You’re having a party and ask your son to get wine. He finds a “buy one get one” offer, keeps the free bottle and tells you he spent $30. During the party, you still run out of wine and say you wish he’d bought two. He says nothing about the bottle sitting in his car. Later, you learn what happened and confront him. He squirms. Then his sister chimes in, “He left work early and sacrificed tips to run this errand for you.” Fair enough. But does it still matter that he hid the free bottle?
Earlier this month, the US Supreme Court considered a similar question, analyzing intent under the False Claims Act. It said yes.
The Schutte Decision
Safeway and SuperValu routinely lowered prescription prices at the pharmacy counter to match a Walmart deep discount program. Federal rules require pharmacies to report their “usual and customary” prices. Walmart included the discounts. Safeway and Supervalu did not, even after payors clarified they should.
The pharmacies relied on Safeco Ins. Co. of America v Burr to say a company doesn’t act willfully if its conduct was objectively reasonable. In litigation, they argued successfully that other pharmacies would have taken the same position.
The Supreme Court was asked to consider whether the later litigation arguments should prevail when emails suggest the companies submitted claims they thought were incorrect, and later tried to hide the discounts.
FCA cases can allege three types of intent: actual knowledge, deliberate ignorance, or reckless disregard. The court noted Safeco was about recklessness, but the relators here alleged actual knowledge. Because of this, the companies’ subjective intent when filing the claims matters. The emails and other evidence reflect their subjective intent. The later litigation arguments don’t.
Not Every Case Is So Easy
The Supreme Court did not interpret the ambiguous Centers for Medicare & Medicaid Services standard. It also emphasized Schutte is a narrow case about actual knowledge. Through this lens, it’s an easy case.
In oral argument, however, Justice Brett Kavanaugh acknowledged harder cases exist. He noted lawyers often analyze options along a broad risk continuum, companies are expected to seek profits, and executives have latitude to choose. A case where reasoned decision making occurs up front would be more difficult.
Reasoned decision-making is routine for companies that deal with the federal government. Health care entities face complex regulations. Many rules are unclear, and sometimes they conflict. The hospital and insurance industries told the court CMS often refuses to engage in dialogue.
Similarly, despite ambiguous price reporting rules, CMS does not review the reasonable assumptions manufacturers submit with filings. Office of Inspector General reports acknowledge CMS is overwhelmed but urge the agency to do more. Still, regulatory ambiguity can also be a strategic choice, allowing an agency freedom to change its mind.
Given the environment, litigators predict FCA cases will become more costly and involved. And even if Kavanaugh would sympathize with a harder case, he still assumes close judicial scrutiny will occur.
Implications for Risk-Based Decision-Making
While litigators focus on FCA nuance, Schutte doesn’t deliver earth-shattering news for people on the ground.
It does, however, provide an important reminder about in-house law and compliance fundamentals: Decisions involving risk require careful analysis, and disciplined execution.
After Schutte, in-house advisers should expect relators and government attorneys to probe earlier and deeper for evidence of actual knowledge. And litigators may feel more pressure to waive privilege.
Risk analyses should be rigorous and documented completely. Be critical. And never assume a memo or email won’t go beyond a line item on a privilege log if litigation ensues.
Also, higher-risk options are more prone to external scrutiny. This is not new. But business partners should appreciate that taking risk is not a simple matter of saying, “Let’s do it!” Adopting a reasoned position in a gray area differs from flying in the face of established guidance.
And analyze industry norms carefully—there is still risk in assuming others are getting it right.
Finally, compliance is a dynamic exercise. Risk decisions require true collaboration among law, compliance, and business stakeholders. Tips for success include:
Know why the company believes its position is right. Employees who think they are being asked to do something wrong often quit. Some become relators. If leaders cannot articulate sound, simple reasons for a decision, training and execution will be difficult. When this happens, it’s worth reassessing.
Decisions to take risk may require investment. Disciplined implementation often requires back-end tools and systems to support execution in line with analytic assumptions.
Keep an eye on changing landscapes. One of the stickiest facts from Schutte was that payors told the companies to factor in the discounted amounts, but the companies did not change their practices for several years.
Watch execution. When decisions involve nuance, establish careful monitoring, and prioritize audit. In Schutte, the companies said countless auditors pressure-tested their positions. Still, relators alleged that after payors clarified guidance, company executives suggested staff “hide” the discounts. As facts and guidance evolve, issues may need to be revisited.
It’s human nature to want settled decisions. But compliance is a living thing. Schutte reminds us that decisions involving risk cannot always be written in stone.
The case is United States ex rel. Schutte v. SuperValu Inc., U.S., Nos. 21-1326, 22-111, 6/1/23.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Mary Kohler is founder and principal of Kohler Health Law, where she advises life science companies on health-care law and compliance matters.
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