Supreme Court to Consider the Meaning of “Knowingly” Under the False Claims Act

Supreme Court to Consider the Meaning of “Knowingly” Under the False Claims Act

Legal Sidebari

Supreme Court to Consider the Meaning of
“Knowingly” Under the False Claims Act
April 13, 2023
On April 18, 2023, the Supreme Court is scheduled to hear arguments in a pair of False Claims Act (FCA)
cases involving allegations that retail pharmacies charged the government inflated prices for prescription
drugs under Medicare and Medicaid. The FCA is a qui tam statute that authorizes private individuals—
called relators—to sue to recover money on behalf of the government from any person who knowingly
submitted false claims to the government for payment. These relators, who are often whistleblowers, are
awarded a portion of the proceeds in a successful action or settlement. The cases before the Supreme
Court, consolidated as United States ex rel. Schutte v. SuperValu, Inc., concern the scienter, or mental
state, element of an FCA violation. Specifically, the Court will consider whether a defendant “knowingly”
violates the FCA if it is aware of a substantial risk that its payment submissions might violate a legal
requirement but the submissions are also consistent with an objectively reasonable (but wrong)
interpretation of that requirement. Stated another way, does the defendant’s subjective intent at the time of
submission matter if its incorrect interpretation of the legal requirement was objectively reasonable?
Resolution of this issue is important not only for guidance in FCA cases—where circuit courts are
divided—but potentially also for a variety of federal laws whose civil penalties turn on whether the
defendant acted knowingly.
The FCA’s Knowledge Standard and the Allegations in Schutte
A person is liable for a civil penalty and triple damages under the FCA if the person “knowingly presents,
or causes to be presented, a false or fraudulent claim for payment or approval.” The FCA defines this
scienter requirement, stating that a person acts “knowingly” when, “with respect to information,” the
person (1) “has actual knowledge of the information,” (2) “acts in deliberate ignorance of the truth or
falsity of the information,” or (3) “acts in reckless disregard of the truth or falsity of the information.”
Knowledge can be established without “proof of specific intent to defraud.”
The Schutte case involves two qui tam actions on behalf of the federal government and several states. The
relators allege that the defendants, operators of hundreds of retail pharmacies, violated the FCA by
knowingly reporting a false price for certain prescription drugs in seeking government reimbursement.
Specifically, the relators allege that the defendants reported their higher, retail prices instead of the lower,
discounted prices offered to many consumers through price-match and membership programs. This
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practice, according to relators, violated federal and state laws requiring pharmacies to report their “usual
and customary” prices (U&C prices) when submitting reimbursement claims through Medicare Part D
and Medicaid. Although the federal government has a right to intervene in FCA cases, it did not do so in
this litigation. The district court in Schutte held, and the defendants did not contest on appeal, that they
submitted false claims. Instead, the defendants argue that they did not do so knowingly.
The Seventh Circuit’s Decisions Below
In each of the decisions below, a divided three-judge panel of the Seventh Circuit held that the defendants
did not act “knowingly” and thus did not violate the FCA. The court based its reasoning on the Supreme
Court’s 2007 decision in Safeco Insurance Co. v. Burr.
In Safeco, the Court interpreted the “willfully” standard in a different federal statute, the Fair Credit
Reporting Act (FCRA), to encompass both knowing and reckless mental states. The Court held that the
defendant in that case did not act recklessly because its interpretation of the law, though incorrect, was
objectively reasonable in light of the “less-than-pellucid” statutory text and the lack of “guidance” from
federal appellate courts or regulators. In a footnote that has become central to the Schutte case, the Safeco
Court declined to consider evidence of the defendant’s “subjective bad faith.” The Safeco Court opined
that where “the statutory text and relevant court and agency guidance allow for more than one reasonable
interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such
interpretation as a knowing or reckless violator.”
The Seventh Circuit in Schutte applied Safeco’s rule because of the similar scienter elements in the FCA
and FCRA. The court asked whether the pharmacy defendants’ interpretation of the U&C price as
excluding certain discounted prices was objectively reasonable, holding that it was. The court concluded
that the references to U&C prices in Medicare and Medicaid regulations were susceptible to “multiple
interpretations.” The court also concluded that no “authoritative guidance” called the defendants’
interpretation into question, holding that only “binding precedent” from federal courts of appeals or
“sufficiently specific” guidance from the relevant federal agency would qualify as authoritative for
purposes of this analysis. Accordingly, the court declined to consider U&C price definitions in state
Medicaid programs or contracts with pharmacy benefit managers (private companies that serve as
intermediaries between pharmacies and Medicare Part D plan sponsors) as evidence that defendants’
interpretation was unreasonable. Although the relators identified an agency manual from the Centers for
Medicare and Medicaid Services (CMS) advising pharmacies to treat certain discounted prices as their
U&C price, the court did not consider that information authoritative because it appeared in a single
footnote and was subject to revision at any time. Ultimately, the court opined that even if the defendants
believed they were reporting incorrect U&C prices at the time they submitted their claims, their subjective
beliefs could not establish scienter under the FCA because the knowledge “inquiry is an objective one.”
The court considered its decisions to be consistent with that of four other circuits that applied Safeco in
evaluating the FCA’s scienter element, citing the decisions of the D.C. and Eighth Circuits, and the
unpublished, nonprecedential opinions of the Third and Ninth Circuits.
One judge on the Seventh Circuit panels dissented, arguing that a jury could reasonably find, based on
internal company documents or circumstantial evidence of price disparities, that the defendants actually
knew or deliberately ignored that the prices they reported to the government were not their U&C prices,
thus satisfying either of the first two prongs of the FCA’s definition of “knowingly.” The dissenting judge
also found the majority’s reasoning inconsistent with the Eleventh Circuit’s approach in another FCA
case.

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Arguments Before the Supreme Court
In their briefing to the Supreme Court, the relators (the petitioners in Schutte) and the federal government
(participating as amicus curiae) argue that the Seventh Circuit’s interpretation of the FCA’s scienter
requirement is inconsistent with the statute’s text, common-law background, and legislative history. They
argue that subjective intent is an integral part of both the “actual knowledge” and “deliberate ignorance”
prongs of the FCA’s definition of “knowingly.” According to their reading of the statute’s legislative
history, Congress added the statutory definition in 1986 to extend liability to government contractors who
suspected their claims were false and failed to verify the truth of those claims. The relators and the United
States also maintain that the Seventh Circuit erred in relying on Safeco because the Supreme Court has
explained that courts must evaluate scienter on a statute-by-statute basis. In their view, the FCRA is an
inapt comparison to the FCA, because the FCRA incorporates common-law standards of tort liability for
reckless conduct, rather than the common-law standards of fraud that underlie the FCA’s more capacious
definition of knowledge.
The relators and the federal government additionally argue that under Supreme Court precedent, parties
who contract with the government have a duty to seek clarification of ambiguous legal requirements in
order to present true and accurate claims for reimbursement. The United States posits that the Seventh
Circuit’s rulings diminish contractors’ incentives to seek clarification of their legal obligations, by
allowing them to “escape FCA liability simply by identifying wrong-but-reasonable post hoc
justifications for their conduct if and when litigation occurs.” Both the relators and the government ask
the Court to remand the Seventh Circuit’s decisions for application of the “appropriate” scienter standard.
The relators ask the Court, in the alternative, to hold that a reasonable jury could find that the defendants
acted knowingly within the meaning of the FCA, and to remand the cases to the district court for trial.
The pharmacy defendants (the respondents in Schutte) argue that “[w]hen the government fails to speak
clearly, a regulated party cannot ‘know’ what the law requires.” They maintain that Congress and the
regulatory agencies could have, but chose not to, specify how contractors should calculate prescription-
drug reimbursement rates under Medicare and Medicaid, or to define U&C prices in a consistent way.
They also point out that the government audited them “literally thousands of times” while the defendants
offered their “well-known” price-matching and membership programs, without ever raising concerns
about the defendants’ reported reimbursement rates. The defendants advocate for the Safeco standard
applied by the Seventh Circuit, which, in their view, is consistent with the approach taken by the majority
of circuits. According to the defendants, the Safeco rule also comports with Supreme Court precedent
construing the FCA’s scienter requirement strictly in order to provide FCA defendants “fair notice” of
prohibited conduct.
Considerations for Congress
A Supreme Court decision in this case could clarify the application of the FCA’s scienter element in cases
involving disputed legal requirements. If Congress were to disagree with the Court’s interpretation of the
FCA’s scienter standard, it might have the option to amend the statute in accordance with Congress’s
policy choice. A possible limit on Congress’s ability to respond through lawmaking is if the Court
grounds its reasoning in the constitutional, due process principle of “fair notice” that the defendants
invoke. A decision in Schutte might also inform future interpretations of other federal statutes that
authorize civil penalties based on “knowing” violations. For example, the Civil Monetary Penalties Law
(CMPL) allows the Department of Health and Human Services (HHS) to recover civil penalties from
persons who “knowingly” present Medicare claims that the person “knows or should know” contain false
information. CMPL regulations define “knowingly” consistently with the FCA’s three-prong definition,
except that the CMPL definition describes a mental state with respect to acts, such as submitting a claim,
rather than with respect to information. The CMPL’s statutory definition of “should know”—which

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applies with respect to information—tracks the “deliberate ignorance” and “reckless disregard” prongs of
the FCA definition. Additionally, CMPL regulations list “actual knowledge” as an aggravating factor for
purposes of determining penalty amounts. If the Court were to hold in Schutte that subjective intent at the
time of claim submission is irrelevant for FCA liability where the inaccurate part of the claim is consistent
with an objectively reasonable interpretation of the applicable legal requirement, that holding could
inform how HHS or courts construe the scienter elements in the CMPL or how HHS measures culpability
for purposes of assessing penalties under that statute.

Author Information

Victoria L. Killion

Legislative Attorney

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