The Fate and Future of Qui Tam:
An Analysis of New Key Cases Under the False Claims Act
By the end of the fiscal year in 2022, more than $2.2 billion worth of settlements and judgments had been awarded to whistleblowers under the False Claims Act (FCA). Since 1986, the total has been $72 billion. The vast majority of those awards came from qui tam lawsuits: whistleblower lawsuits filed by everyday people who discovered fraud being committed against the government. The Department of Justice reports there were 652 qui tam actions filed in 2022.
On December 11, 2023, I was part of a panel which spoke to the Arizona Society of Healthcare Attorneys that focused on two specific Supreme Court rulings on qui tam/FCA claims. I was the only relator’s counsel on the panel; the other members were defense attorneys and Assistant United States Attorneys (AUSAs). Our discussion focused on two specific cases: United States et al. ex rel. Schutte et al. vs. SuperValu Inc. et al. and United States ex rel. Polansky v. Executive Health Resources, Inc, et al.
I want to talk about how these cases affect the practice and application of the False Claims Act, and what that means for folks who file claims on behalf of our government. I also want to talk a bit about some legislation that could shore up protections for both the FCA and the whistleblowers themselves. It is my hope that, after reading the analysis, you’ll join me in advocating for these protections on behalf of whistleblowers and American taxpayers.
Important terms if you’re new to qui tam claims
The language of the Act and these types of cases differ from other types of civil claims, and that can make reading opinions a bit more challenging if you’re new to this area of law. So before we dive into the analysis, here are a few key definitions:
- The False Claims Act (FCA) is a federal law that allows private citizens to sue individuals, companies, and other entities that defraud the government. The FCA provides that any person who knowingly submits, or causes to submit, false claims to the government is liable for three times the government’s damages plus a penalty linked to inflation. The Department of Justice put together a free “primer” on the FCA; you can read that primer here.
- Qui tam is a (shortened) Latin phrase that means “who sues on behalf of the King as well as for himself.” The qui tam provision of the False Claims Act allows individuals with evidence of fraud against the government to sue the fraudster on behalf of the government. Qui tam actions are a valuable tool in the fight against fraud.
- Relators are people who act on behalf of the government by filing qui tam claims. If the action is successful, the relator receives a portion of the award.
- Scienter is the legal term for a person’s state of mind. It refers to a person's knowledge of wrongdoing and intent to act despite that knowledge. Scienter is often an element of liability, especially in cases involving fraud. It's used as a standard of guilt and can refer to a mental state where someone knows that their action is wrong, deceptive, or illegal.
With that, let’s take a look at those cases.
The sky is blue: United States et al. ex rel. Schutte et al vs. SuperValu Inc. et al.
The first case I want to look at today is United States et al. ex rel. Schutte et al. vs. SuperValu Inc. et al. In this case, the Supreme Court ruled that a defendant's own subjective belief is relevant to scienter and not solely what an “objectively reasonable” person may have concluded. In plain language, it means if you commit fraud, you cannot later claim that someone else might not have known what you were doing was fraudulent. If you know it’s fraud and still do it, the Court understands that you intended to commit fraud. No Monday morning quarterbacking can get you out of it.
The background to the case
In 2006, Wal-Mart started a $4 generic prescription drug program. Not wanting to lose customers, SuperValu and Safeway started price-match programs in their pharmacies to compete with Wal-Mart. Safeway also started a “’membership’ discount program” (Opinion, pg 4) for customers who filled prescriptions for generic drugs at their stores. These programs earned SuperValu and Safeway quite a bit of money; per the court documents, “according to petitioners, a majority of SuperValu’s 2012 cash sales for 44 of its 50 top-selling prescription drugs were made at those discounted prices. And, according to petitioners, 88% of Safeway’s 2014 cash sales for its top 20 generic drugs were at discounted rates” (pg 5).
Now, Medicare and Medicaid both offer reimbursement for prescription drug coverage, though there are limits. From page 3 of the opinion:
The Federal Centers for Medicare and Medicaid Services (CMS) has promulgated regulations that limit the amount these programs may reimburse for certain drugs. Those regulations limit any reimbursement to the lower of two amounts, one of which is the healthcare provider’s “usual and customary charges [for the drug] to the general public.” State Medicaid agencies likewise typically reimburse pharmacies for the lowest of different amounts, one of which is often the pharmacy’s “usual and customary charge” to the public.
Through Medicare Part D, the Government also offers prescription-drug coverage to beneficiaries. To administer that coverage, CMS awards contracts to private plan sponsors. Those plan sponsors, in turn, enter contracts with pharmacies (sometimes through middlemen called pharmacy benefit managers). Many of the contracts at issue here limited any reimbursement to the pharmacy’s “usual and customary” price.
For almost a decade, SuperValu and Safeway made most of their money through their discounted prescription drug prices. But when it came time to submit the paperwork for reimbursement, neither company listed those discounted prices as their “usual and customary” prices, despite being explicitly told by pharmacy benefit managers and, in the case of Safeway, by state Medicaid agencies that the discounted prices should be used. From the Court’s opinion, page 1:
Here, petitioners claim that respondents—SuperValu and Safeway—defrauded two federal benefits programs, Medicaid and Medicare…. [A]ccording to petitioners, SuperValu and Safeway for years offered various pharmacy discount programs to their customers—yet reported their higher retail prices, rather than their discounted prices. Petitioners also presented evidence that the companies believed their discounted prices were their usual and customary prices and tried to prevent regulators and contractors from finding out about their discounted prices. In sum, petitioners claim that the evidence shows that respondents thought their claims were inaccurate yet submitted them anyway.
When all this went to court the first time, the District Court ruled “that SuperValu’s discounted prices were its ‘usual and customary’ prices and that, by not reporting them, SuperValu submitted claims that were false” (pg 6). But, it granted SuperValu a summary judgment when it came to scienter, “holding SuperValu could not have acted ‘knowingly.’ Soon after, it granted Safeway summary judgment on the same basis” (pg 6). The Seventh Circuit Court affirmed these decisions, saying that it’s possible that the companies could have thought their “normal” retail price for the drugs was the usual and customary price.
When the Supreme Court agreed to hear the case, then, they did so to resolve this question:
If respondents’ claims were false and they actually thought that their claims were false—because they believed that their reported prices were not actually their “usual and customary” prices—then would they have “knowingly” submitted a false claim within the FCA’s meaning? Or is the Seventh Circuit correct—that respondents could not have “knowingly” submitted a false claim unless no hypothetical, reasonable person could have thought that their reported prices were their “usual and customary” prices? (pg 7)
In other words, if Safeway and SuperValu knew their claims were false, but after the fact attorneys argued that someone else might have been confused by the law and not known what to do, did Safeway and SuperValu commit fraud?
What the Court decided – unanimously, at that – was yes: if you know you’re committing fraud, then you’re knowingly committing fraud.
SCOTUS blog reports:
Vacating the 7th Circuit’s rulings, as was expected following oral argument in April, Justice Clarence Thomas explained for the unanimous court that “[w]hat matters for an FCA case is whether the defendant knew the claim was false. Thus, if [the defendants] correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”
Why this case matters
This decision is important because it closes up a loophole, of sorts. For the FCA to apply, you must prove that the defendant knowingly engaged in fraud. But for years, sly defense lawyers have been able to make the case that the law was ambiguous enough; “can we ever really know what someone is thinking,” they might ask.
As it turns out, yes – yes, we can. And while the standard may still be a bit ambiguous as written, the actions of SuperValu certainly were not.
SCOTUS blog also notes that:
The 7th Circuit’s framework would have meant defendants could not be found liable under the FCA as long as they were able to come up with an objectively reasonable interpretation after the fact – even if they never actually believed that interpretation. The court rejected that view, making clear the focus is on what the defendant thought when it submitted the false claims, noting “[t]he FCA’s scienter element refers to [the defendants’] knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.”
Did SCOTUS get it right?
Yes, I believe they did. This case, in essence, tells us the sky is blue. In the simplest terms, if you know that you’re lying, it’s fraud. Hindsight can never excuse fraud. Additionally, relators have no way of knowing what “objectively reasonable” ideas a company or their counsel may come up with in the future. So yes, I think the Court got it right.
Right, however, does not mean perfect. For example, Justice Thomas was not clear that this case should only apply to actual knowledge, rather than constructive knowledge. This leaves a door open to say that scienter does not look to an objective standard. However, I do believe that case law supports that, for deliberate indifference and reckless disregard, one can look to the objective view to establish scienter.
Thomas also suggests that ambiguity could have prevented the fraud, but because defendants learned of the meaning of “usual and customary,” it was fraudulent. I think that’s a dangerously narrow drafting. Again, he missed the opportunity to either say “this only applies to actual knowledge” or “failing to find out runs the risk of deliberate ignorance or reckless disregard.”
When your case is not really your case: United States ex rel. Polansky v. Executive Health Resources, Inc, et al.
The second case I want to talk about is United States ex rel. Polansky v. Executive Health Resources, Inc, et al., another qui tam case before the Supreme Court. This one was really, really frustrating, because it creates a barrier to bringing claims: after all, why put in the time, effort, and money if the federal government can come in and have the case dismissed at any time? It’s hard enough to bring fraudulent actors to justice, and the decision here just makes that more difficult.
The background to the case
Dr. Jesse Polansky, M.D., M.PH., is a former Medicare Official who took a job consulting for Executive Health Resources (EHR), a company which helped facilitate payments between hospitals and Medicare for any services rendered. During his time with EHR, Polansky filed “a qui tam action against EHR. The complaint alleged that EHR was enabling its clients to cheat the Government—essentially, by charging inpatient rates for what should have been outpatient services” (Opinion, pg 6).
Polansky filed his complaint under seal, as is required, and sent the requisite copy to the federal government. The government has 60 days to decide whether it wants to intervene – that is, to say “yes, we want to pursue a case” or “no, we don’t want to pursue a case,” and in this situation, it opted for the latter, declining intervention. But Polansky wanted to move forward – as is his right under the law.
Here’s where it gets sticky. Even if the government decides not to pursue the case, it’s still legally a party to the lawsuit. Furthermore, there’s a section of the FCA (more on that below) which basically says that the federal government can reconsider its decision, and choose to intervene, at any time. In this case, it chose to intervene after Polansky and his attorneys had spent several years (and a significant sum) pursuing this case on their own. And, the government intervened for the sole purpose of shutting Polansky’s case down! So, it filed a motion to have the entire case dismissed. (Yes, it’s as crazy as it sounds; the US Government chose to dismiss a case in which it was the plaintiff and it would collect any damages.)
The Government declined to intervene during the seal period, and the case spent years in discovery. Eventually, the Government decided that the varied burdens of the suit outweighed its potential value, so it filed a motion under §3730(c)(2)(A) (Subparagraph (2)(A) for short), which provides that “[t]he Government may dismiss the action notwithstanding the objections of the [relator],” so long as the relator received notice and an opportunity for a hearing. The District Court granted the request, finding that the Government had thoroughly investigated the costs and benefits and come to a valid conclusion.
The Court of Appeals for the Third Circuit affirmed after considering two legal questions. First, does the Government have authority to dismiss an action under Subparagraph (2)(A) if it declined to intervene during the seal period? The Court of Appeals held that the Government has that power so long as it intervened sometime later. And the court found that the Government had satisfied that condition here. Second, what standard should a district court use in ruling on a Subparagraph (2)(A) motion? The Court of Appeals held that the proper standard comes from Federal Rule of Civil Procedure 41(a)—the rule governing voluntary dismissals in ordinary civil litigation. And here, the Third Circuit ruled, the District Court had not abused its discretion in granting the Government’s motion. (pg 6)
Why this case matters
Whether and at what point the Government can intervene in the suit before it can file for a § 3730(c)(2)(A) dismissal has long been a subject of debate. In the end, the Third Circuit basically said, “the government can intervene whenever it wants,” and the Supreme Court affirmed that decision.
But it didn’t do so unanimously; the decision was 8-1, with Justice Thomas dissenting.
The second, and scarier issue, is the standards the Supreme Court used. First, it said that while the government needs good cause to intervene in a case after its first chance, wanting to dismiss the case is good enough cause to intervene. So, the government can come in just to ruin the case.
The next standard the Court dealt with was the standard to dismiss the case. In short, does a court have to grant the Government’s motion to dismiss when the relator objects to it? And the Court said that you use the normal standard to dismiss a case – if the plaintiff wants to dismiss it, it should be dismissed. In this case, the Court said that the objecting relator has the right to be heard on the topic, but did not give guidance as to how a motion to dismiss can be defeated.
Did SCOTUS get it right?
Nope. In this case, SCOTUS got it wrong. This is a lot of overreach and a really broad interpretation of federal powers. In Justice Thomas’ dissent, he argues that “the Government faces a binary choice. It must either: ‘(A) proceed with the action, in which case the action shall be conducted by the Government; or (B) notify the court that it declines to take over the action, in which case the [relator] shall have the right to conduct the action’” (Dissent, pg 2).
His argument, in general, is that once the government chooses A or B, the path forward changes. If it chooses Option A, then it has the right to do whatever it wants to do with the case. But if it chooses Option B, then it is the relator who decides, not the government. And all of this must be decided, he argues, within that 60 day seal period (pg 3-4).
I also have some concerns about how this will affect other cases moving forward. Because of this decision, relators’ counsel may now be less willing to take on cases. Remember, the decision to file a case is stressful and requires a lot of very deliberate and thorough preparation. However, if the government can now intervene at any time, counsel may pass over some valid cases. Think about it: the relator does all the work, while the government can decide to come in later and either a) decrease the relator’s share of the reward or b) dismiss the case after the relators have invested their time and money.
This ruling also begs the question of whether it would make sense to allow the relator to proceed after the government dismisses a case, and only collect their 30% reward. In most circuits, if a relator signs a release with an employer, they cannot waive the government’s rights in a qui tam suit. Therefore, the converse should be true too – why is the government permitted to waive the relator’s rights if the relator can’t waive the government’s? While the regulations say the purpose is to protect the government, nothing in the regulatory scheme says that the relator’s interest does not matter. After all, would it be an interest if it didn’t matter?
Where do we go from here?
If you’re worried about the future of the False Claims Act, I think it’s likely safe to say that the Act itself isn’t going anywhere – even if these recent SCOTUS decisions have created new challenges. And if you don’t like fraudsters, it’s time you learned about the False Claims Amendments Act of 2023: legislation that could help close loopholes in the current law and add further protections for taxpayers.
Says Sen. Chuck Grassley (R-Iowa), who introduced the bipartisan bill:
The False Claims Amendments Act of 2023 makes clear that the government’s continued payment on a fraudulent claim is not dispositive evidence that the fraud was not material if the government shows other reasons exist for the payment. It also clarifies that the False Claims Act’s whistleblower anti-retaliation provision applies to post-employment retaliation, and requires a GAO study on the benefits and challenges of enforcement efforts and amounts recovered under the False Claims Act.
What this all means is that the bill would ensure that those who “knowingly defraud the government cannot escape liability in cases where the government has made recurring payments on a fraudulent claim.”
If you want to ensure the integrity of the False Claims Act, you can contact your Senators and ask them to pass the False Claims Amendment Act of 2023. You can find their contact information here.
About Nick Verderame
Nick Verderame came to Plattner Verderame, P.C. in 2016 to represent individuals who are injured or suffered harms in their pursuit of justice and just compensation. His practice focuses on negligence actions, qui tam actions, and catastrophic injury claims, and he has published national articles on the topic of sports-related concussions.
Nick is a member of the State Bar of Arizona, the Arizona Association for Justice (formerly the Arizona Trial Lawyers Association) and the American Association for Justice (AAJ). He currently serves on the AAJ’s Political Action Task Force and its Oversight Committee, and on the Board of Governors for Revitalization in Arizona. He also serves on the Convention Planning Committee. Nick is the current Chair of the Arizona Association for Justice’s Learn at Lunch group, which hosts CLE presentation events throughout the state. He also serves on the Legislative Committee, which works during the Arizona Legislative session to identify, strengthen, and support bills designed to improve the civil justice system.