From Lemons to Lemonade – Supervalu and the Renewed Importance of Advice Evidence in False Claims Act Matters

The legal community waited with bated breath in anticipation of the most important False Claims Act decision in a generation – the Supreme Court’s interpretation of “knowingly” in Supervalu and Safeway. Could objectively reasonable defendants hope to avoid False Claims Act liability? Was this to be the moment when the Supreme Court reigned in the Department of Justice?

Well, no. There would be no silver bullet. However, this does not mean the Supreme Court left False Claims Act defendants entirely empty-handed. While not everything some had hoped for, the court’s decision charted a course for careful companies to stay on the right side of the law – and effectively defend their actions.

In June, in the consolidated cases of U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway Inc., the Supreme Court unanimously held that the False Claims Act’s scienter element refers to a defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.1 With this restoration of a more traditional, common-law fraud scienter requirement, the advice a defendant received regarding the legality of their actions is now of renewed importance in both defending against False Claims Act actions and in prosecuting them.

In some cases, the False Claims Act’s prohibition against “knowingly” submitting a “false” claim to the government is straightforward: If a law authorized payment of $100 for “each” medical test, and a doctor knows that he did five tests but submits a claim for 10, then he has knowingly submitted a false claim. Sometimes, however, the rule is less clear. If, for example, the law only authorizes reimbursement for the “customary” medical tests, some providers might be confused when it comes time to bill. And, while some providers might honestly mistake what that term means, others might correctly understand whatever “customary” meant in this context — and submit inaccurate claims anyway. The consolidated cases at issue in SuperValu involved a situation similar to that latter example: In certain circumstances, pharmacies must bill Medicare and Medicaid for their “usual and customary” drug prices. And, critically, these cases involved defendants who may have correctly understood the relevant standard and submitted inaccurate claims anyway.

Relying heavily on a case that interpreted the term “willfully” in the Fair Credit Reporting Act, the Seventh Circuit concluded that the defendants were nevertheless entitled to summary judgment because their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary.” The Supreme Court reversed, finding the Seventh Circuit’s interpretation of “knowingly” to be untenable with both the statutory text of the False Claims Act and its common-law fraud roots. Beginning with the statutory text, the court explained that the False Claims Act defines “knowingly” as a person who has actual knowledge of the information and either acts in deliberate ignorance or reckless disregard of the truth or falsity of it. That this three-part test essentially tracks the traditional common-law scienter requirement for fraud claims is “unsurprising,” given that the False Claims Act is primarily a fraud statute.

On their face and at common law, the False Claims Act’s standards focus primarily on what defendants thought and believed.

  1. “Actual knowledge” refers to whether a person is “aware of” information.
  2. The term “deliberate ignorance” encompasses defendants aware of a substantial risk that their statements are false but intentionally avoid taking steps to confirm the statement’s truth or falsity.
  3. The term “reckless disregard” similarly captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false but submit them anyway.

Again, that tracks traditional common-law fraud, which depends on a subjective test and the defendant’s culpable state of mind.

Turning to the cases before them, the court rejected the defendants’ argument that they could not have “known” that their claims were inaccurate because they could not have “known” what the phrase “usual and customary” actually meant. Although the terms, in isolation, may have been somewhat ambiguous, the court explained that ambiguity does not preclude defendants from having learned their correct meaning — or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning. To illustrate why, the court considered a hypothetical driver who sees a road sign that says “Drive Only Reasonable Speeds:”

“That driver, without any more information, might have no way of knowing what speeds are reasonable and what speeds are too fast. But then assume that the same driver was informed earlier in the day by a police officer that speeds over 50 mph are unreasonable and then noticed that all the other cars around him are going only 48 mph. In that case, the driver might know that “Reasonable Speeds” are anything under 50 mph; or, at the least, he might be aware of an unjustifiably high risk that anything over 50 mph is unreasonable. Indeed, if the same police officer later pulled the driver over, we imagine that he would be hard-pressed to argue that some other person might have understood the sign to allow driving at 80 mph.”

The court held that the same analysis applied in the cases before them, which involved evidence of the defendants being informed of the correct legal interpretation of “usual and customary charges” multiple times and by numerous qualified sources — specifically, pharmacy benefit managers and the Medicare and Medicaid agencies. That the defendants comprehended this correct interpretation was evidenced by executives trying to hide their true “usual and customary” prices from the agencies. If this evidence is true, the court explained, then perhaps the defendants knew what the phrase meant or were aware of an unjustifiably high risk that it referred to their discounted prices. And, if that is true, then defendants may have known that their claims were false. The facial ambiguity of the phrase thus does not by itself preclude a finding of scienter under the False Claims Act.  

That the court emphasized the relevance of what advice the defendants received as to the legality of their actions is also unsurprising, given that the advice a defendant received from an attorney, accountant, or other qualified professional has long been considered relevant evidence in determining whether the defendant had the requisite mental state for fraud generally, as well as culpability under the False Claims Act specifically. While an “advice-of-counsel defense” is perhaps the most common scenario, the court’s decision in SuperValu is consistent with longstanding precedent that advice need not come from an attorney to be considered relevant to a defendant’s scienter. Indeed, “the touchstone in examining reliance on advice is the expertise of the expert, and not [his or] her licensure.”2 SuperValu is consistent with the longstanding use of advice by plaintiffs or prosecutors to prove that a defendant possessed the requisite scienter.

Lower court decisions applying SuperValu confirm the newfound importance of advice from all qualified sources in False Claims Act actions in the future. For example, the district court in United States v. Teva Pharmaceuticals USA, Inc. found that a jury could reasonably conclude the defendant’s employees acted knowingly under the False Claims Act based on the government’s evidence that the employees had circulated legal analysis as to the illegality of their actions from the relevant agency itself, i.e., the Chief of the Industry Guidance Branch of U.S. Department of Health and Human Services—Office of the Inspector General, along with legal analysis from a law firm.3 In another case, a district court encountered the “inverse” of SuperValu — that is, “a relatively unambiguous regulation … and a defendant who contends he subjectively believed the claims were proper.” 4 In that case, the district court concluded a jury could find the defendant acted with the requisite scienter under the False Claims Act based, in part, on evidence that the defendant utterly failed to seek legal counsel or consultation with industry experts and failed to seek any clarification or authoritative guidance from the relevant agency’s voluntary attestation process.5

Under SuperValu and its progeny, the advice a defendant received as to the legality of their intended actions — whether it be from their attorney, their accountant, the relevant agency itself, or any other qualified professional — will be strong evidence to either negate or prove scienter under the False Claims Act. Companies should take heed. Seeking sound advice remains an important first step when facing any ambiguity in the context of a government claim, and correctly documenting that advice is crucial. Regarding legal advice, counsel can advise whether and how best to preserve any applicable privilege. In any event, competent and well-documented advice could prove valuable in evaluating the merits of submitting government claims and defending such claims in the face of False Claims Act scrutiny.

1United States ex rel. Schutte v. SuperValu Inc., 589 U.S. 739, 749 (2023).

2SEC v. Westport Cap. Markets LLC, 613 F.Supp.3d 643, 646 (D. Conn. 2020) (citing Addington v. Comm’r of Internal Revenue, 205 F.3d 54, 58 (2d. Cir. 2000) (Sotomayor, J.)); see also United States v. Boyle, 469 U.S. 241, 250 (1985) (reliance on an adviser is reasonable where the adviser has expertise in the relevant area, such as an accountant on a question of tax law).

32023 WL 4565105, at *4 (D. Mass. July 14, 2023).

4United States ex rel. Edalati v. Sabharwal, 2023 WL 5334621, at *12 (D. Kan. Aug. 18, 2023).

5Id. at *11.

In This Article

You May Also Like