SuperValu: It’s Not Super Bad! A Practical Look at the Supreme Court’s Recent FCA Scienter Ruling

On June 1, 2023, the Supreme Court released its opinion in United States ex rel. Schutte v. SuperValu Inc., No. 21-1326, and United States ex rel. Proctor v. Safeway, Inc., No. 22-111. The question the Court faced was this: where a complex regulation is ambiguous, does it violate the FCA to submit a claim for reimbursement that is consistent with one reasonable interpretation of the regulation if the party making the claim did not actually believe that interpretation was correct at the time? The Court ruled that this is indeed a violation of the FCA. The required scienter is present when an entity submits a claim that it does not believe is permitted, even if its lawyers can point to another interpretation of the regulation that would allow the claim.

The underlying cases allege that SuperValu’s and Safeway’s retail pharmacies violated the FCA by reporting the full retail price of prescription drugs as their public “usual and customary” price, a data point that Medicare and Medicaid regulations require, when in fact those drugs were provided at a significantly discounted price to many cash-paying patients. The relators (whistleblowers) alleged that not only were the pharmacies required to report the discounted price as their “usual and customary” price, but that the pharmacies in fact knew that they should have reported the discounted prices.

The US Court of Appeals for the Seventh Circuit previously ruled, in granting summary judgment in favor of the pharmacies, that they could not have acted “knowingly” if the pharmacies’ actions were consistent with any objectively reasonable interpretation of the phrase “usual and customary”—even if they did not believe that interpretation at the time.

Writing for a unanimous Supreme Court, Justice Clarence Thomas disagreed with the Seventh Circuit’s interpretation of the FCA’s knowledge requirement, positing that this view would require a claim “to be objectively unreasonable, as a legal matter, before a defendant could be held liable for ‘knowingly’ submitting a false claim, no matter what the defendant thought.” Instead, SuperValu holds that a defendant’s subjective knowledge and beliefs are what must be reviewed to determine if they acted “knowingly” under the FCA (a standard that includes reckless disregard). Thus, if a defendant both (1) “correctly interpreted” the relevant phrase and (2) “believed their claims were false” when submitting the claim, then they could have acted knowingly.

One procedural point bears emphasis. No court has yet confirmed which interpretation of the regulation the pharmacies believed and/or held (as the relators allege) that they did not believe the interpretation they acted on. The Seventh Circuit granted summary judgment on the grounds that it did not matter what the pharmacies believed. Rejecting this, the Supreme Court remanded the case for further proceedings to resolve these disputed questions about knowledge and intent.

WHILE MEANINGFUL, SUPERVALU IS LIMITED

The SuperValu opinion is clear on its limited scope, only touching “one discrete legal issue.” Justice Thomas writes that the only question before the Supreme Court is whether the pharmacies “could have the scienter required by the FCA if they correctly understood that standard and thought that their claims were inaccurate.” In other words, this opinion does not address a scenario where the defendant honestly believed and submitted claims based on an objectively reasonable interpretation of the law, even if a court later rules that the interpretation is wrong (i.e., falsity but no scienter). Nor does it address a scenario where the defendant submitted claims that it believed were false but were actually permitted by the regulation (i.e., scienter but not falsity).

While the opinion is significant, it has limits:

• The opinion did not reach the interplay of ambiguous regulations and “falsity,” a separate (and critical) required element of proof in any FCA case. This is a meaningful limitation. Even if there is evidence that a defendant had doubts about its interpretation of a particular ambiguous regulation at the time of the alleged violation, a defendant is not precluded, by virtue of SuperValu, from later arguing to a court that its claims were not “false” because it did not, in fact, violate the regulation. If a court were to agree in a particular case, SuperValu would be irrelevant as the separate element of “knowledge” would not need to be reached because there was no violation. In other words, if one mistakenly believes they are violating a law that they are not actually violating, there can be no liability. Thus, regulatory ambiguity still has relevance for defensive purposes in FCA cases.

• The opinion is limited to instances where there is evidence that a defendant believed their claims were false in the face of ambiguity. If there is an ambiguous standard that is incorrectly interpreted but a defendant actually believed its incorrect interpretation, then there would be no “knowledge” to support FCA liability.

• The opinion does not touch the element of materiality, which is a key component of proof in any FCA case. Even if a defendant knowingly violated a regulation, an FCA plaintiff still must clear the materiality hurdle by demonstrating that the regulatory violation at issue was meaningful to a government payor’s decision to reimburse claims. If not, then there is no violation. This may be particularly important given some of the opinion’s practical implications concerning reaching out to regulators about ambiguous regulations in real-time (see below for more).

• Unlike many truly ambiguous regulations, “usual and customary” public pricing is a long-standing term of art and standard in the healthcare industry, and thus the ambiguity in these cases is less acute than in other federal healthcare program (FHCP) rules. The evidence was also unfavorable, including emails between SuperValu executives describing the discount program as a “stealthy approach” and cautioning employees away from documenting their discount approach in writing. Here, the pharmacies were not only seemingly told by state Medicaid agencies and pharmacy benefit managers that their position was not reasonably supportable, but they also were alleged to have taken steps to cloak the discount program from reporting. Given the summary judgment procedural posture and the appellate review undertaken by the Supreme Court, this evidence was viewed in the light most favorable to relators.

There is no question that SuperValu is a significant decision that will make it more difficult for some defendants to achieve dismissal or summary judgment on the issue of scienter. With that said, whether a defendant acted knowingly has always been an element of proof that is more difficult than others to eliminate in motion practice because many courts hold that it is bound up in competing facts that a jury should assess.

PRACTICAL IMPLICATIONS AND ISSUES

SuperValu’s effect on FCA litigation will be more limited than relators and the government tout, and the opinion itself also suffers from incorrect assumptions about how the healthcare industry operates. The opinion seems to assume that a healthcare provider will be able to get a clear-cut, authoritative answer from an agency and that there is one agency view of the meaning of every regulation and requirement; however, anyone with experience in healthcare is painfully aware that this is not the case. Further, it’s no secret that different employees within a provider or supplier may also have differing views, both before and after receiving “clarifications” and submitting claims, for example. If some people believe X is the right interpretation and others believe Y is, whose views constitute scienter for the organization? As discussed above, SuperValu may not have been the best vehicle to resolve the knowledge issue because the regulation before it was not particularly ambiguous.

Another limitation is that SuperValu suggests that companies can easily learn the “correct” meaning of an ambiguous rule. There is often not a clear pathway for providers and suppliers to seek definitive guidance quickly. The various agencies involved in regulating healthcare, such as the Centers for Medicare & Medicaid Services (CMS), the Office of Inspector General, state Medicaid agencies, state medical boards and licensing agencies, take different approaches to handling questions, including declining to answer or never responding. Even if providers or suppliers secure a response, as noted above, the interpretations and answers they receive can, and often do, differ from person to person.

SuperValu also leaves the question of what exactly creates an awareness of an “unjustifiably high risk” of falsity unanswered, something Justice Thomas suggests could qualify as scienter in his reasonable driver “speed limit” analogy. The phrase “unjustifiably high risk” conveys that there should be a high evidentiary bar to proving this standard. Justice Thomas’s rather simple analogy does not provide much insight into how providers and suppliers can seek clarification of complex ambiguous rules in the healthcare industry, who can meaningfully opine ambiguous rules, and what kind of data (and how much) is required for providers and suppliers to have ascertained the “correct” meaning of a rule (therefore creating an “unjust risk” if they act contrary to that meaning). Is it one regulator at an agency telling you their interpretation of an ambiguous rule? A written response from a Medicare contractor’s help desk? Two Medicare contractors’ auditors that seemingly agree on an interpretation? A formal published document (e.g., an FAQ or advisory opinion) that the agency labels non-binding and did not go through notice and comment rulemaking? Which of these is enough to defeat summary judgment and which is enough for the relator or government to prevail at trial?

This inquiry into agency interpretation and guidance raises two intersecting issues that affect FCA litigation and compliance advice: the role of sub-regulatory guidance in demonstrating falsity and materiality under the FCA and the potential future of the Chevron doctrine in light of the Supreme Court’s decision to review Loper Bright Enterprises v. Raimondo next term. Is informal or other sub-regulatory guidance enough to defeat any defense that a defendant honestly believed the incorrect interpretation of the law, contrary to the informal guidance? Organizations and courts will continue to grapple with these questions.

So where does this leave an industry faced with ambiguous rules? When it comes to a healthcare organization’s overarching compliance approach, perhaps SuperValu’s impact is somewhat minimal. Providers, suppliers, manufacturers and other companies operating in the highly regulated environment of healthcare should continue to take the appropriate steps to ensure they have an awareness of applicable rules, use reasonable safeguards to promote compliance and help minimize risk in the face of ambiguity and obtain legal advice from competent healthcare regulatory counsel. Organizations may also consider taking additional steps when faced with a truly ambiguous rule including (1) formalizing their interpretation, (2) making the government aware of that interpretation and, if warranted by the underlying facts and nature of the ambiguity, (3) challenging the government’s interpretation:

• Formalizing the interpretation internally, either through written legal advice or after consulting with competent healthcare legal counsel, can address the potential for differing views that create confusion as to the organization’s official interpretation. Relying on a privileged document for this purpose may result in a request by the government to waive privilege, so it may be useful to consider creating non-privileged documents that reflect the organization’s position on a particular issue. This process may also help to develop organizational consensus on the official position on a particular issue in the face of differing internal views. Individuals who feel their voice is not being heard, even if their views are wrong, can turn into relators.

• It can be useful to consider ways to make the government aware of an organization’s interpretation or position, which would be helpful for both scienter and materiality. This approach is not limited to asking the agency if the interpretation is correct. As discussed above, oftentimes one does not receive an answer to the question, or the answer may not come from a source that is authoritative. Also, asking the agency about each interpretative question in healthcare is not practical, feasible or even advisable. There are other ways to document an organization’s views, such as submitting comments to proposed rules or requests for information issued by agencies, sending correspondence to CMS or a Medicare contractor explaining a position in an overpayment refund (or why a refund is not necessary), or otherwise documenting an organization’s stance through letters and audit responses. Organizations wishing to maintain some level of anonymity can also use their trade associations and legal counsel to document industry views and interpretations in both the formal comment submitting process and informal agency outreach.

• Organizations may also want to consider the legal challenges to agency actions or interpretations more often. Organizations typically limit agency legal challenges to appealing claims denials. However, the cost versus benefit analysis of appealing claims denials oftentimes results in a decision to not appeal, even if the organization disagrees with the denial reason. In certain circumstances, pursuing some level of appeal may be a pathway to documenting the organization’s position on an ambiguous standard, which would show a subjective belief in that position. If the appeal is not successful, it would be useful to have healthcare legal counsel advise as to the reliability of that decision in formulating the organizational position on the issue going forward. Beyond appealing claims denials, many organizations are reluctant to sue an agency because they are afraid of jeopardizing its relationship with the regulator. That fear is not justified in many circumstances, as some organizations have sued CMS and won those lawsuits.

In short, SuperValu is a significant decision, but its true reach is more limited than some would suggest. Finding practical ways to manage risk in the face of ambiguous rules will be critical, particularly for those in an industry like healthcare where ambiguous rules abound.