Supreme Court Strikes Down Reasonableness Test For Scienter

The knowledge that a claim a contractor makes is false is the linchpin of a False Claim Acts Case. The question is how to know (scienter) whether the contractor knows that He, She or It is lying when there may be several reasonable legal interpretations about what is permissible. In United States ex rel. Schutte v. SuperValu Inc., the U.S. Supreme Court struck down the “reasonableness test” as a knowledge requirement. Pharmacies at both Schutte and SuperValue had submitted millions of dollars in false claims to Medicare and Medicaid. The regulations allowed them to submit claims that reflect “usual and customary” drug prices but both stores provided steep discounts to prescribers and then billed the federal government for the higher prices. Both stores revealed through internal communications their concern that their practices could be illegal. The lower courts and the Seventh Circuit agreed with the defendants that their conduct could be reasonably interpreted as legal, so subjective evidence of wrongdoing, such as internal discussions expressing extreme legal risk or uncertainty, is irrelevant. The Supreme Court disagreed, citing the False Claims Act’s several definitions of knowledge, and found that the conduct expressed “substantial risk that their statements [were] false, but intentionally [avoided] taking steps to confirm the statements’ truth or falsity.” The above-referenced article has several takeaways for legal departments.