Part I | Background: “Knowing” Violations of Unknowable Rules: Is the Supreme Court Poised to Alter the FCA Enforcement Landscape in SuperValu?

Below is the first in a three-part series on U.S. ex rel. Schutte et al. v. SuperValu Inc.

The story of one of the most significant False Claims Act (“FCA”) cases this year began nearly two decades ago. Between 2006 and 2012, SuperValu, Inc.—which operated thousands of pharmacies nationwide—offered a “price match program” whereby it discounted the prices of certain prescription drugs to “match” the prices charged by its competitors. United States ex rel. Schutte v. SuperValu, Inc., No. 11-3290, 2020 WL 3577996, at *3 (C.D. Ill. July 1, 2020). SuperValu, however, did not factor these discounts into the price it reported to government healthcare programs when submitting claims for reimbursement. Id. Instead, SuperValu reported prices set by its corporate pricing department, which were controlled by contract or by state law. Id. at *5.

Based on this conduct, Relators Tracy Schutte and Michael Yarberryfiled a qui tam action alleging that SuperValu’s failure to report its discounted prices violated the FCA. SuperValu, Inc., 2020 WL 3577996, at *1, *3. At issue was the definition of the “usual and customary” (“U&C”) price, which federal and state regulations require companies like SuperValu to report when submitting claims. Id. At the time SuperValu offered the price match program, the U&C price was not clearly defined by regulation, nor had the relevant question been interpreted by the courts. Id. at *5, *7. SuperValu argued that its definition of the U&C price, which did not include individualized price matching discounts, was an objectively reasonable one. Id. at *7. Although in 2016 the Seventh Circuit held that price match programs should be factored into the U&C price, SuperValu had by then discontinued its program. Id. at *7. The FCA requires a “knowing” violation to impose liability, which the FCA defines to mean that a person has “actual knowledge” that the information is false or “acts in deliberate ignorance” or “reckless disregard of the truth or falsity” of the information; SuperValu maintained that it could not have acted knowingly if its interpretation of an ambiguous requirement was objectively reasonable. Id. at *6, *8.

The district court granted summary judgment in SuperValu’s favor, finding that the company did not have the requisite mental state to violate the FCA. The district court relied on Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), in which the Supreme Court found that a company does not knowingly or recklessly violate the Fair Credit Reporting Act (“FCRA”) when the company’s reading of a statute is objectively reasonable and not foreclosed by court or agency guidance. Id. at 57, 70 n.20. This holding, the district court reasoned, applied with equal force to FCA claims. “[T]here was authority in support of both parties as to how price matching affected usual and customary price. However, there was no binding authority warning the Defendants away from their position.” SuperValu, Inc., 2020 WL 3577996, at *11. Although there was some evidence that SuperValu executives “expressed concerns about the financial hit” the company would take if it had to factor the price match program into its U&C prices, the district court found that evidence immaterial to the scienter inquiry. Id. at *10. “[R]egardless of the Defendants’ subjective beliefs and/or their internal motivations, it is the contracts or other authoritative guidance that controls.” Id. Accordingly, the district court found that SuperValu could not knowingly have submitted false claims. Id. at *12.

The Seventh Circuit affirmed, agreeing with the district court that Safeco controlled the case’s outcome. United States ex rel. Schutte v. Supervalu Inc., 9 F.4th 455, 459 (7th Cir. 2021). The FCA, like the FCRA, requires a mental state of at least recklessness. Id. at 465. If an alleged violator’s mental state does not satisfy this “baseline” definition, it follows that its actions also could not satisfy the more culpable mental states encompassed by the “knowing” standard. Id

In Safeco, the Supreme Court had concluded that a defendant does not recklessly violate the FCRA when (1) its interpretation of the relevant statute or regulation was “not objectively unreasonable,” and (2) no authoritative guidance “warned it away from the view it took.” Safeco, 551 U.S. at 70. When these two conditions are satisfied, an alleged violator’s subjective intent is irrelevant to the FCRA scienter inquiry. Id. at 70 n.20. 

The Seventh Circuit adopted this reasoning in determining that the Safeco scienter standard applied to FCA claims, and noted that other courts of appeals had reached the same conclusion. Supervalu Inc., 9 F.4th at 465 (citing cases). And, like the district court below, the Seventh Circuit found that SuperValu’s reasonable interpretation of the U&C price, combined with the absence of authoritative guidance warning it away from that reading, precluded liability. Id. at 468–72. In response to the dissent’s concern that this scienter standard could shield a defendant acting in bad faith, the majority reiterated the logic behind the objective test: “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.” Id. at 468 (emphasis in original). Moreover, the court held, objective scienter standard “does not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong.” Id.

Relators filed a Petition for Certiorari, asking the Supreme Court to consider “[w]hether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.” On January 13, 2023, the Court granted certiorari, consolidating SuperValu with a similar Seventh Circuit case, United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022), and electing to consider whether a defendant’s “objectively reasonable” interpretation of an ambiguous statute presents a viable defense to the “knowledge” element of FCA liability. While the Court’s decision to hear a second FCA case in a single term surprised the legal community,2 the defense bar was hopeful the Court would provide some much-needed clarity to the FCA’s “knowledge” component when confronted with a plainly ambiguous regulatory scheme and affirm the Seventh Circuit’s ruling. 

1 Schutte and Yarberry are both pharmacists. While Schutte briefly worked at SuperValu in 2011, Yarberry was never employed by the company or its affiliates.
2 The Court had previously granted certiorari in United States ex rel. Polansky v. Executive Health Resources, 17 F.4th 376 (3rd Cir. 2021), cert. granted, 142 S. Ct. 2834 (June 21, 2022) (No. 21-1052), to consider whether the government has authority to dismiss an FCA action after initially declining to intervene.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

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As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.