Supreme Court: SuperValu, Safeway knowingly overcharged feds for drugs

Companies cannot rely on their own definition of “usual and customary” when determining prices to reimburse federal drug programs, the U.S. Supreme Court unanimously ruled Thursday in a whistleblower case brought under the False Claims Act.

“There are probably a lot of disappointed defense lawyers today,” said Phillips & Cohen partner Stephen Hasegawa in a statement sent shortly after the opinion was released in Schutte v. SuperValu on Thursday.

The dispute started with FCA claims from whistleblowers who alleged pharmacies at two grocery store chains, SuperValu and Safeway, were overcharging the federal government’s Medicare and Medicaid programs for generic drugs via “membership programs” by $200 million.

Specifically, members were receiving a discounted price but the stores sought reimbursement from the government based on retail prices, according to the allegation, which the Supreme Court revived with its decision. A federal appeals court dismissed the suits against both companies, ruling that their decisions to report the higher prices were “not objectively unreasonable” under the  FCA. However, the Supreme Court decision gives the whistleblowers another chance to pursue their claims that the companies defrauded the government programs when they reported retail prices for generic prescription drugs.

Related: False Claims Act: Businesses should consider how to document their interpretations

The whistleblowers allege the companies knew they were skirting the law based on emails in which executives raised concerns about letting state agencies or pharmacy benefit managers find out about their discounted prices. The stores deny the allegations.

The high court’s decision, written by Justice Clarence Thomas, turned on the regulatory allowance of “usual and customary” pricing in the context of how much drug stores can seek in reimbursement from the government.

Attorneys from Kirkland & Ellis and Sidley Austin argued on behalf of the stores that it was objectively reasonable for company executives to believe the retail price was the “usual and customary” price for the drugs, regardless of any subjective belief they may or may not have had that the discounted price was the appropriate charge to the government.

Both a federal district court and the U.S. Court of Appeals for the Seventh Circuit had agreed with the attorneys, finding that the ambiguity of the regulatory phrase “usual and customary” pricing opened the door for a wider interpretation by the stores.

“Because SuperValu (and Safeway) had an objectively reasonable understanding of the regulatory definition of (usual and customary) price and no authoritative guidance placed it on notice of its error, the relators (whistleblowers) have not shown that SuperValu (and Safeway) acted knowingly,” the Seventh Circuit held.

But Thomas wrote that was not the case.

“On their face and at common law, the FCA’s standards focus primarily on what (defendants) thought and believed,” he wrote. “In short, either actual knowledge, deliberate ignorance, or recklessness will suffice.”

To illustrate, Thomas compared the companies alleged disregard for their discount prices to a driver speeding down a road marked with a sign labeled “Drive Only Reasonable Speeds.”

“That driver, without any more information, might have no way of knowing what speeds are reasonable and what speeds are too fast,” Thomas wrote.

“But then assume that the same driver was informed earlier in the day by a police officer that speeds over 50 mph are unreasonable and then noticed that all other cars around him are going only 48 mph,” Thomas added. “In that case, the driver might know that ‘reasonable speeds’ are anything under 50 mph; or, at the least, he might be aware of an unjustifiably high risk that anything over 50 mph is unreasonable. Indeed, if the same police officer later pulled the driver over, we imagine that he would be hard pressed to argue that some other person might have understood the sign to allow driving at 80 mph.”

The dispute was being watched by much of the False Claims Act community with an eye for how wide—or narrowly—future courts should interpret the defendants’ knowledge.

Hasegawa, of Phillips & Cohen, called the decision “an important signal from a unanimous Supreme Court that lower courts should just apply the False Claims Act as written and not look for ways to narrow it.”

Another party expected to be happy with the decision is U.S. Sen. Chuck Grassley. The Iowa Republican submitted an amicus brief in the case pointing to his own role in updating the FCA in the 1980s to make sure abuse of the law would not be tolerated.

In a statement following the opinion’s release, Grassley praised the high court for enabling the FCA to continue to be “our best tool to combat government fraud and abuse, which is why I’ve fought for decades to strengthen and improve it.”