The Supreme Court sides with whistleblowers in False Claims Act cases and rejects “objectively reasonable” interpretation of the law defense.

On June 1, 2023, the Supreme Court issued a decision in the pending whistleblower cases, United States ex rel. Schutte v. SuperValue and United States ex rel. Proctor v. Safeway.  The Seventh Circuit Court of Appeals previously ruled against the whistleblowers, finding the retail pharmaceutical companies had reasonably interpreted regulatory requirements and, therefore, could not have knowingly submitted a false claim to the Government.  The Supreme Court, however, disagreed. 

In the two cases, whistleblowers claimed that the companies were offering prescription drugs at discounted prices to customers paying out of pocket, while charging higher rates to the government.  But Medicare and Medicaid require pharmacies to charge the same price to the government as the general public.

At oral argument, the companies argued that liability for fraud could be avoided by showing that “an objectively reasonable” reading of the law supported their conduct, even if the company believed the conduct was unlawful.  The whistleblowers opposed, stating such a reading would permit “some of the worst offenders to escape liability.”  The Government supported the whistleblowers, stating that companies should “not say things they do not believe to be true.”

In a unanimous 9-0 decision written by Justice Clarence Thomas, the Court rejected the companies “objectively reasonable” argument. The Court held the False Claims Act’s scienter requirement “refers to [defendants’] knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”  If a company “correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”  

The Court further analyzed the text of the False Claims Act and its connection to common-law principles.  Under the common-law, fraud “ordinarily ‘depends on a subjective test’ and the defendant’s ‘culpable state of mind.’”  Thus, “what matters for an FCA case is whether the defendant knew the claim was false,” and “it does not matter whether some other, objectively reasonable interpretation” exists. 

The Court’s decision now settles a divide among courts across the nation.  A company’s subjective knowledge of its unlawful conduct is relevant, and reliance on objectively reasonable interpretations may not be a defense against False Claims Act liability moving forward.  Pharmacies and healthcare providers, specifically, should consider reviewing billing practices, policies and procedures, and compliance with any regulations.

If you have questions about the False Claims Act or how you can defend against such claims, please contact Alexandria Rowen (716.848.1759) or any of the attorneys in our False Claims Act & Whistleblower Protection Practice Group.

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