On August 12, 2021, the Seventh Circuit joined the Third, Eighth, Ninth, and D.C. Circuits in holding that the “objective reasonableness” standard for determinations of scienter, as set forth by the Supreme Court in Safeco Insurance Co. of America v. Burr, 551 U.S. 47, 70 (2007), applies in the context of False Claims Act (FCA) litigation. In doing so, the Seventh Circuit observed that, under Safeco, a defendant cannot possess the requisite scienter under the FCA if: (1) it has an objectively reasonable reading of the statute or regulation; and (2) there was no authoritative guidance warning against its view. This case has significant implications for defendants in FCA litigation by finding that an objectively reasonable interpretation of the law will defeat allegations of false claims.
Further, the decision is the latest victory in a spate of cases brought by the plaintiffs’ bar claiming that pharmacies are required to report special prices—such as membership club prices or matched competitor prices—as their usual and customary (U&C) prices. Virtually every pharmacy that has operated a membership club has faced scrutiny through actions under the FCA and consumer-class actions. The Seventh Circuit’s decision comes in the wake of the recent jury verdict in favor of CVS in the matter of Carl Washington (formerly known as Corcoran) et al. v. CVS Pharmacy, Inc., No. 15-cv-03504 (N.D. Ca. Jun. 24, 2021). This victory will support pharmacies’ defenses in other similar litigation alleging the submission of false U&C prices, particularly when the alleged false conduct occurred before 2016, given that the Seventh Circuit found that reporting retail prices—as opposed to special prices such as price matches—was an objectively reasonable approach to U&C reporting.
The Lower Court’s Decision:
In U.S. ex rel. Schutte v. SUPERVALU, No. 11-cv-3290 (7th Cir. Aug. 12, 2021), two whistleblowers filed suit under the FCA in 2011, alleging that pharmacies operated by the grocery chains SUPERVALU and Albertsons knowingly caused false claims to be submitted to government healthcare programs because they submitted their retail cash prices, not customer-initiated matches of their competitors’ prices, as their U&C prices. The government declined to intervene in the case. Following the close of discovery, the district court initially entered partial summary judgment in favor of the whistleblowers on the sole issue of the FCA’s falsity element in accordance with the Seventh Circuit’s 2016 decision in U.S. ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), which had held that Kmart submitted false claims when it did not pass on its discount-program prices—that were held to be widely available—to the government.
After this decision limited to falsity, the district court then entered complete summary judgment in favor of the pharmacies, applying Safeco. The district court concluded that SUPERVALU and Albertsons could not have acted “knowingly” under the FCA because their understanding that U&C definitions did not require the pharmacies to submit lower, price-match prices as U&C, was objectively reasonable.
The Seventh Circuit’s Decision:
On appeal, in a 2-1 decision, the Seventh Circuit joined all other circuits that have reviewed this issue by applying the Supreme Court’s decision in Safeco to the FCA. In finding for the pharmacies, the Court first concluded that the meaning of U&C, as set forth in the relevant statutes and regulations, was ambiguous. The Court then noted that SUPERVALU and Albertsons’ interpretation of Medicaid laws that defined U&C to refer to its retail cash prices, as opposed to its price-match prices that it did not necessarily charge all or most of its customers, was objectively reasonable. The Court rejected the Relators’ contention that the only objectively reasonable interpretation of U&C was to include special prices, such as club prices or price matches, and found that an incorrect interpretation does not render an interpretation unreasonable. The Court further cautioned that its prior decision in Garbe did not address the FCA’s scienter prong and that the Court did not say that the only way to define U&C was the way the Court defined it in Garbe. In addition, the Court observed that it is irrelevant whether a defendant believed that it was violating its U&C reporting requirements, as the FCA establishes liability for knowingly false claims and, thus, a defendant’s subjective intent is insufficient for purposes of establishing liability.
Finally, the Court concluded that there was no authoritative guidance that should have warned SUPERVALU and Albertsons away from their interpretation of U&C, noting that there was no circuit court precedent or guidance from a relevant agency prior to Garbe. Notably, the Court specifically rejected the application of a 2006 Centers for Medicare and Medicaid Services Medicare Prescription Drug Benefit Manual, which neither addressed price matches nor customer-initiated prices.
Accordingly, the Court affirmed the district court’s holding, concluding that SUPERVALU and Albertsons’ understanding of the definition of U&C was objectively reasonable, and there was no authoritative guidance that placed the pharmacies on notice that their interpretation was erroneous. This decision—which represents the most recent in a series of Circuit Court rulings adopting the Safeco standard in the context of FCA litigation—is a welcome outcome for FCA defendants.
Case to Watch:
The Seventh Circuit will also review the same lower court’s adoption of the Safeco “objective reasonableness” standard with respect to Safeway’s pharmacy programs, resulting in summary judgment in favor of Safeway. See U.S. ex rel. Proctor v. Safeway, Inc., 466 F. Supp. 3d 912 (C.D. Ill. 2020). Immediately following its decision in Schutte, the Seventh Circuit invited the parties in the Proctor case to brief Schutte’s impact on the appeal. Oral argument is scheduled to take place on September 9.
Reed Smith will continue to track the progress of this and any related litigation. Please reach out to the health care attorneys at Reed Smith if you have any questions about this precedent or any other False Claims Act related inquiries.