30 F.4th 649
7th Cir.2022Background
- Relator Proctor sued Safeway under the False Claims Act, alleging Safeway submitted inflated Medicare/Medicaid claims by reporting its higher “retail” prices as the pharmacies’ “usual and customary” (U&C) prices while offering lower discounted prices to many cash/customers.
- Safeway used three relevant pricing practices between 2006–2015: ad hoc individual price-matching, a $4 Generics Program (reported as U&C in some divisions), and membership discount clubs (MCGP/LMP) that required simple enrollment and were not reported as U&C.
- CMS issued a “Lower Cash Price Policy” memorandum (Oct. 2006) and incorporated a footnote into the Medicare Prescription Drug Benefit Manual (Dec. 2006) stating Wal‑Mart’s consistent $4 generics price counts as U&C.
- PBMs and some state Medicaid programs sent communications suggesting discounts should be included in U&C; parties dispute whether those communications constituted authoritative agency guidance.
- The district court granted Safeway summary judgment applying Safeco’s standard (as applied to the FCA in Schutte), and the Seventh Circuit affirmed: Safeway’s U&C interpretation was objectively reasonable prior to Garbe, and the CMS Manual footnote was not authoritative guidance under Safeco.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Safeco’s objective‑reasonableness/authoritative‑guidance standard apply to the FCA scienter element? | Safeco should not shield FCA claims; scienter can be shown here. | Safeco applies; court should require objective reasonableness and agency guidance to show reckless disregard. | Court applied Schutte: Safeco applies to FCA reckless‑disregard inquiry. |
| Was Safeway’s interpretation of “usual and customary” objectively unreasonable? | Safeway’s discounts (esp. where majority of cash sales were discounted) show its reported retail prices were false and unreasonable. | The regulatory text was ambiguous pre‑Garbe; Safeway’s reading (excluding some price‑matches and club discounts) was one objectively reasonable interpretation. | Court: Safeway’s interpretation was objectively reasonable for its price‑matching and discount programs prior to Garbe. |
| Did the CMS Manual footnote constitute “authoritative guidance” that warned Safeway away from its interpretation? | The footnote expressly treated consistent Wal‑Mart $4 pricing as U&C and should have put Safeway on notice to report discount‑club prices as U&C. | The footnote is nonbinding, isolated in a long manual, addressed sponsors not pharmacies, and was removed/changed over time—so not authoritative. | Court: The single, nonbinding footnote was not authoritative under Safeco and did not establish reckless disregard. |
| Are PBM and state communications authoritative guidance under Safeco? | PBM and state notices showed industry and regulators understood U&C to include discounts. | PBM contracts and state Medicaid materials are not controlling federal agency guidance for the scienter inquiry. | Court: PBM/state materials are not authoritative guidance from CMS and therefore do not satisfy Safeco’s requirement. |
Key Cases Cited
- Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007) (establishes objective‑reasonableness + authoritative‑guidance standard for reckless‑disregard inquiries)
- United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) (applies Safeco standard to FCA scienter; held similar CMS footnote insufficiently specific re price‑matching)
- United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016) (held discount‑program prices can be U&C when broadly available)
- Univ. Health Servs., Inc. v. U.S. ex rel. Escobar, 579 U.S. 176 (2016) (FCA requires rigorous scienter; not a vehicle for ordinary regulatory breaches)
- Kisor v. Wilkie, 139 S. Ct. 2400 (2019) (limits deference to agency interpretations; relevant to whether CMS Manual merits deference)
- Purcell v. MWI Corp., 807 F.3d 281 (D.C. Cir. 2015) (discusses need for specificity and authoritative quality in agency guidance under Safeco)