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Safeway Prevails on Motion for Summary Judgment in Whistleblower Pharmacy Usual and Customary Pricing Case

Health & Life Sciences Alert Roger N. Morris, Amy Cotton Peterson, Simone Colgan Dunlap, Christopher T. Dang

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A federal judge for United States District Court for the Central District of Illinois granted Safeway, Inc.’s motion of summary judgment in a whistleblower-initiated pharmacy usual and customary pricing (U&C) case alleging Safeway overbilled federal and state health care programs. The qui tam relator in U.S. ex. rel. Proctor v. Safeway, alleged that Safeway violated the False Claims Act (FCA) by knowingly failing to include the pharmacy's generic drug discount program and competitor price matching into the pharmacy’s usual and customary U&C pricing reports.

In its decision granting summary judgment in favor of Safeway, the court noted that the Seventh Circuit’s May 2016 opinion in U.S. ex. rel. Garbe v. Kmart Corp “definitively answered the question as to the impact of discount and price matching programs and U&C price.” However, the court found that between 2006 and 2015, there was some authority to support both Safeway’s contention that industry practice understood U&C to mean the retail cash price that the pharmacy charged to the “general public” (i.e., the price automatically charged to a majority of a pharmacy’s cash-paying customers for a particular drug, on a particular day, and at a particular store) without a customer having taken affirmative action as to the price, as well as the relator’s contention that PBM and CMS guidance intended to capture discounts such as generic discount pricing and price matching into the pharmacy’s U&C.

Notably, the FCA provides for liability if a person “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” A person acts “knowingly” for purposes of the FCA if they: “[have] actual knowledge of that information”; “acts in deliberate ignorance of the truth or falsity of the information”; or “acts in reckless disregard of the truth or falsity of the information.” Proof of specific intent to defraud is not required.

The court noted that before Garbe, there was no authoritative guidance that warned Safeway away from what was an objectively reasonable position: that it did not have to include such discounts in its U&C reporting. While Safeway’s purported internal communications pointed to concern about whether its generic discount and price matching programs would become the pharmacy’s U&C, there was no definitive guidance from courts of appeals or binding authority from applicable agencies.

The court then applied the “objective scienter standard” for knowledge established by the Supreme Court in Safeco Insurance Co. of Am. v. Burr, 551 U.S. 47 (2007). Under Safeco’s “objective scienter standard,” the conduct of an actor cannot meet a statute’s scienter requirement absent an “objectively unreasonable” interpretation of the statute’s legal requirements. While Safeco originally applied this reasoning to the Fair Credit Reporting Act (FCRA), the standard has been applied to FCA cases in the D.C., Third, Fifth, Eighth, and Ninth Circuits to assess whether a defendant “knowingly” engaged in making a false claim.

Here, because there was no authoritative guidance warning Safeway away from its interpretation of U&C prior to the Seventh Circuit’s May 2016 opinion in Garbe, the court found that Safeway’s position at the times in question was objectively reasonable. As a result, the relator could not meet the scienter requirement under the FCA since it could not establish that Safeway “knowingly” made false claims. Consequently, Safeway was entitled to summary judgment.

Ultimately, the district court’s ruling in Proctor establishes an important defense for historic allegations of U&C-related FCA violations in the Seventh Circuit prior to Garbe. The case could also be illustrative to defense arguments in other circuits where courts and regulatory agencies have yet to adopt authoritative positions on pharmacy discounts and U&C.

For more information on how this ruling could affect your business, contact your Quarles & Brady attorney or:

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