In U.S. ex rel. Schutte v. SuperValu Inc., the Supreme Court delivered an unequivocal win for insiders who warn their employers about committing fraud against U.S. government programs such as Medicare: Executives' contemporaneous reaction to such whistleblower warnings, the court ruled unanimously, can be used against them in cases under the False Claims Act — and so can other evidence of decision makers' beliefs and intentions at the time of wrongdoing.
This expert analysis by
TELG managing principal R. Scott Oswald was published by Law360 on June 2, 2023.
Originally published in:
No Easy Out For FCA Defendants After Justices’ Ruling
By R. Scott Oswald
Yesterday’s decision from the U.S. Supreme Court in U.S. ex rel. Schutte v. SuperValu Inc. is a stark warning against aggressive billing by Medicare providers and other federal contractors: The False Claims Act, which punishes fraud against the U.S. government, doesn’t apply to honest mistakes — but internal debate about the propriety of certain billing practices, even where federal rules seem ambiguous, can count as evidence of FCA liability, according to the 9-0 opinion from Justice Clarence Thomas.
The decision elevates the voice of corporate whistleblowers who raise red flags on possibly fraudulent billing. It’s an unalloyed defeat for the original defendants in SuperValu, who had argued that in-house discussion is irrelevant so long as the federal contractor can retroactively offer a good argument that might have applied, regardless of whether anyone believed it at the time.
In his opinion, Thomas compares such post hoc rationalization to a driver who zooms past a signpost that requires “reasonable” speeds, even after a cop has warned him that it’s unreasonable to drive over 50 mph — and even though all the other cars are driving at 48 mph:
[I]f the same police officer later pulled the driver over, we imagine that he would be hard pressed to [avoid a ticket by arguing] that some other person might have understood the sign to allow driving at 80 mph. The same analysis applies here.
An End to Safeco Arguments
The brusque 15-page opinion, which also covers the consolidated case of U.S. ex rel. Proctor v. Safeway, Inc., guts several defense-side arguments that have bedeviled FCA cases in recent years.
In particular, it rejects the idea that FCA liability is governed by Safeco Insurance Co. of America v. Burr, a 2007 Supreme Court ruling that the SuperValu defendants had interpreted to mean that the requisite FCA scienter can’t exist if there was, at the time of overbilling, any objectively reasonable view of the rules that could have gotten them off the hook.
Safeco applies only to the Fair Credit Reporting Act and doesn’t reach the FCA, says Thomas — and anyhow, its teaching was misconstrued by the SuperValu defendants and the U.S. Court of Appeals for the Seventh Circuit below, to which he returned the case.
After a scant page of Safeco analysis, Thomas’ opinion bluntly holds that “we do not look to legal interpretations that respondents did not believe or have reason to believe at the time they submitted their claims.”
As a practical matter, the court’s decision in SuperValu makes it easier for FCA cases — which often are brought by whistleblowers in the name of the government — to survive summary judgment. And unlike a 2016 FCA opinion by Thomas, in Universal Health Services Inc. v. U.S. ex rel. Escobar, there seems to be little that the FCA defense bar can salvage in defeat.
“The FCA’s scienter element refers to respondent’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed,” writes Thomas definitively.
Background of the Case
SuperValu revolves around requests for reimbursement by SuperValu-owned pharmacies for their usual and customary price of prescriptions covered by Medicare, the federal insurance program. During the period in question, the pharmacies routinely offered big discounts to customers on many drugs, even as they often billed the government for the non-discounted retail price, which they portrayed as the norm. The consolidated case, Safeway, involves very similar facts.
Yesterday’s opinion cited “evidence that, at least some times and for some drugs, SuperValu made more than 80% of its cash sales for prices less than what was disclosed as its ‘usual and customary’ price,” while executives discussed staying “stealthy” for fear of undermining the amounts being reimbursed by the government.
The trial court granted summary judgment to SuperValu and the Seventh Circuit affirmed, agreeing that the pharmacies’ certification of their retail prices as “usual and customary” was factually false, and that the pharmacies may have believed it to be false — but that under a Safeco analysis, subjective belief and intent were irrelevant.
“What mattered, instead,” writes Thomas, summarizing the argument that he goes on to reject, “was that someone else, standing in [the pharmacies’] shoes, may have reasonably thought that the retail prices were what counted.”
The Common Law of Fraud
As in Escobar, Thomas interprets the FCA as largely a fraud statute that is construed under the well-settled meaning of common law fraud. “On their face and at common law,” he writes, “the FCA’s [scienter] standards focus primarily on what respondents thought and believed” — and under common law, the moment at which such thoughts and beliefs must be gauged is “when submitting the false claim.”
The pharmacies’ arguments to the contrary are unavailing, he says, and Justice Thomas devotes just a few pages to rebutting all of them. Even a common-law argument that purely legal misstatements aren’t actionable must fail, he says. In a homespun analogy, Thomas conjures a worker who falsely states that “the plumbing work that I did on your house complied with state law.” Because plumbers have unique knowledge of the work they did and how it related to requirements, says Thomas, such a statement isn’t merely one person’s interpretation of disputable, fuzzy rules — it’s also a representation of facts that can support a fraud claim.
By certifying their own “usual and customary” prices, he says, SuperValu and Safeway sound much “like our hypothetical plumber.”
Thomas’ analogies to everyday life may signal trouble ahead for FCA defendants. The now-discredited Safeco standard suggested that the government bears a responsibility to warn away contractors from every spurious interpretation of its rules before FCA liability can attach.
The speeding driver analogy, however, implies that contractors should look to road signs and common practice for their cues — and that if everyone else is driving at 48 mph, you can’t complain about being ticketed for driving at 80 mph.
Similarly, if you install leaky pipes it’s dubious to say that the regulations are so complex that they arguably allow leaky pipes.
At oral arguments in April, the justices talked about “easy” and “hard” FCA scienter cases, suggesting that SuperValu was easy because of evidence that pharmacy executives were deliberately overstating their normal prices despite subjective knowledge of the rules. If proven, that’s classic scienter.
The harder case, they posited, would involve some degree of uncertainty over the rules — and a conscious decision to act aggressively, perhaps after weighing the risks. After this decision, such a determination doesn’t look so hard after all: We look at the advice and examples that were available to the decision makers, and we apply common sense.
Were they driving just a tad fast? Or recklessly? What kind of ticket do they deserve?
In most cases, as long as the culprits’ feet were consciously on the pedal, their fate will rest in the able hands of a jury, which will be guided by Thomas’ easy-to-understand analogies.
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R. Scott Oswald is managing principal of The Employment Law Group, P.C.
(Note: This article has been edited slightly from the version published by Law360.)
