United States ex rel. Schutte v. Supervalu Inc.
The Supreme Court unanimously ruled that pharmacy chains SuperValu and Safeway cannot avoid a federal fraud lawsuit simply because the billing phrase they allegedly misused was ambiguous, if evidence shows they personally believed their reported prices were wrong.
The decision clarifies that the federal False Claims Act asks what a defendant actually thought when submitting a claim to the government — not whether some hypothetical reasonable person might have read the rules differently — keeping the focus on the defendant's own state of mind.
“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 False Claims Act liability turns on the defendant's own beliefs, not on an objective reasonableness standard.
How it got here: Federal district courts granted summary judgment to both pharmacy companies on the knowledge element; the Seventh Circuit affirmed both; the whistleblowers asked the Supreme Court to step in and the Court agreed.
The Case in Depth
What happened
SuperValu and Safeway — two large pharmacy chains — offered popular discount drug programs to customers, often charging $4 for a 30-day supply of common medications to compete with Walmart. Medicare and Medicaid reimbursements were capped at pharmacies' "usual and customary" prices. But instead of reporting their lower discounted prices as their usual-and-customary rates, both companies reported higher retail prices. Petitioners — private whistleblowers suing on the government's behalf — presented evidence that the companies knew the discounted prices were their true usual-and-customary rates and deliberately hid this from regulators.
The question before the Court
Can a pharmacy company escape liability for overbilling Medicare and Medicaid by pointing to an ambiguous billing term — even if the company actually believed its claims were inaccurate when it submitted them?
The Court's answer
No — an ambiguous phrase in the billing rules does not automatically let a company off the hook. The Court held that the False Claims Act's "knowingly" standard is about what the defendant actually believed when submitting the claim, not about whether some hypothetical reasonable person might have read the disputed phrase differently. If the pharmacy companies actually believed their reported prices were inaccurate — because they understood "usual and customary" to refer to their discounted prices — they could still be found to have knowingly submitted false claims.
The Court rejected the Seventh Circuit's approach, which had effectively immunized any company whose conduct was consistent with any objectively plausible reading of an ambiguous rule, regardless of what the company personally believed. The correct inquiry is subjective: actual knowledge of falsity, deliberate avoidance of the truth, or conscious disregard of a substantial risk that the claims were false are each enough. The cases were sent back for the lower courts to apply this standard.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Companies that submit claims to Medicare, Medicaid, or other federal programs cannot use legal ambiguity as a blanket shield against fraud liability if internal evidence — like emails, warnings, or deliberate concealment — suggests they knew their claims were inaccurate. Whistleblowers and government investigators now have a clearer path to proving fraud against defendants who hid behind plausible-sounding alternative interpretations.
What changes now
The judgments in both cases are vacated and sent back to the Seventh Circuit to apply the correct, subjective scienter standard. The Supreme Court did not decide whether the pharmacies actually knew their claims were false, whether the discounted prices truly were their "usual and customary" prices, or whether the whistleblowers' evidence is sufficient to survive summary judgment under the correct standard. Those factual and evidentiary questions are now for the lower courts to resolve.
What this does not decide
The Court did not decide whether SuperValu's or Safeway's claims were actually false, what "usual and customary" means, whether respondents in fact believed their claims were inaccurate, or whether the whistleblowers' evidence is sufficient to defeat summary judgment. All of those questions return to the lower courts.
How the Court got there
The legal reasoning, step by step
- The False Claims Act defines 'knowingly' to include three mental states: actual knowledge that a claim is false, deliberate ignorance of its truth or falsity (intentionally looking away), and reckless disregard of a substantial risk that the claim is false. All three focus on what the defendant thought — not on what a reasonable bystander would have thought.
- This three-part definition tracks traditional common-law fraud, which has always turned on a subjective test: whether the defendant lacked an honest belief in the truth of the statement when making it. Because Congress used common-law fraud vocabulary in the FCA, the Court read the statute to carry that same subjective focus.
- Even if the phrase 'usual and customary' is facially ambiguous, that ambiguity alone does not prevent a defendant from having learned its correct meaning — or from becoming aware of a substantial likelihood of what it means. Like a driver told by a police officer that speeds over 50 mph are unreasonable, a company that received explicit notices explaining the phrase's meaning could not later claim ignorance just because the words have some theoretical wiggle room.
- The Seventh Circuit had applied a test borrowed from Safeco Insurance Co. v. Burr — a case about 'willful' violations of a different law, the Fair Credit Reporting Act — and treated that test as creating a purely objective safe harbor: if any reasonable person could have read the phrase the defendant's way, scienter was impossible as a matter of law. The Court rejected this transplant because Safeco interpreted a different statute with a different mental-state requirement, and Safeco itself never endorsed the purely objective reading the Seventh Circuit gave it.
- The pharmacies also argued that their alleged wrongdoing amounted to a non-actionable 'misrepresentation of law' — claiming fraud liability can't attach when the falsity of a statement depends on the meaning of an ambiguous legal phrase. The Court assumed without deciding that the FCA incorporates some version of this common-law rule, but found it inapplicable here: the pharmacies weren't saying 'this is what usual-and-customary means as a legal matter'; they were saying 'these are our usual-and-customary prices' — an implied factual claim about their own pricing, which falls squarely within actionable fraud.
Doctrinal impact
Cases affected by this decision
Distinguishes Safeco Ins. Co. of America v. Burr (551 U.S. 47)
Safeco's objective standard applied only to the Fair Credit Reporting Act's 'willfully,' not to the FCA's 'knowingly.'
Reaffirms Halo Electronics, Inc. v. Pulse Electronics, Inc. (579 U.S. 93)
Reaffirmed that culpability is measured against what the defendant knew at the time of the conduct, not post-hoc rationalizations.