Courts Create New Defense for False Claims Based on Reasonable Mistakes about Regulatory Requirements

The False Claims Act (FCA) bans labs and other providers from “knowingly” submitting false claims. “Knowingly” is a curious word. Medicare coverage and billing rules can be intricate, confusing and hard to understand. So, in a different world, “knowingly” might provide legal cover to labs and other providers that want and try to comply but can’t figure out what exactly the rules require. However, courts, prosecutors and investigators have interpreted “knowingly” very broadly to ensure that confusion over the rules isn’t a defense. But recently, federal courts in some parts of the country have been begun recognizing misinterpretation of regulatory requirement as a valid defense, as long as the mistake is reasonable. Here’s a look at the trend and what it may mean for your own lab.

What the FCA Says

As with many regulatory laws, FCA violations have two elements, both of which the prosecutor or whistleblower has the burden of proving:

• An action—submitting or causing a false claim for payment to be submitted to the government; and
• “Scienter,” i.e., a state of mind that a defendant must have in committing the action—knowingly.

The FCA defines “knowingly” as “actual knowledge,” “deliberate ignorance” or “reckless disregard.” Historically, misunderstanding a confusing federal coverage or billing regulation has been interpreted as falling into the “reckless disregard” category. However, in a 2007 case called Safeco Insurance Co. of Am. v. Burr, 551 U.S. 47, the U.S. Supreme Court drew some lines by finding that misinterpretation may be a defense to the scienter requirement as long as:

• The defendant’s interpretation was objectively reasonable; and
• “Authoritative guidance” didn’t warn the defendant away from its interpretation.

In this case, the defendant’s interpretation was reasonable and there was no guidance from the agency enforcing the law, the U.S. Federal Trade Commission, that “might have warned it away from the view it took.”

The Safeco Standard Catches On 

Technically, Safeco was an interpretation of the Fair Credit Reporting Act (FCRA), rather than the FCA; and the scienter standard under the FCRA is “willful,” rather than “knowingly.” However, the “reckless disregard” phrase that appears in the FCRA interpretation of “willful” is also used in the FCA definition of “knowingly.” Result: The logic of Safeco would seem to apply equally to the FCA.

In fact, five different federal Circuit courts have extended Safeco to FCA claims. On Aug. 12, 2021, the Seventh Circuit joined the D.C., Third, Fifth and Eighth Circuits in this view.

The Schutte v. SuperValu Case

At issue were Medicare Part D regulations limiting drugs reimbursement to a pharmacy’s “usual and customary” (U&C) costs. A pair of pharmacists filed a whistleblower lawsuit accusing the SuperValu grocery chain of knowingly submitting false claims by listing its pharmacies’ retail cash prices—the price for uninsured cash customers—as its U&C price, rather than lower, price-matched amounts charged to qualifying customers under its discount program. The government decided not to intervene in the case.

The lower court agreed with the whistleblowers that SupeValu should have reported its lower, price-matched prices because that’s what the definition of U&C price in the regulations required. But Safeco saved the day for SuperValu. The court ruled that the whistleblowers didn’t prove that SuperValu submitted the false claims “knowingly” and partially dismissed the case.

The whistleblowers appealed, but to no avail. The standard the Supreme Court used to evaluate scienter under the FCRA applies equally to “knowingly” under the FCA, the Seventh Circuit affirmed. SuperValu’s use of retail cash prices was a reasonable interpretation of the U&C rules, the Court reasoned, since they required pharmacies to use the prices they charge the “general public.” And the discount rates the whistleblowers said SuperValu should have used weren’t the ones it charged the general public.

The Court also concluded that there was no “authoritative guidance” that should have warned SuperValu away from its interpretation of U&C. On the contrary, the Centers for Medicare and Medicaid Services (CMS) didn’t issue any guidance explaining the requirement; nor were there any circuit court rulings on the issue.

U.S. ex rel. Schutte v. SuperValu, No. 11-cv-3290 (7th Cir. Aug. 12, 2021)

Takeaway

FCA liability for knowingly submitting false claims is extremely broad. Until recently, there has been no cushion for labs that billed Medicare and other federal health programs based on a faulty interpretation of regulatory requirements. But Safeco and its progeny have the potential to blow the FCA liability scheme wide open. What especially keeps enforcers, whistleblowers and their attorneys up at night is that the “reasonable” standard is objective, rather than subjective. In other words, it doesn’t matter if the lab actually believed that its misinterpretation of the regulatory requirement was or might have been wrong, as long as it can show that it’s one that a reasonable third party would have made.

However, the second prong, or “authoritative guidance” of the Safeco test is also something labs must reckon with. Although no court has yet offered an official definition, it’s clear that in interpreting regulatory requirements, labs and other providers must look not only at the regulations themselves but also guidance from CMS, OIG and other government agencies, as well as court rulings on and above the circuit court level.