Supreme Court Sides With Whistleblowers in Pharmacy Fraud Lawsuits

Supreme Court Justice Clarence Thomas sits during a group photograph of the justices at the Supreme Court in Washington on April 23, 2021. Erin Schaff/Pool/AFP via Getty Images

In a unanimous ruling on June 1, the Supreme Court revived whistleblower lawsuits against pharmacy operators SuperValu and Safeway for allegedly overcharging the government by filing false Medicare and Medicaid reimbursement claims for prescription drugs they sold.

The case concerns the federal False Claims Act (FCA), which is a key tool for the government to crack down on health care fraud.

The Supreme Court reversed the decision of the U.S. Court of Appeals for the 7th Circuit. This means the lawsuits, which aren’t final, will be allowed to proceed in the lower courts.

The 7th Circuit had previously determined that the two companies had overbilled the government but found that their pricing was based on a reasonable regulatory interpretation.

The U.S. Supreme Court in Washington on March 23, 2023. Richard Moore/The Epoch Times

The appeals court held that the companies had no scienter, a legal term meaning prior intent or knowledge of wrongdoing.

It found that the companies’ billing processes were consistent with an “objectively reasonable” interpretation of the law, regardless of their intentions.

Various federal courts of appeal disagree over the scope of the FCA’s scienter requirement.

To prove scienter under the statute, the government or the whistleblower must demonstrate that the company acted “knowingly,” or with “reckless disregard,” or “deliberate ignorance” of the law in question.

But the 7th Circuit applied the wrong test, Justice Clarence Thomas wrote in the court’s unanimous opinion (pdf).

“In certain circumstances, pharmacies are required to bill Medicare and Medicaid for their ‘usual and customary’ drug prices,” he wrote.

“And, critically, these cases involve defendants ... who may have correctly understood the relevant standard and submitted inaccurate claims anyway. The question presented is thus whether respondents could have the scienter required by the FCA if they correctly understood that standard and thought that their claims were inaccurate.

“We hold that the answer is yes: What matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”

Open to Interpretation

At the oral argument on April 18, Carter Phillips—attorney for Safeway and SuperValu—said that his clients did their best, reporting prices they believed to be accurate.

“There is nothing from the federal government that tells you what the right answer is. And there are lots of different states that take lots of different positions,” he said.

“There’s lots in the record in this case that says that the interpretation adopted by my clients was absolutely correct,” Phillips said at the time.

Sen. Charles Grassley (R-Iowa) had filed a friend-of-the-court brief arguing that the 7th Circuit’s “radical departure from the statute continues a lamentable tradition of some courts interpreting the FCA in an unduly restrictive fashion.”

The appeals court “crafted from whole cloth a novel and unprecedented requirement for proving scienter, which puts on the government a nearly impossible burden to anticipate and warn off future fraudsters from every colorable misinterpretation of the law,” the brief stated.

The FCA is the “most important anti-fraud statute,” and if the ruling is not corrected “it will not be long before the centerpiece of the government’s anti-fraud arsenal becomes unusable,” according to the brief.

Sometimes called the Lincoln Law, the FCA was enacted in 1863 to deal with defense contractor fraud during the Civil War.

The act currently provides that anyone who knowingly files false claims with the government is liable for treble damages plus a $2,000 penalty for each false claim.

The FCA allows the government to pursue perpetrators on its own, and for private citizens to sue those who defraud the government on behalf of the government in what are known as qui tam suits.

Allegations of Artificially High Prices

Private citizens who prevail may be awarded part of what the government recovers.

The whistleblowers’ lawsuits allege that the two supermarket chains billed the two government programs at artificially high rates while charging most paying customers significantly lower prices under discount schedules.

They say the two companies together bilked taxpayers out of $200 million. Federal law mandates that pharmacies bill the programs at the normal prices they actually make customers pay.

Whistleblowers Tracy Schutte and Michael Yarberry claimed that SuperValu knew “its reporting was problematic” and failed to report discounted prices, “charging the government ... higher prices.”

Whistleblower Thomas Proctor claimed that “despite ample warning” Safeway “did not report its discounted prices” to the government, which allowed the company “to offer discounts to price-sensitive consumers without sacrificing lucrative reimbursements from the government.”

The case was actually two cases that the court consolidated: U.S. ex rel. Schutte v. SuperValu (court file 21-1326) and U.S. ex rel. Proctor v. Safeway (court file 22-111).

The way the petitioners are listed reflects that the whistleblowers, known in legal parlance as relators, brought their lawsuits on behalf of the United States government.