In holding so, the Court declined to adopt the premise that an objective inquiry as to state of mind – specifically, whether a defendant’s actions were “consistent with any objectively reasonable interpretation” of a predicate regulation for an FCA claim – precludes FCA liability.[2] Thus, scienter can exist even if a defendant follows an objectively reasonable but ultimately incorrect reading of an ambiguous statute or regulation, and the defendant was at least aware of a substantial and unjustifiable risk that they were wrong.[3]
Case law evaluating the impact of SuperValu on the pleading standard for alleging scienter has begun to trickle in. Early returns indicate that SuperValu may have lowered the pleading threshold for the government and plaintiff-relators pleading scienter. Consequently, FCA defendants should be prepared more than ever before to litigate to the summary judgment stage and potentially beyond if they are relying primarily on scienter-based defenses.
A subjective scienter standard[4]
SuperValu concerned two grocery store pharmacies that allegedly submitted false claims for Medicaid and Medicare reimbursements. The regulations for those two federal programs impose certain rules on prescription drug reimbursement – one relevant measure being a pharmacy’s “usual and customary charges [for the drug] to the general public.”[5] The Court found that “usual and customary” could refer either to a pharmacy’s undiscounted retail prices or, if enough customers receive a discount, to the discounted prices.[6]
The defendants sold certain prescription drugs at a discount rate to compete with Walmart.[7] Representing the non-discounted drug prices as “usual and customary,” they submitted Medicaid and Medicare reimbursements for those prices.[8] The defendants did so despite allegedly voicing internal doubts about this interpretation of the regulations and receiving non-definitive guidance from a pharmacy benefit manager and state Medicaid agencies that “usual and customary charges” corresponded to the discounted rates.[9]
The Seventh Circuit affirmed the District Court’s holding that the defendants were entitled to summary judgment because the plaintiff-relators had not established scienter.[10] It found that the defendant’s interpretation of the regulations was objectively reasonable and that such a finding precluded scienter.[11] The Supreme Court disagreed. It unanimously held that the objective reasonableness of the defendant’s interpretation of the Medicaid and Medicare regulations did not preclude a finding of scienter. The defendants’ subjective belief that their reimbursement claims were inaccurate was sufficient to overcome summary judgment for lack of scienter.[12]
Case law applying SuperValu at the pleading stage
A pattern is potentially emerging in the case law evaluating the effect of SuperValu at the motion to dismiss stage. Although many courts continue to dispose of FCA cases in response to motions to dismiss, some courts appear less inclined to do so when a defendant’s primary argument is that plaintiffs failed to adequately plead scienter.
For example, in United States v. Chattanooga-Hamilton County Hospital Authority, a court of the Eastern District of Tennessee found that the government had successfully pled an FCA claim against Erlanger, an operator of hospitals, for violating a Medicare regulation allowing reimbursement for “teaching-physician services” only “if the teaching physician personally provided the services, or if a resident provided the services while the teaching physician was present.”[13] Erlanger allegedly submitted reimbursement claims for teaching-physician services involving overlapping, resident-performed surgeries that were assigned to one teaching physician – the implication being that the teaching physician could not be physically present for multiple resident-performed surgeries at once.[14] Citing SuperValu, the district court found that allegations regarding Erlanger’s status as “a sophisticated player in the healthcare industry,” a compliance presentation by Erlanger’s Chief Compliance Officer warning against overlapping surgeries, and internal communications warning against reporting overlapping surgeries were sufficient to plead the subjective scienter element – that the defendant had an understanding of the rule.[15] Pursuant to SuperValu, the district court did not consider, when analyzing the scienter prong, whether Erlanger’s actions were nevertheless consistent with a reasonable interpretation of the relevant Medicare regulation.
Likewise, in United States ex rel. Souza v. Embrace Home Loans, Inc., the District of Rhode Island found that the plaintiff-relator had successfully stated an FCA claim against Embrace, a home loan provider, for claiming eligibility for FHA mortgage insurance for issuing loans that were noncompliant with HUD’s underwriting requirements.[16] The court concluded that the plaintiff-relator had successfully pled scienter by alleging that the defendant’s operating policies, including a “do not decline” policy and a “guaranteed on-time close” policy, created, by their very design, an inference of subjective knowledge that they were violating regulations.[17] The district court explained that the defendants “cannot claim to know and have complied with HUD regulations while, on the other hand, have developed and implemented practices that led to the underwriting of dozens of loans that allegedly violated the same HUD regulations.”[18]
Both Chattanooga-Hamilton Cnty. Hosp. Auth. and Embrace Home Loans illustrate how some courts, post-SuperValu, have been less willing to grant motions to dismiss based solely on scienter-related defenses.[19]
Looking ahead
By lowering the barrier to pleading scienter, SuperValu has widened the gateway for FCA cases proceeding through discovery and to the summary judgment stage even when the standard or language underlying a falsity allegation is itself ambiguous. The early case law from district courts citing SuperValu appears to reflect this potential trend.
By rejecting objective reasonableness as a standalone inquiry to defeat scienter allegations, the Supreme Court has imposed an additional operational burden on regulated entities who submit claims to the government. SuperValue’s scienter standard makes it more prudent for companies to thoroughly document their regulatory interpretation decisions. If a defendant’s subjective state of mind is what most matters for scienter, companies will have an even greater incentive to spell out with specificity exactly why they believe their regulatory decisions are correct. Companies should consider how to do so without inviting a privilege waiver or resorting to an advice of counsel defense.
References
[1] 598 U.S. 739, 757 (2023).
[2] Id. at 748.
[3] Id.
[4] Further discussion of the background and holding of Supervalu can be found here: https://www.engage.hoganlovells.com/knowledgeservices/news/supreme-courts-schutte-decision-the-meaning-of-knowledge-remains-elusive/
[5] 598 U.S. at 744 (quoting regulations).
[6] Id. at 753-54.
[7] Id. at 745.
[8] Id.
[9] Id. at 746-47.
[10] Id. at 747-48.
[11] Id.
[12] Id. at 757.
[13] No. 1:21-CV-84, 2024 WL 221758, at *1 (E.D. Tenn. Jan. 19, 2024).
[14] Id. at *2.
[15] Id. at *7-8.
[16] No. 122CV00453JJMPAS, 2023 WL 4234967, at *1 (D.R.I. June 28, 2023).
[17] Id. at *4.
[18] Id.
[19] See, e.g., United States ex rel. Miller v. Reckitt Benckiser Grp. PLC, No. 1:15CV00017, 2023 WL 6849436, at *17 (W.D. Va. Oct. 17, 2023) (finding that pled facts regarding “under the table” discussions around “the bundling of Medicare Part D and commercial contract pricing” created a plausible allegation of actual knowledge regarding false reporting to CMS); United States ex rel. Goldberg v. Sacramento Heart & Vascular Med. Assocs., No. 219CV00992DJCJDP, 2023 WL 5435890, at *9 (E.D. Cal. Aug. 23, 2023) (finding that plaintiff-relator’s allegation that she was asked to stop investigating defendant’s improper hospital billing practices created the inference of scienter); United States v. Walgreen Co., No. 1:21CV00032, 2024 WL 150959, at *6 (W.D. Va. Jan. 13, 2024) (finding that defendant’s bonus program incentivizing higher sales and its awareness of a substantial increase in sales revenue created a plausible influence of scienter regarding improper Medicaid reimbursement for medication sales to patients that did not meet certain eligibility requirements).