Did pharmacy chain overcharge Medicare and Medicaid? Supreme Court will decide

Government contract attorneys are viewing Tuesday’s U.S. Supreme Court oral argument in a False Claims Act dispute as a case that could represent a pendulum shift sending shock waves through the business community. Two whistleblowers brought suit on behalf of the government, alleging that SuperValu bilked taxpayers in a scheme to present false Medicaid claims.

“If they go with the whistleblowers, it’s going to open up a lot of FCA cases,” Snell & Wilmer partner Brett Johnson said in an interview after Tuesday’s hearing in United States ex rel. Schutte v. SuperValu. “There’s a lot of people waiting in the wings, on both the plaintiff and federal side, waiting to see how this plays out.”

SuperValu, which owned and operated 2,500 grocery stores with over 800 in-store pharmacies between 2006 and 2016, implemented a discount drug program to remain competitive with other pharmacies. The chain contended this price-match program did not need to be reported as its “usual and customary” price to pharmacy benefit managers or federal payors.

Pharmacies are required to submit these U&C prices to the federal government, which impacts the discount that the pharmacy will receive when reimbursed.

The case alleges that the Medicaid- and Medicare Part D-backed programs run by the grocery store’s pharmacies defrauded the company by failing to report “usual and customary” prices accurately to regulators, according to the whistleblower who filed the complaint against SuperValu. But the company says that it was audited 12,000 times over more than a decade before the issue was brought up and the lack of better guidance from the government doesn’t make it liable for the alleged scheme.

“Here we are 15 years after the fact and being exposed to treble damages, to literally thousands of individual claims and circumstances where we had no notice that that would happen,” Sidley Austin partner Carter G. Phillips argued on behalf of the defendant companies before the high court.

Related: Health care fraud tops DOJ’s annual false claims act report — again!

The U.S. Court of Appeals for the Seventh Circuit had tossed the employee whistleblower claims alleging the infractions, but the whistleblowers appealed to the Supreme Court, joined by the federal government and 33 states.

At the Supreme Court hearing, attorneys who argued on behalf of the whistleblowers said that communications from within the company showed that officials knew about the scheme and the American people paid for it.

But according to a handful of lawyers who spoke to the National Law Journal after the hearing, a convergence between Justices Neil Gorsuch and Ketanji Brown Jackson could signal a negative outcome for the defendants.

“The only question … is whether the allegations that are being made about their subjective beliefs matter. They’re not irrelevant,” Jackson said. “If we’re trying to figure out what the scienter [a legal term that refers to a defendant’s knowledge that an act is wrongful] is in this case … the jury can take into account evidence concerning their actual beliefs.”

“If all the court does is say that was a misconception on the Seventh Circuit’s part, we send it back for the Seventh Circuit to redo the analysis without regard to that misconception, that’s certainly a step in the right direction,” responded Deputy Solicitor General Malcolm L. Stewart, who joined the whistleblowers in their appeal, to the newest justice’s suggestion.

But taking into account that subjective intent could mean a sea change for the FCA space.

“It becomes more difficult to interpret as discovery in a case goes on, it makes it more difficult for defendants and the court,” Clark Hill member Tim Herman warned. Herman actually thinks the high court will stay the course of the Seventh Circuit for this reason. He argued, like Phillips, that the lack of guidance from the government on the program should reinforce an existing high bar that whistleblowers should struggle to clear.

“If the precedent is ‘defendants don’t know what to follow going forward,’ I think it makes it very difficult for companies to know what’s happening in the future and increases risk when companies are dealing with government programs,” he said.

Justice Samuel Alito noted the issue with the subjective standard is the nature of how companies interact with their internal staff. And while putting such internal messages before a jury might illustrate one point, it may not accurately reflect how decisions are really made.

“The law could mean X or it could mean Y, and an entity that ends up being the defendant in a False Claims Act case says, ‘We think there’s a 49% chance the courts will say it’s X, which is good for us, and a 51% chance that they will say that it’s Y, which is bad for us,’ and, therefore, we think it really means Y, the unfavorable interpretation,” he said.

That internal deliberation speaks to the vagueness of the regulation, said Alex Ward, co-chair of Morrison & Foerster’s government contract team. He said his many years in the government contract space have shown him that regulations and statutes often fail to take every outcome into account, and his job as a lawyer is to find the best outcome for his client, even if it’s an aggressive one.

“So what do you do? If you turn out to have made the wrong legal interpretation, does that subject you to liability?” he said, noting that usual missteps in the government contract space can lead to fines. But if the door to FCA claims swing open, it could increase to treble damages or worse.

To that end, Ward envisions a possibly narrow reading, but even he admits that could be impactful on future FCA fights: making evidence of subjective intent admissible at early stages of a claim.

“But even that has very broad potential implications,” he warned. “If subjective intent is relevant and admissible, does that mean every FCA case that turns on scienter has to go to trial? That’s an important question.”

A decision is expected by summer.