UNITED STATES OF AMERICA ex rel. TRACY SCHUTTE, et al., Relators-Appellants, v. SUPERVALU INC., et al., Defendants-Appellees.
No. 20-2241
United States Court of Appeals For the Seventh Circuit
DECIDED AUGUST 12, 2021
ARGUED JANUARY 19, 2021
Appeal from the United States District Court for the Central District of Illinois.
No. 11-cv-3290 — Richard Mills, Judge.
Before ROVNER, HAMILTON, and ST. EVE, Circuit Judges.
This issue comes to us in a lawsuit against Defendants (collectively, “SuperValu“), which claims that SuperValu knowingly filed false reports of its pharmacies’ “usual and customary” (“U&C“) drug prices when it sought reimbursements under Medicare and Medicaid. SuperValu listed its retail cash prices as its U&C drug prices rather than the lower, price-matched amounts that it charged qualifying customers under its discount program. Medicaid regulations define “usual and customary price” as the price charged to the general public. Based on our decision in U.S. ex rel. Garbe v. Kmart Corporation, 824 F.3d 632 (7th Cir. 2016), the district court held that SuperValu‘s discounted prices fell within the definition of U&C price and that SuperValu should have reported them. Relators Tracy Schutte and Michael Yarberry (the “Relators“) thus established falsity, the first prong of their False Claims Act (“FCA” or “the Act“) claims. On the scienter prong, however, the court applied the Safeco standard to the FCA and held that SuperValu did not meet it.
We agree that the scienter standard articulated in Safeco applies to the FCA. Here, as with the Fair Credit Reporting Act (“FCRA“), there is no statutory indication that Congress meant its usage of “knowingly,” or the scienter definitions it encompasses, to bear a different meaning than its common law definition. We further hold that while the FCA‘s scienter provision is defined via three distinct definitions, a failure to establish the Safeco standard as a threshold matter precludes liability under any of these definitions. Applying this standard to the case at hand, SuperValu did not act with the requisite knowledge under the FCA. The judgment of the district court is affirmed.
I. Background
Underlying this case is a complex regulatory scheme, the details of which inform whether SuperValu has run afoul of the FCA‘s prohibition on submitting false claims to the government. Before canvassing the case facts, it is necessary to provide a brief overview of both the regulatory schemes under Medicare Part D and Medicaid and our FCA precedent involving those statutes.
A. Medicare Part D and Medicaid
Medicare and Medicaid are government healthcare programs administered by the Department of Health and Human Services through the Centers for Medicare and Medicaid Services (“CMS“). Medicare Part D is a prescription drug benefit providing insurance coverage to beneficiaries. The government employs a multi-tier system to provide Medicare prescription subsidies. At the outset, CMS awards contracts to private plan sponsors to facilitate the benefits program and pays them directly, based in part on the number of enrolled beneficiaries.
Medicare Part D limits prescription drug reimbursement rates to the lower of either the “actual charge” or “106 percent of the average sales price,” subject to specific limitations.
Medicaid operates in similar fashion but leverages the cooperative efforts of the states.
Medicaid programs involve third-party submission of claims to the government, these reimbursement processes give rise to FCA litigation.
B. United States ex rel. Garbe v. Kmart Corporation
We confronted one such FCA qui tam suit in United States ex rel. Garbe v. Kmart Corporation. In Garbe, we elaborated on the falsity prong of FCA claims in the context of U&C prices reported by pharmacies. The Garbe relator alleged that Kmart submitted false claims for prescription reimbursements undеr Medicare and Medicaid by failing to report its discount-program prices as its U&C prices. Garbe, 824 F.3d at 636. Instead, Kmart had reported the higher prices it charged to third-party insurers and non-program cash customers.
Our decision referenced a variety of sources — dictionary definitions, regulatory definitions, Medicare policy, caselaw, and a CMS manual — to determine the boundaries of “usual and customary price charged to the general public.” We noted that unless state regulations provided a different meaning, the U&C price “is defined as the ‘cash price offered to the general public.‘” Id. at 643. Upon consideration
C. Factual Background
SuperValu, through several subsidiaries, operated or controlled roughly 2,500 grocery stores with over 800 in-store pharmacies between 2006 and 2016. In 2006, SuperValu‘s national headquarters implemented the discount program underlying this appeal, which ran until December 2016. The price-match initiative was an attempt to compete with pharmacies such as Wal-Mart, which had launched a discount program that same year offering hundreds of generic drugs at $4 per 30-day prescription. SuperValu sought to remain competitive without adopting Wal-Mart‘s program. According to SuperValu‘s Vice President of Prescription Services, implementing a $4 generics program would cost SuperValu $40–$50 million in losses if $4 was the U&C cost passed on to PBMs. Instead, SuperValu employed what it internally characterized as a “‘stealthy’ approach.” Corporate officers framed SuperValu‘s price-match program as an “‘exception’ for customer service reasons” that would not be reported as the U&C price.
Under SuperValu‘s price-match program, its regional stores could match lower prices on prescription drugs offered by other, local pharmacies within a specific proximity to the regional store. But the discount was not automatic. Customers had to request a price match. Once SuperValu pharmacists verified the competitor‘s price, SuperValu automatically applied the discount for that customer on future refills.2 Any customer could request a price match, including those with insurance or government healthcare plans. When applying a price-match cost for insured customers, the pharmacists overrode the price in the pharmacy‘s automatic system and manually entered the price-matched cost. SuperValu instructed pharmacies to process these price-match sales as cash transactions rather than third-party payor claims that would go directly to insurers.
SuperValu did not report these price-matches when it submitted reimbursement claims to third-party insurers, including Medicare Part D and Medicaid. Rather, SuperValu listed its retail price — the price for uninsured cash customers — as its U&C price. Many of SuperValu‘s PBM contracts contained U&C price clauses, but the contractual definitions of that term varied.
discount programs, either including discount programs as a blanket rule or excepting specific types of discounts. Others did not mention discounts at all. None of the contracts expressly included price-matching, although one PBM, Medco, stated in its 2007–2008 manual that it included a “competitor‘s matched price” in its definition of U&C price.
Between 2006 and 2016, sales under SuperValu‘s price-matching policy accounted for 26.6% of SuperValu‘s cash drug sales and 1.69% of its total prescription drug sales — roughly 6.3 million sales. In 2012, the majority of the cash sales for 44 of SuperValu‘s top 50 prescription drugs were made at a price-match cost rather than SuperValu‘s retail price.3 SuperValu continued its price-match program until December 2016 and did not report its discount prices as its U&C prices to any PBM or state agency during that time.
D. Procedural Background
In 2011, the Relators filed this suit against SuperValu under the FCA on behalf of the federal government and several states.4 They alleged that SuperValu knowingly caused false payment claims to be submitted to government healthcare programs between 2006 and 2016 by incorrectly reporting their U&C drug prices. The Relators’ theory of the case was
that SuperValu price-matched to avoid losing customers to competitors with lower drug prices like Wal-Mart and made up the difference by charging government healthcare programs its higher, retail price. In effect, the Relators argued, SuperValu caused the government to subsidize its market competitiveness. The government did not intervene in this case.
The district court, relying on Garbe, granted summary judgment to the Relators on the falsity prong.5 It acknowledged that SuperValu‘s price-match program required customers to initiate a discount and found that discount sales comprised a lower portion of SuperValu‘s sales — roughly 2% of total transactions and 26.9% of cash sales — compared to Kmart‘s discounts in Garbe, which amounted to 89% of its cash sales. Even so, the court held that the fact that SuperValu made its price-match policy available to the general public throughout a benefit year was determinative.
In a separate order, the district court sided with SuperValu on the scienter prong. The court first applied Safeco‘s standard to the FCA‘s scienter prong and held that a failure to establish the objective scienter standard precluded liability under the FCA. Under the Safeco standard, the court held that SuperValu‘s understanding of U&C price, while incorrect, was objectively reasonable at the time. The district court first observed that there were multiple district court decisions endorsing SuperValu‘s view of U&C price or recognizing that the term was open to interpretation. It also took note of the unique circumstance in which Garbe addressed the definition
of U&C price. Because the Seventh Circuit added that question to the issues certified for interlocutory appeal, the district court suggested that
Based on the available caselaw, the court held that it was unclear that SuperValu‘s program fell within the U&C definition. Further, the court held that prior to our 2016 decision in Garbe, there was no authoritative guidance to warn SuperValu away from its interpretation of U&C price. In view of these conclusions, the district court entered summary judgment for SuperValu on all FCA claims, which the Relators now challenge.
II. Discussion
On appeal, the parties ask us to determine whether Safeco applies to the FCA‘s scienter standard and, if so, to what extent. Our answers to those questions will dictate the outcome of the final issue in this appeal — whether the district court properly granted summary judgment for SuperValu on the scienter prong of the FCA claim. We review the district court‘s determinations on these legal issues de novo and affirm the grant of summary judgment to SuperValu. Bigger v. Facebook, Inc., 947 F.3d 1043, 1048, 1051 (7th Cir. 2020).
A. The False Claims Act
The FCA imposes civil liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”
Although “Congress did not define what makes a claim ‘false’ or ‘fraudulent,‘” the Supreme Court has applied the common law meaning of fraud to these terms as they are used in the FCA. Id. at 1999. Under that definition, a claim may be false or fraudulent through either express misrepresentations or “misrepresentations by omission.”
Unlike the falsity prong, the FCA‘s scienter requirement is statutorily defined. A party who submits a false claim to the government is on the hook for FCA liability only if it acted knowingly.
B. Safeco Insurance Company of America v. Burr
While the FCA lists the range of scienter levels encompassed by “knowingly,” it does not further define those terms. SuperValu urges us to look to the Supreme Court‘s decision in Safeco for guidance. Safeco involved an interpretation of the FCRA‘s common law scienter requirement, under which plaintiffs must show that defendants acted “willfully.”
The Court then applied that standard and held that while Safeco may have violated the FCRA, it did not do so with reckless disregard. The FCRA requires that any person who takes an “adverse action” against a consumer based on informatiоn in a consumer report notify that consumer.
While Safeco‘s interpretation was erroneous, the Court held that it was objectively reasonable. Why? Because Safeco‘s “reading ha[d] a foundation” in “the less-than-pellucid statutory text.”
C. Safeco applies to the FCA
To determine what the FCA‘s scienter provision requires, we “start, as always, with the statutory text.” Escobar, 136 S. Ct. at 1999. The FCA defines “knowingly” as encompassing three common law standards — actual knowledge, deliberate indifference, and reckless disregard — but is silent as to what those standards mean in the context of this statute.6 Supreme Court precedent teaches that “a common law term in a statute comes with a common law meaning, absent anything pointing another way.” Safeco, 551 U.S. at 58. That principle informs our decision today. Here, the Relators have identified no statutory indicia that Congress intended the familiar, common
law terms used in
Safeco defined a similar common law term — “willfully,” as used in the FCRA — which the Court interpreted as encompassing the same common law scienter terms used in the FCA (“knowingly” or “reckless disregard“). Referencing the common law meaning, the Court then announced a standard inquiry for reckless disregard. While reiterating that “knowingly” and “reckless disregard” remain distinct terms, the Supreme Court held that the objective scienter standard it articulated precluded liability under either term. Safeco, 551 U.S. at 60, 70 n.20. There is no reason why the scienter standard established in Safeco (for violations committed knowingly or with reckless disregard) should not apply to the same common law terms used in the FCA.
The dissent suggests that Safeco has no bearing simply because it interpreted a different scienter requirement in a different statute. We respectfully disagree. Safeco articulated an objective scienter standard for establishing willful violations, which it framed in terms of the scienter floor for that standard — reckless disregard. Likewise, reckless disregard is the baseline scienter definition encompassed by the FCA‘s scienter requirement, “knowingly.” United States v. King-Vassal, 728 F.3d 707, 712 (7th Cir. 2013) (observing that reckless disregard “is the most capacious of the three” terms used to define the FCA‘s scienter requirement). And Safeco explicitly held that the tеst for reckless disregard would likewise cover violations committed “knowingly.” Safeco, 551 U.S. at 70 n.20. In view of those parallels, we see no barrier to importing the Safeco standard to the FCA. See Purcell, 807 F.3d at 284, 290.
Every other circuit court to discuss the relevance of Safeco‘s scienter standard to the FCA has arrived at this conclusion. United States ex rel. Streck v. Allergan, 746 F. App‘x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App‘x 551, 552 (9th Cir. 2017); United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015). The dissent claims that the Eleventh Circuit declined to apply Safeco to the FCA in United States ex rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148 (11th Cir. 2017). But Phalp did not reject Safeco — it did not even cite Safeco. To support its conclusion, the dissent points to Phalp‘s assertion that “scienter is not determined by the ambiguity of a regulation, and can exist even if a defendant‘s interpretation is reasonable.” Id. at 1155. That is not inconsistent with Safeco. Under Safeco, an objectively reasonable interpretation of a statute or regulation does not shield a defendant from liability if authoritative guidance warned the defendant away from that interpretation. Regardless of differing views as to whether Phalp is consistent with the Safeco standard, the Eleventh Circuit did not reject Safeco‘s applicability to the FCA. Even though the parties briefed the court on Safeco, that briefing does not convert the Eleventh Circuit‘s silence into a decision
The dissent would part ways with the circuits that have applied the Safeco standard to the FCA and look instead to the Restatement (Second) of Torts § 526, which makes subjective intent relevant to the scienter inquiry. Section 526 defines “conditions under which misrepresentation is fraudulent.” It does not define “knowingly” (or any of the common law scienter terms listed in
Unlike § 526, § 500 defines a term that the FCA‘s definition of knowingly expressly includes (“reckless disregаrd“). The dissent insists that because § 500 — which defines “reckless disregard of safety” — applies to cases involving physical harm, it is inapplicable to “reckless disregard” as used in the FCA. But the Supreme Court applied this definition outside the physical-harm context in Safeco. Ultimately, the crucial point is that the Court has articulated a standard for acts committed “knowingly” or with “reckless disregard” that excludes subjective intent. In the absence of textual indicia in the FCA supporting that subjective intent matters here, we apply Supreme Court precedent to interpret the same common law terms addressed in Safeco.
While the dissent claims that its countervailing view is textually mandated, nothing in the language of the FCA suggests that a defendant‘s subjective intent is relevant. In contrast to § 526, terms such as “believes” or “have [] confidence” are conspicuously absent from the FCA, and the only reference to intent is an express disclaimer that “specific intent to defraud” is irrelevant.
The dissent instead looks to legislative history and out-of-circuit caselaw to support its reading of the FCA. We find neither source persuasive. Legislative history cannot support reading in a subjective-intent requirement that goes beyond the text of the Act‘s scienter provision. See Chamber of Commerce of U.S. v. Whiting, 563 U.S. 582, 599 (2011) (“Congress‘s authoritative statement is the statutory text, not the legislative history.” (internal citation and quotation omitted)). And the circuit cases upon which the dissent relies all predate Safeco, as well as subsequent caselaw in each of those circuits applying Safeco to the FCA. Neither Restatement § 526 nor legislative history pose a barrier to applying Safeco.
The Relators challenge Safeco‘s viability on a separate basis that likewise fails. They contend that subsequent Supreme Court precedent limited Safeco, leaning on a 2016 patent case for this premise — Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016). Halo Electronics interpreted
The problem with importing an objective recklessness inquiry into the patent context was that “such a defense insulates the infringer from enhanced damages, even if he did not act on the basis of the defense or was even aware of it.” Id. at 1933. In rejecting that standard, the Court emphasized that the Patent Act targets “consciously wrongful” bad action and held that “[i]n the context of such deliberate wrongdoing, however, it is not clear why an independent showing of objective recklessness ... should be a prerequisite to enhanced damages.” Id. at 1932.
The defendants, citing Safeco, argued that bad faith is irrelevant when there is no showing of objective recklessness. Id. at 1933 n.*. While acknowledging the Safeco standard, the Court declined to apply it. It observed that “willfully is a word of many meanings whose construction is often dependent on the context in which it appears.” Id. (internal quotation omitted). The Patent Act presented a different context than the FCRA: “[O]ur precedents make clear that ‘bad-faith infringement’ is an independent basis for enhancing patent damages.” Id.
The Supreme Court thus did not walk back Safeco or adopt a new standard for objective recklessness. Halo Electronics simply did not apply objective recklessness in the context of a statute focused on defendants’ subjective bad faith. The reasons informing that decision do not apply here. Unlike the Patent Act, the FCA expressly includes a scienter standard and limits liability to knowingly false сlaims. By its own terms, Safeco holds that a failure to establish its objective scienter standard precludes a finding that a defendant acted knowingly. We thus hold that Safeco‘s scienter standard applies to the FCA.
D. Failure to meet the Safeco standard precludes liability
Beyond the threshold question of Safeco‘s applicability to the FCA, the parties also dispute how broadly Safeco reaches. We agree with SuperValu that the Safeco standard reaches all three of the scienter terms that define “knowingly.” The dissent takes the Relators’ position that even if it is relevant to the FCA, Safeco defines only “reckless disregard.” Under this view, failure to show that a defendant meets the Safeco standard does not preclude liability under the actual knowledge or deliberate ignorance components of the FCA‘s scienter definition. The dissent contends that holding otherwise would collapse distinct scienter terms and violate the rule against surplusage. We are unconvinced.
The Supreme Court has already undermined this line of reasoning. In Safeco, the Court rejected the defendants’ argument that it was conflating scienter terms and reaffirmed that the terms it used to define “willfully” were distinct. Safeco, 551 U.S. at 60. (“[A]ction falling within the knowing subcategory does not simultaneously fall within the reckless alternative.“) It nevertheless held that the standard it articulated in the context of “reckless disregard” also functioned as a baseline requirement for establishing the more demanding scienter category of “knowledge.” Id. at 70 n.20 (“Where, as here, 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.” (emphasis added)).
Even aside from Safeco‘s dismissal, the dissent‘s argument rests upon a false equivalence. No one disputes that the three scienter terms used to define “knowingly” are distinct and bear different meanings. Both actual knowledge and deliberate ignorance indicate higher degrees of culpability and, if implicated in a case, might render reckless disregard inapplicable. See Purcell, 807 F.3d at 288 (observing that reckless disregard is the loosest standard of knowledge under the FCA‘s scienter requirement). That does not prevent these terms, however, from sharing a common requirement.
Indeed, we do not see how it would be possible for defendants to actually know that they submitted a false claim if relators cannot establish the Safeco scienter standard. A defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown. The dissent‘s primary concern that the Safeco standard eliminates culpability for deliberately indifferent defendants is likewise misplaced. The dissent postulates that under the Safeco standard, defendants could escape liability by making a “barely plausible” post-hoc argument about a statute‘s meaning, “even though the defendant ignored repeated and correct warnings.” That fundamentally misapprehends Safeco. Under Safeco, a defendant will be successful only if (a) it has an objectively reasonable reading of the statute or regulation and (b) there was no authoritative guidance warning against its erroneous view. That test does not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong. Nor does Safeco‘s standard excuse a company if its executive decisionmakers attempted to remain ignorant of the company‘s claims processes and internal policies. Safeco covers all three of the scienter standards listed in
establish the standard articulated in Safeco, there is no liability under the
E. SuperValu‘s interpretation of “usual and customary price” was objectively reasonable under Safeco
Although the Safeco Court did not express its standard for reckless disregard in terms of elements, the Court‘s objectively reasonable inquiry involved two distinct questions—whether the defendant has a permissible interpretation of the relevant provision and whether authoritative guidance nevertheless warned it away from that reading.7
1. Permissible Interpretation
The objectively reasonable inquiry hinges on the text of the statute or regulation that the defendant allegedly violated and as such is a question of law. Safeco, 551 U.S. at 69; see also Van Straaten v. Shell Oil Prods. Co. LLC, 678 F.3d 486, 489–90 (7th Cir. 2012). If the plain language of the statute precludes the erroneous interpretation, the defendant cannot clear this hurdle. To decide whether SuperValu had a permissible interpretation of U&C price, we must first determine
Medicaid regulations define U&C price without much elaboration as the price that a pharmacy “charges to the general public.”8
Medicare Enrollees at 1 (Oct. 6, 2004) (“The usual and customary price is the undiscounted price individuals without drug coverage would pay.“). “General public” may mean that discount prices qualify only if applied to all consumers or, alternatively, if they constitute the price most frequently charged to consumers. But it just as easily might encompass any discount program offered to the public, regardless of whether all consumers take advantage of it. Garbe, 824 F.3d at 643. As is, the U&C price definition is open to multiple interpretations.
Here, SuperValu interpreted its set, retail price for a prescription drug as the “price it charges to the general public.” Unlike its retail price, the discount prices under SuperValu‘s price-match program depended upon the prices charged by local competitors and initially applied only upon customer request. In short, while its program was available to any customer requesting a valid price match, SuperValu would not necessarily charge all or most of its customers lower, price-matched costs. SuperValu thus did not view its competitor price-matching as the price that it “charged to the general public.” That interpretation is not inconsistent with the text of the U&C price definition. See Garbe, 824 F.3d at 644 (citing
The Relators spend little time discussing the compatibility of SuperValu‘s interpretation of U&C price with the regulatory text. Instead, they contend that Garbe forecloses any argument on objective reasonableness. Garbe characterized the federal regulations at issue here as having a “clear” purpose—ensuring that the government receives the benefit of the “prevailing retail market price” that pharmacies
As an initial matter, it overextends our holding in Garbe. Garbe held that the correct interpretation of U&C price included certain discount program prices—it did not hold that this was the only objectively reasonable interpretation of the term. In fact, Garbe did not discuss Safeco at all. We had no reason to do so because we explicitly did not address the
The Relators also err by calibrating objective reasonableness against the clarity of a statute or regulation‘s policy оbjective. Their Garbe argument rests on the assumption that any regulation with a clear purpose cannot be ambiguous. But Safeco tethered the objectively reasonable inquiry to the legal text, not its underlying policy. Safeco, 551 U.S. at 69–70 (holding that Safeco‘s erroneous interpretation was reasonable because it had a foundation in the “less-than-pellucid” statutory text). The Relators’ failure to engage with the regulatory text is fatal to their objections. They have not shown that SuperValu‘s erroneous interpretation of U&C price was unreasonable.
Apart from the Relators’ arguments based on Garbe, the dissent suggests a more fundamental concern with SuperValu‘s interpretation of U&C price. It argues that for an erroneous interpretation to be objectively reasonable, the defendant must have held that view at the time that it submitted its false claim.10 Otherwise, the dissent insists, defendants can avoid liability by concocting “post-hoc arguments” to justify their conduct under an objectively reasonable reading of the applicable regulation—even if they acted in bad faith. The dissent essentially argues that SuperValu believed it was violating the requirement to report its U&C price and arrived at its “interpretation” of U&C price after the fact.
Even if the Relators can raise an issue of fact on this point, it is irrelevant. The
This moves SuperValu but halfway across the scienter line. Safeco makes clear that a permissible interpretation is no defense if there existed authoritative guidance that should have warned defendants away from their erroneous interpretation.11 “Authoritative guidance,” as the moniker implies, must come from a source with authority to interpret the relevant text. Safeco also suggests that the guidance must be sufficiently specific to the defendant‘s incorrect interpretation.
The Supreme Court did not flesh out the boundaries of authoritative guidance, but at minimum, Safeco supports that it must come from a governmental source—either circuit court precedent or guidance from the relevant agency.12 Safeco, 551 U.S. at 70. We are not alone in this view. Other circuit courts likewise have limited authoritative guidance to these two sources. See Purcell, 807 F.3d at 289 (considering only circuit court caselaw and guidance from the controlling agency); Streck, 746 F. App‘x at 106, 108 (same). Our reading of Safeco automatically excludes one of the three sources of guidance proposed by the Relators—the PBM contract definitions of U&C price. The Relators also identify federal and state regulations defining U&C price, but we have considered the relevant regulatory definition above and determined that it does
not preclude SuperValu‘s interpretation. As a result, those definitions cannot constitute warnings that SuperValu‘s interpretation was erroneous.
The remaining source of guidance identified by the Relators is the CMS Medicare Prescription Drug Benefit Manual (“CMS manual” or “manual“). The Relators contend that the manual constitutes authoritative guidance which should have warned SuperValu thаt its discount prices amounted to U&C prices. SuperValu responds that it did not, for two reasons. First, SuperValu suggests that the manual is not “authoritative” guidance as defined by Safeco. It reads Safeco to require that authoritative agency guidance not only originate from the agency charged with implementing the relevant statute but that it be binding on the agency, such as notice-and-comment rulemaking or agency adjudication. The circuits that have addressed Safeco‘s applicability to the
Safeco suggests that authoritative guidance must have a high level of specificity to control an issue. In Safeco, the agency guidance at issue was an FTC letter to Safeco explaining that an adverse action “occurs when ‘the applicant will have to pay more for insurance at the inception of the policy than he or she would have been charged if the consumer report had been more favorable.‘” Safeco, 551 U.S. at 70 n.19 (internal citation omitted). That guidance certainly related to the question on appeal—whether an “increase” in insurance rates based on a consumer
Upon review of the CMS manual, we conclude that it is similarly flawed. Footnote one of the manual is most salient and reads in relevant part as follows:
We note that in cases wherе a pharmacy offers a lower price to its customers throughout a benefit year, this would not constitute a “lower cash price” situation that is the subject of this guidance. For example, Wal-Mart recently introduced a program offering a reduced price for certain generics to its customers. The low Wal-Mart price on these specific generic drugs is considered Wal-Mart‘s “usual and customary” price, and is not considered a one-time “lower cash” price. Part D sponsors consider this lower amount to be “usual and customary” and will reimburse Wal-Mart on the basis of this price.
CENTERS FOR MEDICARE & MEDICAID SERVICES, Chapter 14—Coordination of Benefits, in MEDICARE PRESCRIPTION DRUG BENEFIT MANUAL 19 n.1 (2006), https://perma.cc/MW6AH4P6.
The footnote clarifies that a pharmacy‘s consistent, lower-price offers are included within U&C prices. But it says nothing about price-match programs like that employed by
SuperValu. Further, the majority of the footnote discusses a specific example—Wal-Mart‘s $4 generics program—which differed in significant respects from SuperValu‘s price-match guarantee. Wal-Mart‘s program employed a set lower price ($4 for 30-day generic prescriptions) automatically applied to any customer. By contrast, SuperValu‘s discount prices could vacillate. Its discounts depended upon the pricing of local competitors, which could vary between SuperValu‘s regional stores. SuperValu‘s discounts also were customer-initiated in the first instance. The manual did not put SuperValu on notice that this type of discount program fell within the definition of U&C price—at least, not with the specificity required to be authoritative guidance. We hold that no authoritative guidance warned SuperValu away from its permissible interрretation of U&C price. The district court correctly granted summary judgment to SuperValu on the question of scienter.
III. Conclusion
Our resolution of this case is controlled by Safeco. Today, we hold that Safeco‘s standard both applies to the
AFFIRMED.
HAMILTON, Circuit Judge, dissenting. We should reverse summary judgment for defendant SuperValu. The relators have come forward with evidence that SuperValu knowingly misled the government‘s agents about its “usual and customary” prices for a significant number and volume of prescription drug sales. For forty-four
This appeal presents a broad and important issue for the
The majority answers no. It thus creates a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test. The majority‘s new safe harbor even makes subjective bad faith “irrelevant” in fraud cases. Ante at 25. That undermines the 1986 amendments to the
Part I of this opinion explains the relators’ claims and supporting evidence. Part II explains the better understanding of the
I. The Relators’ Claims
A. The Relators’ Evidence
The majority explains helpfully the important role of “usual and customary” drug prices in Medicare and Medicaid. Congress has not allowed the government to do what private insurance companies do: use bargaining power to negotiate for lower drug prices. Instead, the government tries to take advantage of private competition in so-called “cash” sales of prescription drugs. See United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632, 644 (7th Cir. 2016). Those are sales to customers whose drug purchases are not covered by insurance. Under the statutes and regulations, SuperValu‘s “usual and customary” drug prices for those cash sales were caps on what the government would pay SuperValu for drugs provided to Medicare and Medicaid patients.
Starting in 2006, Walmart began offering cash sales of generic drug prescriptions for four dollars for a one-month supply and ten dollars for a three-month supply. SuperValu responded to Walmart‘s move with an aggressive, widely-advertised priсe-matching program. The result, giving relators the benefit of reasonable inferences from the evidence, was dramatic reductions in the prices SuperValu charged most “cash” customers for many drugs for over a decade.
The applicable regulation describes the price cap as “Providers’ usual and customary charges to the general public.”
In this appeal, SuperValu does not dispute that under now-binding circuit precedent, a discounted price can be the “usual and customary” price. See Garbe, 824 F.3d at 644–45. SuperValu also does not dispute that it pushed its price match as a matter of company policy and that it usually charged the four-dollar price for many drugs.
Relators offered evidence that SuperValu told the federal government for years that its “usual and customary” prices were much higher than those that it actually charged most cash customers for many drugs. The question here is whether plaintiffs have come forward with evidence to support a finding that SuperValu made these many false claims “knowingly.”
There is room for reasonable disagreement about exactly how to interpret “usual and customary” prices when a seller matches a competitor‘s prices to keep a customer. That room for argument, says the majority, entitles SuperValu to summary judgment. As applied to these facts, though, it should be easy to find that SuperValu‘s claims were false and that SuperValu knew they were false.
At one end of a spectrum, imagine a local mom-and-pop pharmacy that occasionally grants a few customers’ informal requests for lower prices after some comparison shopping. At the other end, imagine a nationwide chain with a nationwide program advertising that the seller will match any competitor‘s lower prices. Then imagine that the seller tells its pharmacists and cashiers to offer the discounted prices to all customers paying cash for drugs (i.e., without insurance or government coverage). And then imagine that the seller makes a majority of its cash drug sales at the discounted rates, not at the much higher prices that it officially tells the government are “usual and customary.” Relators’ evidence here fits this end of the spectrum—SuperValu‘s price matches were available to any members of the general public, who were encouraged to ask for them.
Then consider relators’ evidence about the results of this nationwide, decade-long program. Focus on SuperValu‘s sales of the fifty highest-volume drugs, where most of the relevant money is. For forty-four of those top fifty drugs, SuperValu was making a majority of its cash sales for less than its claimed “usual and customary” prices. For thirty of those drugs, SuperValu was making more than eighty percent of its cash sales for less than its claimed “usual and customary” prices.
Then consider that SuperValu was claiming that its “usual and customary” prices for those drugs were as much as eight to fifteen times the discounted prices it was actually charging most of the time. See Dew Rebuttal Report at 7–8. Given those facts, a reasonable jury could easily find both that SuperValu‘s claims for reimbursement based on its “usual and customary” prices were false under any reasonable interpretation of the term and that SuperValu knew its claims were false.
B. Ambiguity and Knowing Fraud
Smart lawyers and judges can debate exactly how to define “usual and customary” under the infinite variety of situations we might hypothesize. But with respect, I do not see room for reasonable disagreement about whether claimed prices eight to fifteen times the actual cash prices that SuperValu charged most of the time were
Then we come to the more direct evidence that SuperValu knew that what it was doing was fraudulent. The huge gaps between actual sale prices and claimed “usual and customary” prices did not escape notice by executives. Documents show that they paid close attention to the results of the price-matching program. That‘s no surprise. The program responded to a major disruption in retail drug markets, with a big financial impact on cash sales. The executives also knew it had huge implications for the even higher volume of Medicare and Medicaid sales of those drugs. The executives estimated that the correct application of “usual and customary” prices could cost SuperValu tens of millions of dollars per year.
Executives recognized that widеspread price-matching could undermine what they euphemistically called the “integrity” of SuperValu‘s “usual and customary” price claims for government reimbursement as price-matching became more than an “‘exception’ for customer services reasons.” And in the face of that concern, they chose what one called in an email the “stealthy” approach (scare-quotes in the SuperValu original) to ensure that word about this “exception” did not reach too many customers. The problem, of course, is that SuperValu‘s price-matching was not only widespread but also advertised in all its stores. It knew that these practices were undermining the “integrity” of its certifications to the government, yet went forward anyway.
The
SuperValu of course has arguments and evidence pointing toward its honesty and innocence. But we are reviewing a grant of summary judgment. The aсcount set forth above is a reasonable view of the evidence in the light most favorable to the non-moving relators. A reasonable jury could find that SuperValu either actually knew or deliberately chose to keep itself in ignorance that it was submitting false, hugely inflated claims for reimbursement.
SuperValu does not dispute that it was selling forty-four of the top fifty drugs most of the time for much less than it claimed to the government were its “usual and customary” prices. Nor does it dispute
Relators’ case here is factually complex because of time, geography, and the number of drugs involved. Their claims span a decade, during which SuperValu‘s price-matching practices changed in arguably important ways. Their claims also span drug sales across a host of local and regional retail markets with different competitors and matched prices. And their claims cover hundreds of different drugs. That complexity should not distract us from the sound theory at the core of relators’ case. Where the price-matching program produced a majority of actual sales at prices below the claimed “usual and customary” prices, the claimed prices could no longer be honestly deemed “usual and customary.”
II. Knowledge Under the False Claims Act
SuperValu and the majority do not dispute this evidence or even the inferences that relators seek to draw from it. Instead, SuperValu and the majority say the evidence of SuperValu‘s actual knowledge and intentions is “irrelevant.” Ante at 25. If that‘s correct, this case creates a safe harbor for fraudsters who claim taxpayer funds in bad faith, but whose barely-straight-faced lawyers offer an innocent explanation for their conduct. The majority even says it is irrelevant whether SuperValu actually believed and/or relied upon the post hoc justifications offered in litigation. “[I]t is not enough that a defendant suspect or believe that its claim was false.” Id., citing United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 288 (D.C. Cir. 2015); ante at 20 (“A defendant might suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements for that claim are unknown.“).
From 40,000 feet, that interpretation of the
“You may find that the defendant acted knowingly if you find beyond a reasonable doubt that he believed it was highly probable thаt [state fact as to which knowledge is in question, e.g., ‘drugs were in the suitcase,’ ‘the financial statement was false,‘] and that he took deliberate action to avoid learning that fact.” Seventh Circuit Pattern Criminal Jury Instructions 4.10 (2020).
We would never accept a defense theory based on such Cartesian doubt, and certainly not as a matter of law, in any other case requiring proof of knowledge of the key facts.
A. Statutory Text and the Common Law
Looking at the analysis more closely, the majority‘s interpretation conflicts with the statutory text of the
The scienter standard is “knowingly,” and the Act then defines the term:
(b) Definitions. For purposes of this section—
(1) the terms “knowing” and “knowingly“—
(A) mean that a person, with respect to information—
(i) has actual knowledge of the information;
(ii) acts in deliberate ignorance of the truth or falsity of the information; or
(iii) acts in reckless disregard of the truth or falsity of the information; and
(B) require no proof of specific intent to defraud....
The three prongs of the statutory definition closely track the most authoritative summary of the common law‘s treatment of fraudulent scienter, used by the Supreme Court to interpret the
A misrepresentation is fraudulent if the maker
(a) knows or believes that the matter is not as he represents it to be,
(b) does not have the confidence in the accuracy of his representation that he states or implies, or
(c) knows that he does not have the basis for his representation that he states or implies.
The majority itself emphasizes that the Supreme Court has interpreted the
As Restatement §
B. Origins of the Statutory Definition
The majority fails to appreciate the importance of the False Claims Act‘s textual definitions of “knowingly” and their common-law roots. The majority instead focuses on the Supreme Court‘s interpretation of a different term in a different statute. That‘s a mistake. The False Claims Act‘s three-part definition of knowingly, with the disclaimer that specific intent to defraud is not required, did not come from nowhere. It was a clear instruction from Congress to courts to relax their restrictive interpretations of “knowing” under the Act.
Before 1986, the False Claims Act used the terms “knowing” and “knowingly” without elaboration. When Congress added the definitions in 1986, it acted in response to court decisions that were making it difficult to bring claims against dishonest claimants absent clear evidence of actual knowledge of the falsity of the claim. We should not ignore this history. Thе statutory text and history show Congress‘s clear intent to allow False Claims Act lawsuits to proceed against businesses that fail to do basic due diligence in response to warning signs that their government payments are ill-gotten.2
The amended three-pronged definition of “knowledge” in the False Claims Act was added in 1986 as part of a broader revision to the Act. As sponsor Senator Grassley explained, the government needed “lots of help” from Congress to identify fraudsters and bring them to justice. 132 Cong. Rec. S11243 (Aug. 11, 1986). Expanding the statute‘s definition of “knowledge” to reach broader degrees of culpability was an important tool to reach that goal. Id.
The problem, as explained in the Senate Committee report, was that courts had applied too narrow a definition of “knowledge,” often requiring actual literal knowledge of a claim‘s falsity or even specific intent to defraud to find liability under the Act. S. Rep. 99-345 at 7, citing United States v. Aerodex, 469 F.2d 1003 (5th Cir. 1972) (collecting cases). Given the “remedial” goals of the False Claims Act, the
The result of these earlier court decisions had been predictable: unscrupulous claimants could structure claim-processing procedures so that false claims could be filed without the relevant decision-makers truly “knowing” of the fraud. Id. at 7. Even if hints of possible wrongdoing surfaced, decision-makers could insulate themselves from liability by ignoring problems that even a cursory investigation would have uncovered. Id.
In explaining the statutory text, the House Judiciary Committee noted the problems from the lack оf a definition of “knowledge” and reported:
By adopting this [three-pronged] definition of knowledge, the committee intends not only to cover those individuals who file a claim with actual knowledge that the information is false, but also to confer liability upon those individuals who deliberately ignore or act in reckless disregard of the falsity of the information contained in the claim. It is intended that persons who ignore “red flags” that the information may not be accurate or those persons who deliberately choose to remain ignorant of the process through which their company handles a claim should be held liable under the Act. This definition, therefore, enables the Government not only to effectively prosecute those persons who have actual knowledge, but also those who play “ostrich.”
H. Rep. 99-660 at 21 (emphasis added).
The Senate Committee also focused on proverbial “ostriches” who stick their heads in the sand instead of verifying that they are not cheating taxpayers. S. Rep. 99-345 at 7, 15, 21. These ostriches need not have “conscious culpability” of wrongdoing: people who submit claims that they have “reason to know” are potentially false run the risk of violating the Act if they “fail[] to inquire” as to the falsity of the claims. 132 Cong. Rec. S11243-44 (Aug. 11, 1986; statement of Senator Grassley).
The Committee reports explained that the added definition was aimed at claimants who acted in bad faith by failing to investigate potential problems: “those doing business with the Government have an obligation to make a limited inquiry to ensure the claims they submit are accurate.” S. Rep. 99-345 at 7. Congress chose statutory language that could have been custom-tailored for SuperValu‘s approach in this case. SuрerValu knew that the “integrity” of its “usual and customary” prices would be suspect if price-matching were not the “exception” but the rule, yet it kept submitting those claims through a nationwide price-matching campaign anyway, netting tens of millions of dollars of public funds annually.
This is the same standard that the Eleventh Circuit adopted in United States ex rel. Phalp v. Lincare Holdings, Inc., 857 F.3d 1148 (11th Cir. 2017), another case involving arguable regulatory ambiguity. After considering the statutory text and legislative history, the court concluded that “scienter is not determined by the ambiguity of a regulation, and can exist even if a defendant‘s interpretation is reasonable.” Id. at 1155, citing the Senate Committee Report indicating Congressional intent to require claimants to engage in “limited inquiry.” Phalp also squarely rejected the majority‘s position here: “The district court‘s conclusion that a finding of scienter can be precluded by a defendant‘s identification of a reasonable interpretation of an ambiguous regulation that would have permitted its conduct is erroneous.” Id. (Phalp‘s treatment of this issue refutes the
In fact, before the Safeco progeny cited by the majority, our colleagues in other circuits followed the amended text of the False Claims Act and common sense: a claimant could be liable under the Act notwithstanding a purported regulatory ambiguity if the defendant deliberately ignored the falsity of the claim or otherwise acted in bad faith. United States v. Science Applications International Corp., 626 F.3d 1257, 1272-73 (D.C. Cir. 2010) (affirming verdict for United States; jury could infer that defendant knew its claims were false notwithstanding “regulatory divide” in how to interpret a regulation); United States ex rel. Oliver v. Parsons Co., 195 F.3d 457, 464 (9th Cir. 1999) (reversing summary judgment: “In short, [defendant‘s] petition arguing that the sky will fall upon government contractors if they are precluded from relying on a ‘reasonable interpretation’ is not оnly unsupported by case law, it is also ungrounded in reality.“); see also Minnesota Ass‘n of Nurse Anesthetists v. Allina Health System Corp., 276 F.3d 1032, 1053 (8th Cir. 2002) (citing Parsons for the proposition that “any possible ambiguity of the regulations is water under the bridge” where contractor‘s misinterpretation is “knowing“).3
In this case, the relators’ evidence shows that SuperValu knew it was claiming high “usual and customary” prices that it was charging less than half the time, often less than one fifth of the time. SuperValu knew that its practices raised questions about the “integrity” of its “usual and customary” prices but nonetheless ignored those concerns. The False Claims Act‘s statutory definition of “knowing” reaches those who know their claims are false or who act in deliberate ignorance of whether their claims were true or false. We should reverse summary judgment for SuperValu.
III. The Majority‘s Safeco Tangent
Rather than focusing on the language of the False Claims Act itself, and its origins in the common law of fraud and responses to crabbed judicial interpretations, the majority opinion takes a very different approach. It borrows the Supreme Court‘s treatment of a different term, “willfully,” under a different statute, the Fair Credit Reporting Act, in Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007). The majority adopts Safeco‘s treatment of reckless disregard for law as a branch of “willful” misconduct. The majority then goes even further and concludes that relators must meet that standard for reckless disregard for any False Claims Act case, even if they rely on the actual-knowledge or deliberate-ignorance prongs of the Act‘s definition of knowing.
The majority makes two fundamental mistakes. First, the reliance on Safeco to understand “reckless disregard” is neither necessary nor fitting for the False Claims Act. The Act draws on a different branch of the common law (of fraud, not reckless
The question in Safeco was whether an insurer‘s decision about an initial premium rate for an insured could qualify as an “adverse action” based on a credit report that could require notice to the consumer in question. The Supreme Court ultimately held that it could but also held that Safeco had not “willfully” violated that Act because the statute and regulation were not clear as applied to initial premium decisions, so that Safeco had not acted willfully.
The Fair Credit Reporting Act does not define “willfully,” which the Court described as a “word of many meanings whose construction is often dependent on the context in which it appears.” 551 U.S. at 57, quoting Bryan v. United States, 524 U.S. 184, 191 (1998). Without more specific guidance for interpreting the term in that act, the Safeco Court had little choice but to construct a working definition from multiple sources. The Court focused on civil law, noting that in several civil contexts, willful violations of statutes could be shown by recklessness, which was consistent with common-law use of the term. Id. Then, because there was “no indication that Congress had something different in mind,” and because the term “recklessness” is not “self-defining,” the Court announced an application of that scienter standard to the Fair Credit Reporting Act. Id. at 57-58, 68-69.
The Court then drew on common-law definitions of “recklessness” that apply to actions putting others in physical danger. The Court described recklessness as action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known,” id. at 68, quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994), and conduct involving “unreasonable risk of physical harm ... substantially greater than that which is necessary to make his conduct negligent. Id. at 69, quoting Restatement (Second) of Torts § 500 (also regarding putting another person in physical danger). The Court summarized its view for the Fair Credit Reporting Act:
There being no indication that Congress had something different in mind, we have no reason to deviate from the common law understanding in applying the statute. Thus, a company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute‘s terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.
551 U.S. at 69 (emphasis added; citation omitted). Along the way, the Court added footnote 20, saying that evidence of subjective bad faith would not be relevant to the definition of willfulness in
The majority here and four other circuits have borrowed this reasoning from Safeco and grafted it onto the False Claims Act. Two of those circuits did so in non-precedential decisions. The two precedential decisions are United States ex rel. Purcell v. MWI Corp., 807 F.3d 281 (D.C. Cir. 2015), and United States ex rel. Donegan v. Anesthesia Associates of Kansas City, 833 F.3d 874 (8th Cir. 2016). The Eleventh Circuit reached a different conclusion in Phalp, 857 F.3d 1148, discussed above. (The Phalp opinion did not discuss Safeco or Purcell, but both cases were briefed extensively, including by the United States in an amicus brief arguing that Safeco provided no meaningful guidance for False Claims Act cases. There is no doubt that the Eleventh Circuit rejected Purcell‘s borrowing of Safeco. It did not cite Safeco because, for reasons explained here, Safeco simply is not needed to interpret the scienter requirement of the False Claims Act.)
In the absence of better guidance for the False Claims Act and common law, reliance on Safeco might be understandable, if a bit of a stretch. The majority here errs, however, by overlooking Safeco‘s directive: first check to see if “Congress had something different in mind.” 551 U.S. at 57, 69. With the False Claims Act, we do have meaningful guidance from the statutory text, the common law, and legislative history, as discussed above.
If the majority limited its reliance on Safeco to the reckless-disregard prong of the False Claims Act‘s definition of knowing, its mistake would be more understandable. It‘s the majority opinion‘s next move that is more extraordinary and much more damaging. The majority concludes that a relator under the False Claims Act must satisfy the Safeco definition of reckless disregard—show that no reasonable understanding of law could justify the defendant‘s action, or show that the defendant disregarded “authoritative guidance” — in every case, even those relying on the actual-knowledge and deliberate-ignorance prongs of the definition of “knowingly.” As a result, the majority holds in effect that those two-thirds of the statutory definition add zero meaning to the statute.
The majority‘s major premise is that “reckless disregard” is the broadest of the three prongs. Its minor premise is that any case of “actual knowledge” or “deliberate ignorance” would always fall within “reckless disregard,” as that term was defined in Safeco. That too-simple heuristic may be useful in some easy cases, but its application here is inconsistent with how courts should read statutes.
The key logical error lies in the minor premise, that any case of actual knowledge or deliberate ignorance would necessarily also be covered by Safeco-reckless disregard. There is no basis for that assumption, which leads away from the common law of fraud, where subjective bad faith is central.
Consider a hypothetical close to this case. A government contractor submits claims believing, subjectively, that the claims are probably false. The agency has not yet provided what Safeco would call “authoritative guidance,” but the contractor reads the controlling regulation (correctly) to preclude its claim. Still, it decides to stay quiet, hoping it will not get caught, or at least not too quickly. In that situation, judges and jurors can say that claims were fraudulent and the contractor knew it, even if a creative lawyer can later make a non-frivolous legal argument for its innocence. Likewise, the contractor acted with fraudulent intent because it “believed” the claims were false and submitted claims in which it did not have the “confidence” it claimed. See
This bad-faith “catch us if you can” approach to public funds is exactly what Congress thought it was outlawing when it decided in 1986 that it needed to define “knowledge” more specifically for the
The majority‘s logic thus takes the False Claims Act in a direction 180 degrees away from common-law fraud. It makes subjective bad faith, including deliberate ignorance, “irrelevant.” Id. That‘s contrary to both the actual-knowledge and deliberate-ignorance prongs of the Act‘s textual definition. It loses sight of the fact that the Act applies to “fraudulent” conduct. And it‘s also contrary to the common-law scienter standard in the Restatement (Second) of Torts, which is satisfied if the defendant “knows or believes that the matter is not as he represents it to be,” or if he “does not have the confidence in the accuracy of his representation that he states or implies....” § 526 (emphasis added).
The majority rests heavily on Safeco‘s footnote 20 to supports its new safe harbor where subjective state of mind is irrelevant. See ante at 19. With respect, the majority reads far too much into that footnote, which by its own terms is limited to “determining whether a company acted knowingly or recklessly for purposes of
In fact, the Supreme Court itself has warned against reading Safeco‘s footnote 20 so broadly. It did so in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016). The Court declined to extend the Safeco definition of “willfully” to treble-damage awards for patent infringement under
Returning to False Claims Act cases, consider, for example, United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018), where the Sixth Circuit reversed dismissal of a relator‘s complaint. The complaint alleged that the relator and othеr nurses had “concerns about the defendants’ compliance with Medicare regulations, but were told to ignore any problems.” When relator raised issues about regulatory compliance, executives told her on multiple occasions that “‘[w]e can just argue in our favor if we get audited’ as a solution to any compliance issues.” The Sixth Circuit reasoned that the allegations about notice of compliance problems imposed an obligation on the defendants to inquire whether they were actually in compliance with regulations. The Sixth Circuit
The majority‘s bottom line — that only objectively reckless disregard matters, and subjective bad faith does not — also violates one of the most common tools of statutory interpretation. It renders the actual-knowledge and deliberate-ignorance prongs of the statutory definition utterly superfluous. See City of Chicago v. Fulton, 141 S. Ct. 585, 591 (2021) (“The canon against surplusage is strongest when an interpretation would render superfluous another part of the same statutory scheme.“), quoting Yates v. United States, 574 U.S. 528, 543 (2015) (plurality); National Ass‘n of Mfrs. v. Dep‘t of Defense, 138 S. Ct. 617, 632 (2018), quoting Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979); In re Southwest Airlines Voucher Litig., 799 F.3d 701, 710 (7th Cir. 2015); Antonin Scalia & Bryan Garner, Reading Law: The Interpretation of Legal Texts 174 (2012) (“The surplusage canon holds that it is no more the court‘s function to revise by subtraction than by addition.“)
The canon against surplusage is not absolute, of course. Sometimes drafters of legal documents may “intentionally err on the side of redundancy to ‘capture the universe.‘” Sterling Nat‘l Bank v. Block, 984 F.3d 1210, 1218 (7th Cir. 2021), quoting Abbe R. Gluck & Lisa Schultz Bressman, Statutory Interpretation from the Inside—an Empirical Study of Congressional Drafting, Delegation, and the Canons: Part I, 65 Stan. L. Rev. 901, 934 (2013); accord, e.g., Rimini Street, Inc. v. Oracle USA, Inc., 139 S. Ct. 873, 881 (2019); White v. United Airlines, Inc., 987 F.3d 616, 622 (7th Cir. 2021).
The False Claims Act definition of “knowingly” is about as strong a case for the canon against surplusage as one is likely to find. The three prongs mirror three distinct common-law prongs for fraudulent scienter. Congress adopted them to give courts clearer guidance because Congress was disappointed with courts’ interpretations of the undefined “knowing.” Congressional leaders on the subject, such as Senator Grassley and Representative Berman, were concerned that courts would continue to misinterpret the statute. They explained exactly how the definition of “knowing” should be applied, as did the respective committees. The three prongs may overlap in many cases, but the adoption of the three distinct prongs in the same paragraph of the statutory text was unmistakably an effort to be both thorough and broad. Congress said as clearly as it could that the False Claims Act should reach just this kind of case.
I close with two final observations about the majority‘s misguided holding. First, even under the Safeco standard, a reasonable jury could find that SuperValu‘s more extreme conduct here was not reasonable. There is simply no reasonable definition of “usual and customary” that means “something we do less than half the time and that we instruct our employees not to do.” Defining “usual and customary” to mean
Second, the majority‘s approach actually leaves the False Claims Act definition of knowledge narrower than when the 1986 amendment was passed. Consider, for example, United States v. Mead, 426 F.2d 118, 122-23 (9th Cir. 1970), which Representative Fish singled out as applying a too-narrow definition of knowledge. 132 Cong. Rec. H6480 (Sept. 9, 1986); see also Aerodex, 469 F.2d at 1007, cited negatively in S. Rep. 99-345 (collecting Mead as an example of then-operative knowledge standard). In Mead, the court explained that where regulatory language is uncertain and even the district court misinterpreted the regulations, scienter is still a question of fact. If the government had shown that Mead knew his regulatory interpretation was wrong or had fraudulent intent, he would still be liable under the Act. See also United States v. Ueber, 299 F.2d 310, 314 (6th Cir. 1962), cited negatively in S. Rep. 99-345 (where contract distinguished between “direct” and “indirect” labor costs, falsity of claims for “direct” labor costs and defendant‘s knowledge of their falsity are questions of fact for trial; remanding for further fact-finding). Whatever “reckless disregard” means, we should not use it to narrow the definition of knowledge that Congress thought it was expanding.
To sum up, relators have come forward with substantial evidence of knowing fraud, as SuperValu claimed reimbursement at supposedly “usual and customary” prices for drugs that were as much as eight to fifteen times higher than the prices it was actually charging the general public a majority of the time. The evidence supports a reasonable inference of actual knowledge or at least deliberate ignorance or reckless disregard for whether its reimbursement claims were false. We should reverse summary judgment and remand for trial on relators’ claims. With respect, I believe that both Congress and the Supreme Court will be surprised by this decision and the others extending Safeco tо the False Claims Act. If the False Claims Act is to remain effective in discouraging and remedying fraudulent raids on taxpayer dollars, Congress or the Supreme Court or both will need to respond to this line of cases.