Safety in Footnotes? Seventh Circuit Reaffirms Objective Scienter Under FCA

Late last year, the Seventh Circuit joined a growing chorus of circuits to cabin expansive False Claims Act liability by holding in United States ex rel. Schutte v. SuperValu, Inc., No. 20-2241 (7th Cir. Aug. 12, 2021), that the Act requires an objective scienter standard for claims defendants violated ambiguous legal obligations, which considers whether (1) the defendant’s interpretation of a statute or regulation, even if incorrect, was objectively reasonable, and (2) any authoritative guidance warned the defendant away from that interpretation.

In reporting on that decision here on Qui Notes, we mentioned that the court passed on answering whether agency guidance must be binding to be sufficiently authoritative to warn a defendant away from an otherwise objectively reasonable interpretation of a statute or regulation. This week, the court again dodged the question but spent a bit more time explaining why the agency guidance at issue—a single footnote in a lengthy agency manual—did not undercut the reasonableness of the defendant’s statutory interpretation.

In United States of America ex rel. Proctor v. Safeway, Inc., No. 20-3425 (7th Cir. Apr. 5, 2022), the relator alleged that, between 2006 and 2015, Safeway knowingly submitted to Medicare and Medicaid false reports of its pharmacies’ “usual and customary” drug prices. Safeway listed its retail prices as its usual and customary price, rather than lower amounts that it charged qualifying customers under price-matching and discount club programs. These allegations might sound familiar: the relators in SuperValu alleged nearly identical conduct by SuperValu pharmacies.

While Safeway was pending, the court decided Supervalu, holding that SuperValu did not act with the requisite knowledge under the FCA because (1) its interpretation of the meaning of “usual and customary” price was objectively reasonable and (2) no authoritative guidance warned the defendant away from that interpretation. The court had little trouble reaching the same conclusion for Safeway but this time elaborated on its reasoning on the authoritative guidance prong (though it again decided to “leave for another day whether agency guidance must always be binding”).

The relator argued that a footnote in the Centers for Medicare & Medicaid Services Manual constituted authoritative guidance, but the Seventh Circuit disagreed. The court reasoned that, though the Manual’s footnote may have been “specific enough to put Safeway on notice that it should have reported its membership-club prices” as its usual and customary ones, “a solitary footnote in a lengthy, nonbinding manual that changed over time” was not authoritative enough to warn Safeway away from its interpretation.

The Seventh Circuit’s “totality of the circumstances” analysis for authoritative guidance, which was rooted in concerns about due process and fair notice under the FCA’s essentially punitive, treble damages regime should provide some reassurance to would-be FCA defendants, but we’re still waiting for the day that the courts specifically weigh in on whether agency guidance must be binding to be authoritative under the objective scienter standard. We’re also keeping a close eye on the SuperValu relator’s recently filed petition for certiorari and will keep you up to date here on Qui Notes.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.