New Pharmacy, Same Result: Seventh Circuit Holds That Objective Reasonableness Dooms “Usual and Customary” Pricing Case

On April 5, 2022, in a 2-1 decision, the Seventh Circuit applied the precedent it set in United States ex. rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) (discussed here) and found once again that a defendant retail pharmacy did not act with “reckless disregard” under the False Claims Act (“FCA”) by interpreting Medicare Part D and Medicaid “usual and customary” price requirements as allowing it to charge those programs its retail cash prices rather than prices offered through discount programs. United States ex rel. Proctor v. Safeway, Inc., No. 20-3425, 2022 WL 1012256 (7th Cir. Apr. 5, 2022).

As in SuperValu, the Seventh Circuit’s decision was premised on the standard for “reckless disregard” established by the Supreme Court in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007).  Under Safeco, a 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.  Accordingly, the Seventh Circuit first considered whether the defendant’s interpretation of Medicare Part D and Medicaid’s “usual and customary” price requirements as allowing the charging of retail chase prices rather than discount program prices was “objectively reasonable.” The court readily concluded that as to both the defendant’s competitor pricing-matching discount program (the same type of discount program at issue in Supervalu) and its enrollment-based discount club program. Notably, the court came to that conclusion with respect to the latter program even after noting that, “with the benefit of hindsight,” the program could be viewed as an attempt to circumvent the “usual and customary” price requirements.

The Seventh Circuit then considered whether “the only relevant guidance relator . . . identified,” the Medicare Prescription Drug Benefit Manual (the “Manual”), was “authoritative guidance” that would have warned the defendant away from its interpretation. The court found that the Manual was “insufficiently specific” as to the defendant’s competitor-price matching discount program but that it was “specific enough to put [the defendant] on notice that it should have reported its [discount]-club prices as its U&C prices.” Nevertheless, the court found that, despite the Manual’s specificity, the guidance was not sufficiently authoritative because: (1) it was contained in a “single footnote in a fifty-seven page chapter of the voluminous [Manual]”; and (2) “the footnote went in and out of the Manual during the relevant time period.” The defendant argued that the Manual was also not “authoritative guidance” because it was not “binding,” i.e., issued through notice-and-comment rulemaking or binding administrative adjudications, but the Seventh Circuit opted to leave the question of “whether agency guidance must always be binding to satisfy Safeco’s scienter standard” for another day.

The dissent was written by the same judge who wrote the dissent in SuperValu and contains many of the same arguments, including that the majority effectively “create[d] a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.” Similar arguments were also raised by the dissent in a recent Fourth Circuit decision reviewing a defendant’s interpretation of the Medicaid Drug Rebate Program’s “best price” requirements (discussed here).

The Seventh Circuit’s decision can be found here.

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