January 20, 2023

Supreme Court to Decide if SafeCo Standard Should Apply in False Claims Act Cases

The United States Supreme Court is set to hear arguments on two consolidated cases involving alleged False Claims Act (“FCA”) violations by supermarket pharmacies. The whistleblowers in the two cases, U.S. ex rel. Proctor v. Safeway, Inc. and U.S. ex rel. Schutte v. SuperValu Inc., allege that the defendant pharmacies violated Medicare/Medicaid regulations, and overcharged the government in violation of the FCA, by seeking reimbursement for prescription drugs using their retail cash prices rather than the lower prices offered through their price-match discount programs. Medicare and Medicaid guidelines require that pharmacies seeking reimbursement charge no more than the “usual and customary price” they charge to the general public.

The Seventh Circuit Court of Appeals dismissed both cases, applying the standard set forth by the Supreme Court in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). In SafeCo, the Supreme Court held that, for the purposes of the Fair Credit Reporting Act (“FCRA”), a defendant interpreting an ambiguous statute or regulation does not act with reckless disregard if the interpretation was objectively reasonable and “authoritative guidance” did not warn the defendant away from the interpretation. In Safeway and SuperValu, the Seventh Circuit held that the SafeCo standard applies to the FCA’s scienter requirement and that it was “objectively reasonable” for both defendant pharmacies to list their retail cash prices as their “usual and customary” prices because the regulations do not elaborate on “usual and customary” price beyond a cursory definition.

Following the dismissals, the whistleblowers appealed to the Supreme Court, who granted certiorari and consolidated the cases on January 13, 2023. The Supreme Court is now poised to conclusively decide whether the SafeCo standard should be applied in FCA cases. If the Supreme Court does side with the Seventh Circuit and uphold the application of SafeCo to the FCA scienter requirement, the consequences could be dire for future whistleblowers, making it more difficult to prove the intent to defraud the government and thus reducing the likelihood of recovery. Such a result could also create a virtual “get out of jail free card” for defendants who may have acted with the requisite intent to defraud the government but are able to argue the “objective reasonableness” of their actions.

The Supreme Court’s decision in these cases is likely to have a significant impact on FCA litigation regardless of the outcome.


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