Seventh Circuit Affirms That Safeco “Objective Reasonableness” Standard Applies to FCA Claims; Finds It Was Objectively Reasonable for Defendants to Charge Government Retail Cash Prices Instead of Discount Program Prices

In a 2-1 decision, the Seventh Circuit joined the Third, Eighth, Ninth, and D.C. Circuits in holding that the standard for “reckless disregard” under the Fair Credit Reporting Act (“FCRA”) established by the Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007) applies equally to the False Claims Act (“FCA”). Applying Safeco, the Seventh Circuit also held that it was objectively reasonable for Defendants, a group of retail pharmacies, to charge the Medicare Part D and Medicaid programs their retail cash prices as their “usual and customary” prices for drugs rather than prices offered through competitor price-match discount programs.

Under the FCA, defendants may held liable only if they “knowingly” submit a false claim to the government. The term “knowingly” is statutorily defined to cover a defendant who acts with “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” 31 U.S.C. § 3729(b)(1)(A). In Safeco, the Supreme Court established that a FCRA defendant interpreting an ambiguous statute or regulation does not act with reckless disregard if (1) the interpretation was objectively reasonable and (2) “authoritative guidance” did not warn the defendant away from that interpretation. Safeco, 551 U.S. at 70. Noting that the scienter provisions for both FCRA and the FCA are rooted in the common law, the Seventh Circuit held that the Supreme Court’s analysis in Safeco extends to the FCA. The Seventh Circuit’s extension of the Safeco analysis to the FCA is important for companies in all industries but particularly for companies in the health care industry, which is governed by a morass of laws and regulations that are constantly changing and are often not straightforward.

Just as important as its extension of Safeco to the FCA was the Seventh Circuit’s application of Safeco to the conduct at issue. As background, Medicare Part D and Medicaid laws and regulations require pharmacies seeking reimbursement for drugs to charge no more than the “usual and customary” price they charge to the “general public” (“U&C price”). Relators alleged that, between 2006 and 2016, Defendants violated this requirement by charging Medicare Part D and Medicaid their retail cash prices instead of the prices offered through their competitor price-match discount program. Defendants countered that the relevant U&C price requirements did not clearly require them to charge their discount program prices because those prices were not prices charged to the “general public.” The Seventh Circuit agreed, finding that, during the relevant time period, Defendants’ interpretation was reasonable and no guidance, “authoritative” or otherwise, was sufficiently specific to warn them away from that interpretation. Importantly, Defendants’ price-match discount programs had ended before the Seventh Circuit’s decision in U.S. ex rel. Garbe v. Kmart Corporation, 824 F.3d 632 (7th Cir. 2016), which held that prices charged under certain discount programs should be the prices charged to Medicare Part D and Medicaid.

The dissent argued that Safeco only defines the “reckless disregard” prong of the FCA’s scienter standard and does not preclude a finding of liability under the “deliberate ignorance” or “actual knowledge” prongs, which it thought Relators had presented sufficient evidence on to avoid summary judgment. The majority disagreed, finding that the “reckless disregard” prong functions as a “baseline requirement” and therefore failure to establish “reckless disregard” necessarily precludes a finding of “deliberate ignorance” or “actual knowledge,” both of which require “higher degrees of culpability.” As the majority concluded: “we do not see how it would be possible for defendants to actually know that they submitted a false claim if relators cannot establish the Safeco scienter standard.”

A copy of the opinion can be found here.

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