Seventh Circuit Court of Appeals Reiterates Validity of Objective Reasonableness Defense to FCA Claims

12 April 2022 Legal News: Health Care Publication
Author(s): Jessica E. Joseph Michael J. Tuteur Lisa M. Noller

In a 2-1 opinion issued on April 5, the Seventh Circuit Court of Appeals again held that an objectively reasonable interpretation of a relevant statute or regulation precludes the required finding of intent under the False Claims Act (FCA), so long as no sufficiently authoritative guidance warned to the contrary.  This latest ruling follows the 7th Circuit’s prior holding to the same effect in Schutte v. SuperValu, and further bolsters a company-friendly trend allowing FCA defendants to defeat claims where they can show their challenged legal interpretation was objectively reasonable. 9 F.4th 455 (7th Cir. 2021).

In United States ex rel. Proctor v. Safeway Inc., the relator pharmacist alleged that Safeway was defrauding the government by giving cash-paying customers discounts for prescription drugs through competitor price matching and loyalty programs, but billing the government at the higher, non-discounted rate, citing that rate as the “usual and customary price.”  No. 20-3425, 2022 WL 1012256 (7th Cir. Apr. 5, 2022). Safeway argued that federal regulations did not make clear whether the “usual and customary” price billed to the government should include lower prices offered through pharmacy discount programs. 

The Seventh Circuit affirmed the district court’s grant of summary judgment to Safeway, finding the company’s interpretation of the law was reasonable and there was no authoritative guidance that should have warned it away from that interpretation. Even though the 7th Circuit had previously ruled that a similar practice violated the FCA in 2016, Safeway argued that prior to that decision, when its own conduct took place, there was no such authoritative guidance.  See United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016).  For his part, the relator pointed to a footnote in the CMS Medicare Prescription Drug Benefit Manual between 2006 and 2013 that said customer discounts should be reflected in the usual and customary price.

The district court held the footnote relator relied upon was not sufficiently authoritative to warn Safeway away from what was an objectively reasonable interpretation of the relevant law.  The 7th Circuit agreed—noting it was a single footnote in a fifty-seven page chapter of a voluminous CMS Manual, and the larger context of the section in question suggested the guidance was directed at calculating enrollee out-of-pocket costs, rather than setting requirements for pharmacy reimbursement.  The Court also noted the footnote had gone in and out of the Manual during the time period in question, and stated it was “not convinced that treble damages liability should hinge on a single footnote in a lengthy manual that CMS can, and did, revise at any time.”  Proctor, 2022 WL 1012256 at *10. 

While the Court briefly considered whether guidance must be “binding” to amount to “authoritative guidance” (a question left open in Schutte) and found that “dicta suggest the Court might impose such a requirement,” it stopped short of actually doing so, instead holding the CMS footnote in question was not authoritative guidance for the aforementioned other reasons.  Id. at *9.  The Court’s discussion, however, seems to indicate it is at least open to the idea of requiring “authoritative guidance” to be binding, even if it did not go so far as to make that ruling.

Overall, the Proctor ruling is the latest in a growing number of cases sustaining the objective reasonableness defense in FCA cases, providing helpful support to defendants seeking to dismiss complaints or win summary judgment.  While all six circuit courts of appeal considering the issue have thus far ruled the same way, it remains to be seen whether any others will take a different approach.  There are also already efforts to overturn these existing rulings – for example, the Schutte relator has filed a petition for certiorari before the Supreme Court.  We continue to monitor for ongoing developments.