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Supreme Court to Review the Objective Scienter Standard Under the False Claims Act in U&C Drug Pricing Suits

Health & Life Sciences

On January 13, 2023, the United States Supreme Court granted certiorari1 to review the False Claims Act (“FCA”) scienter standard in two FCA whistleblower cases from the Seventh Circuit, U.S. ex rel. Schutte v. SuperValu Inc., et al., No. 21-1326 and U.S. ex rel. Proctor v. Safeway, Inc., No. 22-11. The Supreme Court will decide whether a defendant’s objectively reasonable, but incorrect, interpretation of a legal requirement constitutes a “knowing” violation of the FCA.

The decision will be crucial for businesses who regularly submit claims to the government - especially for the heavily regulated healthcare industry, which often faces ambiguous legal standards. The Supreme Court's review will clarify what is required to invoke an "objectively reasonable" defense to scienter in FCA cases. The decision may also provide clarity on what constitutes “authoritative” guidance. In the interim, businesses should consider the process by which they document interpretations of an ambiguous legal standard that may result in FCA liability.

The False Claims Act

The False Claims Act ("FCA"), 31 U.S.C. §§ 3729 - 3733, sets forth liability, inter alia, for any person who knowingly submits or causes another to submit a false claim to the government, or knowingly makes a false record or statement to get a false claim paid by the government.2 In addition, the FCA provides liability for any person who avoids having to pay money to the government.3 Any person found to have violated the FCA is liable for a civil penalty of up to $25,0764 for each such false or fraudulent claim, plus three times the amount of damages sustained by the government. The FCA is enforced by the Department of Justice ("DOJ"), and both the DOJ and private individuals (known as "whistleblowers" or "relators"),5 may bring a civil action to enforce the FCA's provisions.

The Usual and Customary Price

Pharmacies billing to Medicaid or Medicare Part D for prescriptions dispensed to program beneficiaries may not charge the Government any more than their “usual and customary charge to the general public.” 42 C.F.R. §§ 423.100, 447.512(b). In basic terms, "usual and customary price" refers to the cash price charged to the general public. Federal and state government healthcare programs, including Medicaid and Medicare Part D, reimburse for prescriptions dispensed to program beneficiaries in an amount for each drug that is limited to the lesser of certain prices, including a pharmacy's "usual and customary price."

Procedural History

Pharmacies that knowingly submit false claims for payment based on inflated "usual and customary price" may be subject to FCA liability. That was the theory of liability in both U.S. ex rel. Schutte v. SuperValu Inc., et al. and U.S. ex rel. Proctor v. Safeway, Inc. In both cases, pharmacies offered their patients a discount based on either a membership or price-matching program. Based on whistleblower complaints, the United States brought actions against the defendants because they submitted claims for reimbursement to the government based on a usual and customary price which did not take into account the lower prices offered under the discount and price-matching programs.

In the district court, Safeway argued that it could not be liable under the FCA because the whistleblowers could not establish that false claims were submitted "knowingly," which is the required scienter element for FCA liability. Safeway contended that it reported usual and customary price in a way that was objectively reasonable and the FCA prohibits only knowing violations of clearly established law. Safeway argued that reasonable minds could differ on whether membership discount and price-matching programs affect usual and customary prices, and there was no authoritative guidance on that question. The district court agreed with Safeway and dismissed the case.

Similarly, in SuperValu, the district court held that SuperValu's interpretation of the usual and customary price regulation, though wrong, was an objectively reasonable interpretation of the ambiguous regulatory text. Thus, without authoritative guidance prohibiting SuperValu's interpretation, the scienter element could not be met.

Relators in both cases appealed to the Seventh Circuit Court of Appeals, but in both cases, the district courts were affirmed.6 The Supreme Court will deliberate on these issues this term.

At Quarles, we monitor FCA and Usual and Customary Pricing case law and settlements and the implications, including the effect the objective scienter standard will have on guidance on conditions of payment from intermediaries such as Medicare Part D sponsors or pharmacy benefit managers when analyzing FCA liability.

Kirti Vaidya Reddy and Theresa DeAngelis track developments in application of the False Claims Act, drug pricing and prescription discount laws. For more information, please contact your Quarles & Brady attorney or:

1 See Supreme Court Order Granting Certiorari (Jan. 13, 2023), available at, https://www.supremecourt.gov/orders/ordersofthecourt/22

2 31 U.S.C. § 3729(a)(1)(A)-(B).

3 31 U.S.C. § 3729(a)(1)(G).

4 21 C.F.R. § 85.5, Table 1.

5 FCA relators are authorized to bring FCA claims on behalf of the government and are entitled to a percentage of the government's recoveries in such cases.

6 See United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021), decided August 12, 2021, and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), decided April 5, 2022.

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