United States ex rel. Schutte v. SuperValu Inc., 20-2241

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation9 F.4th 455
Docket NumberNo. 20-2241,20-2241
Parties UNITED STATES of America ex rel. Tracy Schutte, et al., Relators-Appellants, v. SUPERVALU INC., et al., Defendants-Appellees.
Decision Date12 August 2021

John Timothy Keller, Dale J. Aschemann, Attorneys, Aschemann Keller LLC, Marion, IL, Gary M. Grossenbacher, Attorney, Law Office of Gary Grossenbacher, Rollingwood, TX, Glenn Grossenbacher, Attorney, Law Office of Glenn Grossenbacher, Rand J. Riklin, Attorney, Goode, Casseb, Jones, Riklin, Choate & Watson, San Antonio, TX, Jason M. Idell, Attorney, Idell PLLC, Austin, TX, Paul B. Martins, Julie W. Popham, James A. Tate, Attorneys, Helmer, Martins, Tate & Garrett Co., LPA, Cincinnati, OH, for Plaintiffs-Appellants.

James F. Hurst, Andrew A. Kassof, Brenton A. Rogers, Attorneys, Kirkland & Ellis LLP, Chicago, IL, John C. O'Quinn, Attorney, Kirkland & Ellis LLP, Washington, DC, for Defendants-Appellees.

Daniel R. Hergott, Attorney, Behn & Wyetzner, Chartered, Chicago, IL, for Amicus Curiae Taxpayers Against Fraud Education Fund.

John Mercer Masslon, II, Attorney, Washington Legal Foundation, Washington, DC, for Amicus Curiae Washington Legal Foundation.

Craig Young Lee, Attorney, Hunton Andrews Kurth LLP, Washington, DC, for Amicus Curiae National Association of Chain Drug Stores, Incorporated.

John Patrick Elwood, Attorney, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Amici Curiae Pharmaceutical Research and Manufacturers of America, Chamber of Commerce of the United States of America.

Before Rovner, Hamilton, and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

This Court is no stranger to False Claims Act qui tam actions. The present appeal, however, contains a novel question for this Circuit: does the Supreme Court's interpretation of the Fair Credit Reporting Act's scienter provision in Safeco Insurance Company of America v. Burr , 551 U.S. 47, 127 S.Ct. 2201, 167 L.Ed.2d 1045 (2007), apply with equal force to the False Claims Act's scienter provision? We join the four circuits that have answered that question in the affirmative and hold that it does.

This issue comes to us in a lawsuit against Defendants (collectively, "SuperValu"), which claims that SuperValu knowingly filed false reports of its pharmacies’ "usual and customary" ("U&C") drug prices when it sought reimbursements under Medicare and Medicaid. SuperValu listed its retail cash prices as its U&C drug prices rather than the lower, price-matched amounts that it charged qualifying customers under its discount program. Medicaid regulations define "usual and customary price" as the price charged to the general public. Based on our decision in U.S. ex rel. Garbe v. Kmart Corporation , 824 F.3d 632 (7th Cir. 2016), the district court held that SuperValu's discounted prices fell within the definition of U&C price and that SuperValu should have reported them. Relators Tracy Schutte and Michael Yarberry (the "Relators") thus established falsity, the first prong of their False Claims Act ("FCA" or "the Act") claims. On the scienter prong, however, the court applied the Safeco standard to the FCA and held that SuperValu did not meet it.

We agree that the scienter standard articulated in Safeco applies to the FCA. Here, as with the Fair Credit Reporting Act ("FCRA"), there is no statutory indication that Congress meant its usage of "knowingly," or the scienter definitions it encompasses, to bear a different meaning than its common law definition. We further hold that while the FCA's scienter provision is defined via three distinct definitions, a failure to establish the Safeco standard as a threshold matter precludes liability under any of these definitions. Applying this standard to the case at hand, SuperValu did not act with the requisite knowledge under the FCA. The judgment of the district court is affirmed.

I. Background

Underlying this case is a complex regulatory scheme, the details of which inform whether SuperValu has run afoul of the FCA's prohibition on submitting false claims to the government. Before canvassing the case facts, it is necessary to provide a brief overview of both the regulatory schemes under Medicare Part D and Medicaid and our FCA precedent involving those statutes.

A. Medicare Part D and Medicaid

Medicare and Medicaid are government healthcare programs administered by the Department of Health and Human Services through the Centers for Medicare and Medicaid Services ("CMS"). Medicare Part D is a prescription drug benefit providing insurance coverage to beneficiaries. The government employs a multi-tier system to provide Medicare prescription subsidies. At the outset, CMS awards contracts to private plan sponsors to facilitate the benefits program and pays them directly, based in part on the number of enrolled beneficiaries. 42 U.S.C. § 1395w-115 ; 42 C.F.R. §§ 423.265, 423.315, 423.329(a), (c). Plan sponsors, in turn, enter agreements with pharmacies or with middlemen, known as Pharmacy Benefit Managers ("PBMs"), which deal directly with the pharmacies. The PBMs’ contractual agreements with pharmacies specify the methods of calculating prescription drug rates for reimbursement claims, and the PBMs process claims and oversee reimbursements. See 42 U.S.C. § 1395w-111(i).

Medicare Part D limits prescription drug reimbursement rates to the lower of either the "actual charge" or "106 percent of the average sales price," subject to specific limitations. 42 C.F.R. § 414.904(a). While federal regulations do not define "actual charge," they do define "actual cost." 42 C.F.R. § 423.100. The actual cost for a prescription from a "network pharmacy" means the "negotiated price" set by the PBM contract with that pharmacy. Id. If an out-of-network pharmacy prescribed the drug, the actual cost is the U&C price. Id. Medicare regulations define U&C price as the price charged to "a customer who does not have any form of prescription drug coverage." Id. PBM contracts must comply with the Medicare Part D statute and regulations.

Medicaid operates in similar fashion but leverages the cooperative efforts of the states. 42 U.S.C. § 1396 et seq . The federal government and participating states jointly finance Medicaid, and the states implement the program through "state plans." To be eligible for federal funding, a state's plan must comply with the Medicaid statute and federal regulations and obtain approval from CMS. 42 U.S.C. §§ 1396-1, 1396a, 1396b. A state's plan must describe the state agency's "payment methodology for prescription drugs," and the drug reimbursement methodology must comport with federal requirements for Medicaid expenditures. 42 C.F.R. § 447.518(a)(b). Relevant here, federal regulations limit the pharmacy reimbursement for certain prescription drugs to the lower of either "[Actual acquisition cost] plus a professional dispensing fee" or providers’ "usual and customary charges to the general public."1 42 C.F.R. § 447.512(b). Because both Medicare and Medicaid programs involve third-party submission of claims to the government, these reimbursement processes give rise to FCA litigation.

B. United States ex rel. Garbe v. Kmart Corporation

We confronted one such FCA qui tam suit in United States ex rel. Garbe v. Kmart Corporation . In Garbe , we elaborated on the falsity prong of FCA claims in the context of U&C prices reported by pharmacies. The Garbe relator alleged that Kmart submitted false claims for prescription reimbursements under Medicare and Medicaid by failing to report its discount-program prices as its U&C prices. Garbe , 824 F.3d at 636. Instead, Kmart had reported the higher prices it charged to third-party insurers and non-program cash customers. Id. The district court disposed of the relator's FCA claim on a motion for partial summary judgment. On interlocutory appeal, we added the question whether the district court correctly held that Kmart's discount-program prices were U&C prices—the prices "charged to the general public." Id. at 637. We affirmed that determination.

Our decision referenced a variety of sources—dictionary definitions, regulatory definitions, Medicare policy, caselaw, and a CMS manual—to determine the boundaries of "usual and customary price charged to the general public." We noted that unless state regulations provided a different meaning, the U&C price "is defined as the ‘cash price offered to the general public.’ " Id. at 643. Upon consideration of these sources and the case facts, we determined that Kmart's program fell within the scope of "U&C price." Kmart's generic-drug discount program offered set prices and was open to the public—any customer could opt in by paying a $10 fee and providing personal information. Id. at 643. The discount prices were "the lowest prices for which its drugs were widely and consistently available"—over 89% of Kmart's cash customers received the discount prices. Id. at 635, 645 ; U.S. ex rel. Garbe v. Kmart Corp. , 73 F. Supp. 3d 1002, 1018 n.10 (S.D. Ill. 2014). We also found it significant that Kmart had offered these prices for several benefit years rather than as "a one-time ‘lower cash’ price." Garbe , 824 F.3d at 644. On those facts, we held that a pharmacy's discount-program prices could be its U&C prices when the program was offered to the public, even though the discount prices were not the retail prices charged to all customers. Id. at 645. We remanded Garbe without discussing the FCA's scienter prong. Although the scienter prong is at issue in this appeal, Garbe played a key role in the suit against SuperValu.

C. Factual Background

SuperValu, through several subsidiaries, operated or controlled roughly 2,500 grocery stores with over 800 in-store pharmacies between 2006 and 2016. In 2006, SuperValu's national headquarters implemented the discount program underlying this appeal, which ran until December 2016. The price-match initiative was an attempt to compete with pharmacies such as Wal-Mart, which had launched a...

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