Constantine Cannon whistleblower lawyers Marlene Koury and Leah Judge were published in Law360 on the verdict in favor of a whistleblower against Eli Lilly, and what that case says about legal developments in the interpretation of the False Claims Act since the Seventh Circuit’s SuperValu decision. This post is an adaptation of that article.

In August, a Chicago jury in the U.S. District Court for the Northern District of Illinois returned a $61 million verdict for the government in a False Claims Act trial pursued by a whistleblower, Ronald Streck, against pharma manufacturer Eli Lilly and Co. It took the jurors only five hours to decide that Eli Lilly had cheated the Medicaid Drug Rebate Program out of tens of millions of dollars by reporting false drug pricing data.

Although the size of the verdict is significant, perhaps more important is that the relator’s allegations made it to a jury at all.  To get to the jury, the whistleblower had to beat back Eli Lilly’s challenge under the U.S. Court of Appeals for the Seventh Circuit’s controversial 2021 decision in U.S. ex rel. Schutte v. SuperValu Inc.

As we have previously written, the SuperValu court held that a defendant does not possess the requisite intent to submit false claims where defendant can offer a post-hoc, objectively reasonable interpretation of the law that justified its prior behavior, and no authoritative guidance warned the defendant away from its course of action.  In doing so, the SuperValu court stripped from the trier of fact the quintessential determination of a defendant’s intent and created a loophole that appeared to significantly curtail liability under the False Claims Act. However, the recent Eli Lilly verdict suggests that courts might yet be able to limit SuperValu’s reach.

SuperValu and What it Means to “Knowingly” Defraud the Government

In SuperValu, a divided three-judge panel seismically shifted, some might say rewrote, the standard for intent – what lawyers call scienter – under the False Claims Act. To make out a claim under the FCA, the plaintiff must show that the defendant knowingly defrauded the government.

Since Congress overhauled the statute in 1986, the FCA has expressly defined knowingly to “mean that a person, with respect to information (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.”  The FCA does not require proof of specific intent to defraud.

The 1986 FCA amendments modernized the statute and were intended to expand, not contract, the government’s ability to use the FCA to fight fraud. Congress unequivocally broadened the FCA’s scienter provision by drafting one of the most detailed definitions in the federal code, clearly laying out three distinct mental states sufficient for liability.

Nonetheless, the SuperValu majority excised two-thirds of the FCA’s statutory scienter definition, reading out the two subjective prongs.  In doing so, the court grafts onto the FCA a standard from a 2007 Supreme Court decision, Safeco Ins. Co. of America v. Burr, which interpreted a different law, the Fair Credit Reporting Act.  The SuperValu court held that reckless disregard was the “baseline” intent standard that a whistleblower must necessarily establish before proving the more demanding standards for “deliberate ignorance” or “actual knowledge.”  The decision thus holds that a defendant’s subjective intent is irrelevant, stating, “it is not enough that a defendant suspect or believe that its claim was false.”

In other words, SuperValu permits an FCA defendant to avoid liability by offering a reasonable interpretation of the rule it broke to justify its behavior, regardless of whether the defendant actually believed its own justification at the time it submitted the false claims. Under such a rule, the fact-specific, at times messy question of intent can be disposed of by a judge on summary judgment or even a motion to dismiss.

In fact, the SuperValu plaintiffs had compelling scienter evidence to support their claims that SuperValu pharmacies submitted false claims for payment to government healthcare programs because they did not accurately report “usual and customary” drug prices for millions of sales as required to these payers.  Plaintiffs adduced evidence showing that SuperValu’s executives understood that its policies might undermine the integrity of its price reporting, and suggested that the company take a “stealthy” approach.  None of this evidence, however, made it to a jury. Under the SuperValu holding, a jury simply does not get to hear evidence of the actions a defendant took – or did not take – that shed light on its understanding of the law and whether its actions complied with it.

Evidence of Eli Lilly’s Intent Makes it to the Jury as Trial Court finds SuperValu not Controlling

In contrast, the Eli Lilly trial court rejected a SuperValu-based assault on allegations likewise implicating the complex regulatory scheme controlling the government’s reimbursement of prescription drugs.

Eli Lilly involved the Medicaid Drug Rebate Program, which requires drugmakers to pay rebates to the federal and state governments as a condition of Medicaid reimbursement. The relator alleged that Eli Lilly falsely reported to the government a lower average manufacturer price, or AMP, for certain drugs. Generally speaking, the higher the AMP, the higher the rebate owed.

A jury concluded that Eli Lilly reported intentionally lower AMPs by excluding the price-increase value of a drug from its calculations. When Eli Lilly raised the price of a drug after a wholesaler had purchased it, its wholesaler agreements required the wholesaler to pay Eli Lilly the price-increase value, calculated as the value of any drug price increase multiplied by the number of drugs remaining in the wholesaler’s inventory.

Eli Lilly had earlier sought summary judgment, relying on SuperValu and arguing that the regulatory landscape was simply too unclear to unequivocally require inclusion of the price-increase value in its AMP calculations.

The court forcefully rejected Lilly’s position. The court found SuperValu inapplicable, and refused to entertain Eli Lilly’s well-crafted arguments designed to muddy the regulatory waters. This included Eli Lilly’s assertions that its legal obligations were somehow obfuscated by the absence of a regulatory definition for price-increase values.  The court acknowledged that “[b]y requiring regulations to be too specific [courts] would be opening up large loopholes allowing conduct which should be regulated to escape regulation” and declined to allow Eli Lilly’s loophole.

As a result of the court’s denial of summary judgment, a jury heard the evidence of Eli Lilly’s intent to manipulate its AMPs, including its maintenance of a minimally staffed government pricing department, its large financial motive to exclude price-increase value and the alteration of language in its wholesaler agreements to be more consistent with its pricing representations to the government.

How Other Courts Have Applied SuperValu

Making it to a jury was far from inevitable for Ronald Streck, the relator in the Eli Lilly case. Since SuperValu, other courts squarely confronted with challenges to FCA cases concerning a defendant’s subjective intent have sided with defendants.

Five months after the Seventh Circuit decided SuperValu, a likewise split U.S. Court of Appeals for the Fourth Circuit panel in U.S. ex rel. Sheldon v. Allergan Sales, LLC affirmed dismissal of allegations that the defendant intentionally reported a higher “best price” to the government by failing to aggregate stacked discounts.  The Fourth Circuit Allergan majority – deciding the issue on a motion to dismiss – found the defendant’s exclusion of stacked rebates from best-price calculations objectively reasonable, disregarding specific allegations that the defendants knew they should report the stacked rebates and intentionally concealed them from the government. Tellingly, the majority openly decried the “vast power” of the “administrative state” in adopting the defendant’s regulatory interpretation. The Fourth Circuit has agreed to rehear the case en banc in September.

A few months after the Fourth Circuit decided Allergan, the Seventh Circuit again applied SuperValu to dispose of another case with detailed evidence of a knowing scheme to artificially lower usual and customary drug pricing by concealing widespread price matching. In U.S. ex rel. Proctor v. Safeway Inc., the majority itself acknowledged that the defendant appeared to have implemented a program it knew subverted the usual and customary pricing rules and simply disguised it as a something that did not.

At least two district courts have also explicitly applied SuperValu to end cases, giving short shrift to allegations and evidence of subjective intent to defraud. Earlier this year, in U.S. ex rel. Heath v. Wisconsin Bell Inc., the U.S. District Court for the Eastern District of Wisconsin granted summary judgment to defendants after significant discovery without even mentioning the scienter evidence adduced by relator. The Northern District of Illinois similarly applied SuperValu in 2021 to a motion to dismiss in Lupinetti v. Exeltis USA Inc.

Will SuperValu Continue to Limit the False Claims Act?

Despite the success of Streck in the Eli Lilly case, the past year suggests that defendants will continue to invoke SuperValu and its progeny to beat back allegations of fraud that involve complex regulatory or statutory schemes. SuperValu poses a significant threat to the False Claims Act, which is the government’s primary tool to punish fraudsters who fleece taxpayers and allows whistleblowers to sue in the government’s name. If left in place, the decision could have far-reaching consequences, effectively letting defendants off the hook if their lawyers can come up with some plausible interpretation of the law under which the defendant’s conduct would have been permissible – even if the defendant didn’t hold that view.

However, SuperValu may not remain the law. The relators in both SuperValu and Safeway have filed petitions for certiorari, asking the Supreme Court to read subjective intent back into the FCA’s scienter standard. Constantine Cannon represented Sen. Charles Grassley, the principal sponsor of the 1986 FCA amendments, in an amicus brief in support of the SuperValu relators. And the Supreme Court has recently invited the solicitor general to provide its views on SuperValu, dramatically increasing the likelihood that cert will be granted.

Constantine Cannon continues to monitor developments in the False Claims Act and its interpretation.

Read More:

The False Claims Act
Constantine Cannon Whistleblower Attorneys File Brief to Supreme Court on Behalf of Senator Grassley
A recent case could undermine the rules that have been protecting taxpayer money from fraud since the time of Lincoln
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