SuperValu, through various subsidiaries, owned and/or operated approximately 2,500 grocery stores with over 800 in-store pharmacies between 2006 and 2016. In 2006, SuperValu's national headquarters implemented a discount drug program to remain competitive with other pharmacies. Under this program, SuperValu would match its competitors' lower prescription drug prices. SuperValu contended this price-match program did not need to be reported as its usual and customary("U&C") price to Pharmacy Benefit Managers ("PBMs") or federal payors.

Medicaid regulations define the "usual and customary" price as the price charged to the public. Pharmacies are required to submit these U&C prices to the federal government, which impacts the discount that the pharmacy will receive when reimbursed. SuperValu listed its retail cash prices as its U&C drug prices when it sought reimbursement from Medicare Part D and Medicaid, rather than the lower, price-matched amounts that it charged qualifying customers under its discount program.

SuperValu also did not report its discount prices as its U&C prices to any PBM or any state agency. By not reporting the discounts, SuperValu allegedly received greater reimbursement from Medicare Part D and Medicaid, according to the whistleblower who filed the qui tam complaint against SuperValu.

Safeway developed three prescription drug discount programs between 2006 and 2015. One initiative was an individual price matching program (the "Individual Program") where pharmacists had discretion to match competitors' lower drug prices. Under the Individual Program, Safeway did not report the price matches as the U&C price for a given drug or otherwise publicize price matching.

Under the second program, Safeway offered certain generic prescription drugs for $4 (the "$4 Generic Program"). Customers in a particular geographic division were eligible for the reduced drug prices. Safeway did report the $4 as the U&C price for drugs on its formulary at locations participating in the $4 Generic Program and did advertise this program until 2010.

The third initiative was a Matching Competitor Generic Program ("MCGP"), which was implemented in five of Safeway's geographic regions. The MCGP offered certain generic drugs for the same price as the $4 Generic Program. However, MCGP prices were not offered to all customers automatically. Safeway did not report the lower prices under the MCGP as their U&C prices. Like SuperValu, Safeway allegedly received inflated reimbursement from the government under its Individual Program and under the MCGP.

In both cases, the qui tam relators alleged that the defendants submitted false claims to Medicare Part D and Medicaid by failing to account for discounts when reporting the companies' U&C prices for the prescription drugs. The District Court agreed that pharmacies are required, under applicable regulations, to report the discounts as their U&C prices. However, the District Court noted that the relators failed to show that the defendants acted "knowingly" or with reckless disregard or deliberate indifference to that reporting requirement.

The relators appealed to the 7th Circuit. The Court of Appeals stated that the definition of U&C price was open to multiple, reasonable interpretations and that no authoritative guidance cautioned either company against its interpretation of the regulations regarding U&C charges. Therefore, the defendants did not knowingly violate the FCA.

In making its determinations, the 7th Circuit and District Court relied on Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007). In Safeco, the Supreme Court held that a defendant does not act willfully or recklessly where its position is (1) supported by an objectively reasonable, yet erroneous, interpretation of the law, and (2) there was no agency guidance to warn the defendant that its interpretation was incorrect.

The majority reasoned that a defendant might "suspect, believe, or intend to file a false claim, but it cannot know that its claim is false if the requirements of the claim are unknown." U.S. ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 468 (2021) (emphasis in original). Under this interpretation, the defendant's subjective intent is "irrelevant." Id. at 471.

The Supreme Court's decision in SuperValu and Safeway has the potential to significantly impact the viability of scienter-based defenses to FCA claims. If the Supreme Court chooses to adopt a clear, objective standard, defendants may be able to rely on reasonable interpretations of murky regulations as a defense. An objective standard could serve as protection for honest contractors who may otherwise be subject to liability for failing to comply with complex regulations.

The Solicitor General has asked the Supreme Court to reverse the 7th Circuit's decision to preserve the relevance of subjective intent. The government's view is that the FCA's scienter standard is met where a person: (1) subjectively believes that a claim is false; (2) recognizes a substantial risk that the claim is false but deliberately avoids taking readily available steps to obtain clarification; or (3) knows or should know that the claim is probably false but acts with reckless disregard of that danger. See Br. of United States as Amicus Curiae, No. 21-1326, at 8 (Dec. 2022).

The government's view is that a contractor cannot escape liability by identifying "an objectively reasonable (but wrong) exculpatory interpretation of the governing requirements after the fact" even though the actor "was unaware of that interpretation at the time it acted." Id. at 21. Basically, if multiple interpretations were available at the time of the act (even if not considered by the actor) or the government failed to provide adequate guidance, the defendant would still be liable.

Such a sea change may have the effect of shifting the inquiry in FCA cases to fact-intensive questions about what the defendant actually intended at the time the claims were submitted. This could have the unintended consequence of affording defendants an opportunity to create alternative explanations to justify their submission of false claims post hoc.

For instance, many jurists were critical of the 7th Circuit's reliance on Safeco, which is not an FCA case, but rather concerned the Fair Credit Reporting Act (the "FCRA"). In both SuperValu and Safeway, the dissent opined that the FCRA's knowledge standard should be distinguished from the FCA's "knowingly" standard because the FCRA defines knowing to include acting "willfully" while the FCA contains no such requirements. The dissent warned that imputing the Safeco standard to the FCA context could create an inadvertent safe harbor for deliberate or reckless defendants to create an after-the-fact, legal rationale that justifies why their actions were not fraudulent.

FCA defendants are already subject to a materiality requirement under Universal Health Services, Inc. v. United States ex. rel. Escobar, 579 U.S. 176 (2016) where the U.S. Supreme Court transformed the FCA by holding that the statute could only be properly involved when a knowing noncompliance with statutory, regulatory, or contractual requirements has a material impact on the government's payment decision. Combined with the Escobar materiality requirement, limiting the scienter element will make it much more difficult for whistleblowers and the government to prosecute FCA cases. It is possible that the decrease in FCA cases from 2022 was a result of parties waiting to see how the Supreme Court will rule.

Oral arguments in SuperValu and Safeway are scheduled for April 18, 2023. It is quite possible that any decision will then spur a response from Congress to clarify the FCA requirements to again make actions easier. The uncertainty, though, means that government contractors must remain vigilant in their compliance programs to avoid fraud, waste, and abuse — especially in creative programs that are untested.