United States ex rel. Schutte v. Supervalu Inc.
The Supreme Court unanimously ruled that the federal False Claims Act — the main law for fighting fraud against the government — focuses on what a company actually believed when it submitted its bills, not on what a reasonable outsider might have concluded.
Two pharmacy chains that allegedly billed Medicare and Medicaid at inflated prices cannot escape fraud liability just because an ambiguous billing phrase might have been innocently misread by someone else; if they knew their claims were wrong, that is enough.
“What matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”
The Court's core holding that fraud liability turns on what the defendant actually believed, not on what a reasonable person might have thought.
How it got here: A federal district court granted both pharmacy chains summary judgment on the knowledge element; the Seventh Circuit affirmed both rulings; whistleblowers asked the Supreme Court to step in and the Court agreed to hear the consolidated cases.
The Case in Depth
What happened
SuperValu and Safeway — two large pharmacy chains — ran popular discount drug programs offering customers prices as low as $4 for common medications. Medicare and Medicaid required pharmacies to bill at their "usual and customary" prices. But the pharmacies reportedly billed at their higher retail prices instead. Whistleblowers sued under the False Claims Act, presenting evidence — including internal emails — that company executives believed their discount prices were the "usual and customary" ones and tried to hide those prices from regulators.
The question before the Court
Can a pharmacy chain escape a federal fraud lawsuit simply because its billing rules were ambiguous — even if the company privately knew its submitted prices were inaccurate?
The Court's answer
Yes — a company can be held liable for fraud under the False Claims Act based on what it actually believed, even if the billing rule it violated was worded ambiguously. The law's definition of "knowingly" covers actual knowledge, deliberate ignorance, and reckless disregard — all three focus on what the defendant actually thought when submitting a claim, not on what some hypothetical reasonable person might have concluded. If the pharmacies understood that "usual and customary" meant their lower, discounted prices and submitted higher prices anyway, that subjective belief is enough to establish the required mental state.
The Court rejected the pharmacies' argument that because others could have innocently misread "usual and customary," their own state of mind became legally irrelevant. The Seventh Circuit's approach — borrowed from a case about a different statute — would have allowed a company to escape fraud liability whenever its conduct was consistent with any reasonable reading of the law, no matter what the company itself believed. The Court unanimously rejected that objective safe harbor as inconsistent with the False Claims Act's text and the common-law fraud principles it incorporates.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Pharmacies, hospitals, and other businesses that bill the federal government face a higher fraud risk if internal communications show they doubted their own billing accuracy. A company can no longer rely on a "reasonable interpretation" defense to shield itself if the evidence shows its own employees believed the claims were incorrect when they submitted them.
What changes now
Both cases go back to the Seventh Circuit, which must reconsider whether the whistleblowers' evidence — under the correct subjective standard — is strong enough to survive summary judgment and proceed to trial. The Court did not decide whether the pharmacies actually committed fraud, what "usual and customary" concretely means, or whether the existing evidence is sufficient; those questions remain open for the lower courts to resolve.
What this does not decide
The Court did not decide whether the pharmacies' claims were actually false, what "usual and customary" prices means as a matter of law, or whether the whistleblowers' evidence is strong enough to bring the case to trial. All factual disputes about what the pharmacies actually believed remain for the lower courts to resolve on remand.
How the Court got there
The legal reasoning, step by step
- The False Claims Act defines 'knowingly' through three mental states: actual knowledge, deliberate ignorance, and reckless disregard. Each focuses on what the defendant actually thought and believed at the time of submitting the claim — not on how a hypothetical reasonable outsider would have assessed the situation.
- That three-part definition tracks the common-law tradition of fraud, which has long applied a 'subjective test' focused on the defendant's state of mind. Under common-law fraud, what matters is whether the defendant lacked honest belief in the statement's truth — not whether a reasonable person would have believed the same thing.
- The Seventh Circuit had imported an objective safe harbor from Safeco Insurance Co. v. Burr, a 2007 decision interpreting the word 'willfully' in the Fair Credit Reporting Act. The Supreme Court rejected that move because Safeco interpreted a different word in a different statute and never purported to establish a purely objective standard for 'knowing' or 'reckless' conduct generally.
- The pharmacies argued that the phrase 'usual and customary' was too ambiguous for them to have truly 'known' their submissions were false. The Court disagreed: facial ambiguity in a term does not automatically block a fraud finding if the defendant received clear notice of the term's meaning, understood that notice, and then submitted different figures anyway — just as a driver warned that speeds over 50 mph are unreasonable cannot later claim ignorance when pulled over doing 80.
- The pharmacies' last argument — that they made a non-actionable 'misrepresentation of law' rather than a misrepresentation of fact — also failed. When a business reports what its prices actually are, it is making an implied factual claim about those prices, not merely offering a legal opinion about what a billing rule means. That kind of statement can be fraudulent under the common-law principles the False Claims Act incorporates.
Doctrinal impact
Cases affected by this decision
Distinguishes Safeco Ins. Co. of America v. Burr (551 U. S. 47)
Safeco interpreted a different statute's different mental-state standard and does not create an objective safe harbor for False Claims Act cases.