2006 that discounted prices were “usual and customary,” can establish “knowledge.” Thus, parties like Safeway and SuperValu should not rely on a false hope that an ambiguous phrase is a get-out-of-jail-free card. In fact, the Court made it clear that the opposite is true.

Going forward, relators should attempt to collect as much information as possible if they suspect that an entity is making false claims. On the flip side, entities such as Respondents Safeway and SuperValu should ensure that they are complying fully with the regulations set to submit claims to the Government. Organizations should also take pains to document their decision-making processes in order to accurately submit claims and avoid FCA liability. Ultimately, it is the hope of all parties that the Court will continue to clarify the operation of the FCA to ensure that relators can report false claims, and that organizations can operate in compliance with regulations.

Read the article online on Law.com/Legal Intelligencer.

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Vasilios J. (Bill) Kalogredis, Esq. has been exclusively advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

*Anna O’Brien, Lamb McErlane Summer Law Clerk contributed to this article. Anna attends Villanova University Charles Widger School of Law. Along with her education, student and community leadership opportunities have been priorities for Anna. At Villanova, she is the current Vice Chairperson of the Charles Widger School of Law Moot Court Board. She has competed in the William & Mary Spong Constitutional Law Competition preparing briefs and oral arguments.  In 2022, Anna was the first-place winner of the Theodore L. Reimel Moot Court Competition at Villanova.

[1] https://www.supremecourt.gov/opinions/22pdf/21-1326_6jfl.pdf