On June 1, 2023, the U.S. Supreme Court unanimously settled a long-standing dispute over a subjective versus objective standard for scienter under the False Claims Act (FCA), holding that a defendant’s own subjective belief is relevant to scienter, rather than what an “objectively reasonable” person may have known or believed.

The case in question, U.S. ex rel. Schutte v. SuperValu Inc., consolidated from two lower court decisions, involved allegations that the defendants, two retail pharmacy chains, overcharged the government for prescription drugs in violation of the FCA. The FCA provides for liability for a defendant that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” “Knowingly” is defined as acting with (1) “actual knowledge” of the falsity, (2) “deliberate ignorance of the truth,” or (3) “reckless disregard of the truth.” 31 U.S.C. §3729.The companies were accused of overcharging Medicaid and Medicare for drugs by submitting amounts as their “usual and customary” prices that did not reflect the significantly discounted prices that their retail customers were often actually paying.

 The Supreme Court agreed to hear the case after the U.S. Court of Appeals for the Seventh Circuit held in favor of the defendants and found that that when a defendant’s interpretation is considered objectively reasonable, the defendant’s subjective intent is irrelevant to the scienter inquiry under the FCA. Resoundingly rejecting the Seventh Circuit’s interpretation, the Supreme Court emphasized that “[w]hat matters for an FCA case is whether the defendant knew the claim was false,” because “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” The Court further clarified that the analysis of the knowledge element of the FCA should “focus primarily on what the respondents thought and believed” when they submitted “the false claims—not what the defendant may have thought after submitting it” or “post hoc interpretations that might have rendered the claims accurate.”

The Court defined the “reckless disregard” standard as “captur[ing] defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway,” arguably an expansion of the previously understood standard. Under the SuperValu standard, the FCA can now reach defendants who knew that the claims they submitted were fraudulent, even if such defendants subsequently offered an “objectively reasonable” interpretation of a requirement material to the government’s payment decision.

Despite this expansion of the scienter standard, Justice Thomas’s opinion does offer several “consolation prizes” for FCA defendants. The opinion found that a good faith, even if mistaken, interpretation of the terms of a requirement material to the decision to pay may be a defense to FCA liability based on knowledge.  The opinion further remarked that even some objectively unreasonable interpretations may avoid liability if the defendant believed such interpretations to be accurate, stating “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” In this regard, the focus on what a defendant actually believed or knew at the time of the submission of a claim, rather than what an objectively reasonable person would have understood, could very well end up benefitting future unwitting defendants in their defense of FCA suits.

The shift in perspective established by SuperValu suggests that efforts by defendants to obtain early dismissal of FCA cases on the basis of lack of scienter may become more challenging in future cases. Qui tam relators will likely have to undertake additional discovery establish a defendant’s subjective state of mind. However, defendants may find it more difficult to avoid liability under the new FCA standard as the focus shifts from hypothetical “reasonable interpretations,” to measures of belief indicated by defendants’ actual words and conduct.

Ultimately, this decision by the Court will have widespread impact in future FCA cases, and those operating in the health care space in particular should take preemptive steps to protect against future FCA suits. Best practices should include making good faith efforts to reasonably interpret and comply with all relevant legal and contractual provisions related to the government’s decision to pay claims, and documenting such interpretations at the time of claim submission. Additionally, effective compliance programs may help to stem the risk of future FCA liability by identifying areas of risk before they rise to the level of an FCA suit. Those operating in the health care space, especially those at risk of FCA suits, should be prepared to make arguments for the element of scienter and should seek advice and consult from legal counsel in navigating these complex issues.