United States of America v. Supervalu Inc

IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

SPRINGFIELD DIVISION

UNITED STATES OF AMERICA, and )

THE STATES OF CALIFORNIA, )

DELAWARE, ILLINOIS, INDIANA, )

MASSACHUSETTS, MINNESOTA, )

MONTANA, NEVADA, NEW JERSEY, )

NORTH CAROLINA, RHODE ISLAND, )

VIRGINIA, ex rel. TRACY SCHUTTE and )

MICHAEL YARBERRY, )

)

Plaintiffs and Relators, )

)

v. )

)

SUPERVALU, INC., SUPERVALU ) NO. 11-3290

HOLDINGS, INC., FF ACQUISITIONS, )

LLC, FOODARAMA, LLC, SHOPPERS )

FOOD WAREHOUSE CORP., )

SUPERVALU PHARMACIES, INC., )

ALBERTSON’S LLC, JEWEL OSCO )

SOUTHWEST LLC, NEW )

ALBERTSON’S INC., AMERICAN )

DRUG STORES, LLC, ACME )

MARKETS, INC., SHAW’S )

SUPERMARKET, INC., STAR MARKET )

COMPANY. INC., JEWEL FOOD )

STORES, INC., and AB ACQUISITION )

LLC, )

)

Defendants. )

1

OPINION

RICHARD MILLS, U.S. District Judge:

This is a False Claims Act (“FCA”) case.

The Relators allege that the Defendant pharmacies submitted false or

fraudulent claims to obtain federal funds from Government Healthcare Programs

(GHP) to which they were not entitled.

The Relators claim this occurred through the electronic submission of inflated

usual and customary charges to GHPs because Defendants failed to report their cash

price matches as their usual and customary price.

I. INTRODUCTION

Federal and State GHPs include Medicare, Medicaid, TRICARE and the

Federal Employees Health Benefits Program. The federal government provides

beneficiaries of GHPs with prescription drug-benefits through relationships with

private subcontractors known as pharmacy benefit managers. GHPs would offer

pharmaceutical benefits, reimbursing those providers who dispense covered drugs

to program beneficiaries. At issue here is the “usual and customary price” that must

be reported under the FCA if the Defendants matched Wal-Mart’s or other

competitors’ discount drug prices—specifically the meaning of “usual and

customary price” and whether in submitting claims to GHPs for reimbursement

Defendants were obligated to report any individualized price matches as their usual

and customary price.

Plaintiffs United States of America and the States, through the Relators, filed

this action alleging violations of the FCA, 31 U.S.C. § 3729 et seq., and analogous

false claims acts and health care fraud remedial statutes of the Plaintiff States. The

Relators seek recovery on the basis of the state statutes and the FCA.1

The Relators allege the Defendants have submitted false claims to the

Medicaid programs of a number of states through the use of false records and

documents, and by failing to disclose material information in presenting their claims.

Regarding these states, the Relators do not seek to recover under a false claims act

or similarly named health care fraud remedial statute. They allege that because

Medicaid is a program jointly funded by the United States and each state, each false

claim submitted by the Defendants in those states is a false claim against the United

States for the federal share of the claimed amount in violation of the FCA.2

As part of a Stipulation, the Medicaid claims relating to the ten Plaintiff States

other than California and Illinois have been dismissed. The Medicaid claims related

to the ten non-Plaintiff States except for Utah and Washington have been dismissed.

1 The Relators’ amended complaint sought recovery based on the false claims and/or health care fraud

remedial statutes for California, Delaware, Illinois, Indiana, Massachusetts, Minnesota, Montana, Nevada,

New Jersey, North Carolina, Rhode Island and Virginia.

2 These non-Plaintiff states include Idaho, Iowa, Maine, Maryland, Missouri, New Hampshire, Oregon,

Pennsylvania, Utah, Vermont, Washington and Wyoming.

The Medicaid claims as to the United States, regarding the Federal Financial

Participation paid in connection with these 20 states, have been dismissed.

Accordingly, the Relators’ claims on behalf of the United States and the States

of California, Illinois, Utah and Washington related to Medicaid remain pending.

The Relators’ claims on behalf of the United States related to Medicare Part D,

TRICARE and the Federal Employees Health Benefit Plan also remain at issue.

This Court previously considered the Relators’ motion for partial summary

judgment based on the Seventh Circuit’s decision in United States ex rel. Garbe v.

Kmart, 824 F.3d 632 (7th Cir. 2016). At issue in that Order granting the Relators’

motion for partial summary judgment was the Defendants’ Price Match Program and

whether those discounted prices constituted the usual and customary prices.

In an Opinion and Order entered on August 5, 2019 which considered the

effect of Garbe, the Court determined that the Defendants’ “discount cash prices”

offered through a Price Match Program available to all cash customers “are the usual

and customary prices” and that Medicare Part D and the California, Illinois, Utah

and Washington Medicaid programs were entitled to those usual and customary

prices. See Doc. No. 301, at 20. The Court noted that the knowledge element of the

FCA was not at issue in the motion for partial summary judgment based on Garbe.

See id. at 21.

Pending are the (1) Defendants’ motion for partial summary judgment as to

all Medicaid claims based on Defendants’ assertion that Relators cannot prove each

of the FCA elements, including knowledge and materiality; (2) Relators’ second

motion for partial summary judgment as to inflated Medicare Part D claims

submitted to Medco Health Solutions, Inc., based on the Defendants’ alleged failure

to report their discounted cash prices offered to the general public as their usual and

customary prices; and (3) Defendants’ motion for partial summary judgment as to

the Medicare Part D, TRICARE and FEP claims based on Defendants’ assertion that

Relators’ cannot prove each of the elements under the FCA, including knowledge

and materiality.

Also pending is the Defendants’ motion for case management procedures

regarding related motions for summary judgment under Safeco Insurance Co. of Am.

v. Burr, 551 U.S. 47 (2007). The motion states that Defendants have filed the

aforementioned summary judgment motions in this case that raise identical legal

issues to a motion filed by Defendant Safeway, Inc. in U.S. ex rel. Proctor v.

Safeway, Inc., case No. 3:11-cv-03406. The Defendants claim that, in the interest of

judicial efficiency, the Court should consider both motions together or, alternatively,

decide the Proctor motion first. That is because the Court’s ruling in Proctor, which

concerns membership-only and price-matching programs, will largely determine its

ruling here, which concerns price-matching only. The Court decided the motion in

Proctor on June 12, 2020, holding that because there was no authoritative guidance

warning Safeway away from what before Garbe was an objectively reasonable

position, the Relator could not satisfy Safeco’s objective scienter standard and thus

could not meet the FCA’s “knowing” element as a matter of law.

II. BACKGROUND

The Defendants’ “banners” (i.e. Cub Pharmacy, Osco Drug, etc.) offered a

price-match guarantee. SuperValu and Albertsons operated more than 1,000

pharmacies located inside grocery stores in 24 states during the time at issue between

2006 and 2016.

The Price Match Program began for the Defendants in 2006. The Defendants

claim advertising of the Price Match Program occurred at certain times between

2006 and 2012 but Defendants have had a price match policy in place since the

1980s. A Price Match Program “override” occurred when pharmacy personnel

replaced Defendants’ then-current, reported cash “retail” price with a lower

competitor price. Albertsons discontinued the Price Match Program in October

2013. SuperValu discontinued the Price Match Program in December 2016.

The Defendants’ advertisements publicized their practice of matching

competitor prices on prescription drugs and generally included disclaimers.

Defendants’ price match advertisements were disseminated to the public through

various means, such as in-store and pharmacy signage, fliers, circulars, in-store

audio announcements, mailers, newspapers of general circulation, on the back of

store receipts and Defendants’ web pages. The Price Match Program advertisements

described the Defendants’ price match policy.

The Relators allege the Defendants’ Price Match Program was a “stealthy”

discount program that was a response to Walmart’s discount prescription drug

program. It was available to anyone who would request that Defendants match a

competitor’s price. The Defendants say certain other requirements had to be met

before a customer could receive a competitor’s lower price, including the fact that

the lower price had to be available at a local pharmacy and be verified by pharmacy

staff. No fee was required of customers to participate in the Price Match Program.

The Defendants’ price overrides grew from 8.75% of cash sales of all drugs

(including drugs that were not available from the competitors at a lower cash price)

in 2007 to 39.36% of cash sales of all drugs in 2011. The Defendants claim these

percentages are taken out of context with respect to how many total cash transactions

occurred. Moreover, price-match transactions were at most 26.6% of total cash sales

throughout the relevant time period. The Relators state that price-match overrides

occurred as frequently as 18,000 times per week. When all of the prescriptions filled

by the Defendants between 2006 and 2016 are taken into account, at most, 2% were

priced-matched prescriptions.

The Defendants did not submit lower matched price cash sales transactions to

third-party payors, including GHPs. The Defendants would not allow lower

matched prices to be submitted to third party insurance even if a customer

specifically asked Defendants to process a price match transaction through the

customer’s insurance. The Defendants claim doing so would have violated their

contracts with these payors. The customer’s preference does not control. The

contract does.

The Relators allege the Defendants refused to sacrifice profits from third

parties by “officially” lowering their prices. Instead, they made an end-run around

established law to deprive the Government of discount prices.

In October 2006, soon after Walmart announced its discount generics

program, the Defendants estimated that adopting a similar discount generics

program would result in tens of millions of dollars of lost profits, 90% of which

“would go to PBMs, Managed Care and other payors due to co-pay and U&C

contract language.” The Defendants viewed this as a business decision so they

would not lose money.

On October 27, 2006, Medco Health Solutions, Inc.’s Senior Director, Bill

Strein, sent Defendants’ top managers an email entitled “Usual and Customary

(U&C) pricing provision reminder” which stated in part:

[W]e wanted your organization to be reminded of the Usual and Customary

pricing provision in all Medco pharmacy network agreements.

Pharmacy is required, by contract, to:

“Submit Pharmacy’s Usual and Customary (“U&C”) price, which represents

the lowest net price a cash patient would have paid on the day that the

prescription was dispensed inclusive of all applicable discounts.”

These discounts include, but are not limited to, senior citizen discounts, loss

leaders, frequent shopper, or special customer discounts, competitor’s

matched price, or other discounts offered customers. For Medco members

or patients, it is expected that their prescription claim will be submitted

through TelePAID/POS by pharmacy submitting appropriate pharmacy U&C

pricing.

The email was circulated to SuperValu Executive Ron Richmond (Director of

Managed Health Care Contracting), Maxine Johnson (Director of Managed Care

Operations), Dan Salemi (Vice President of Pharmacy Services) and Chris Dimos

(President of Pharmacies). The Defendants claim the email is immaterial because

their relationship with Medco was governed exclusively by contracts and Defendants

did not violate any contractual terms with respect to submitted claims processed by

Medco during the relevant time period.

On December 27, 2007, Ron Richmond sent an email to SuperValu

Executives Pamela Caselius (Marketing Director), Maxine Johnson and Dan Salemi,

writing in part:

As for price matching on the various competitors generic programs, I

believe that we have always taken a “stealthy” approach. We consider

this to be something that we do as an “exception” for customer service

reasons. Once we deviate to a process that is more “rule” or routine, we

begin to affect the integrity of our U&C price – a slippery slope, as true

U&C price is a claim submission requirement for all Medicaid and

private commercial Managed Care and PBM agreements. The financial

implication of this is very broad, Please communicate with Max and Dan

for a broader discussion on Generic Price matching and/or promotional

activities.

The Defendants promoted price matching in part to “combat” discount generic drug

programs offered by Walmart and other competitors. The Defendants’ Price

Matching Program was designed to retain existing customers and attract new

customers.

In October 2008, Defendants’ ARx pharmacy application was enhanced with

an ongoing price match override feature. The “Ongoing Price Override” 1)

processed subsequent fills of the same prescription at the overridden price

automatically; 2) maintained a record of the competitor pharmacy whose price had

been matched; and 3) automatically logged notes to the prescription on which the

override had been performed. Regarding automatic refills, patients were not

required to ask for a price match and refills were done automatically.

SuperValu Prescription Pricing Policy (September 2009) stated that “[t]he

company will not lose a prescription because of price,” and required SuperValu

employees responding to price quotes to “Mention service, convenience and price

match guarantee.” The Defendants say this did not change their longstanding

approach to price matching. Customers were still required to take an affirmative

action, quote a local competitor and price, and have the pharmacy staff verify the

competitor’s price before providing the customer with a price match. The Relators

dispute that customers had to initiate the price match transaction.

SuperValu’s August 2012 Prescription Pricing Policy added the words “[i]f a

customer requests that we match the price . . .” to SuperValu’s “Prescription Price

Match Program” and removed the requirement from the September 2009

Prescription Pricing Policy to “Mention . . . price match guarantee.”

Individual pharmacies could not change the usual and customary price

reported to third parties, including GHPs. The usual and customary price reported

to third parties, including GHPs, “was set by Defendants’ corporate pricing

department.” The Defendants state the usual and customary prices were controlled

by applicable third-party contracts or state law. The Defendants generally did not

acknowledge or consider discount Price Match Program cash prices when setting the

usual and customary prices they reported to third parties.

The Relators dispute the Defendants’ assertion that they “sought clarification”

from payers regarding the proper reporting of usual and customary price. The

Defendants only did this when the Price Match Program “exception” was directly

challenged. At best, the Relators claim the Defendants remained deliberately

ignorant of their obligations and did not want to let third-party payers find out about

the scope of their Price Match Program.

The “PBM Industry Definition of U&C Price” is “generally understood to be

the cash price charged to the general public.” The Defendants allege the primary

Pharmacy Benefit Managers that processed more than 92% of Defendants’ total

prescription records and more than 94% of their total amount paid for those

prescription records did not consider Defendants’ individualized price matching to

have altered the usual and customary prices they submitted. Pharmacy

reimbursement is governed by statutory and regulatory requirements. Contracts

between Defendants and Pharmacy Benefit Managers must be construed consistent

with those statutes and regulations.

The Defendants allege the Pharmacy Benefit Managers and the state Medicaid

programs were well aware of these types of discount programs. The Department of

Justice and relevant States investigated the allegations in Relators’ amended

complaint for more than three years before declining to intervene. Moreover, the

Pharmacy Benefit Managers and the State Medicaid programs at issue extensively

audited Defendants’ prescription claims. The Relators dispute that Pharmacy

Benefit Managers and State Medicaid programs were “well aware” of Defendants’

Price Match Program. They allege that Defendants did not provide Pharmacy

Benefit Managers and State Medicaid programs with candid and complete disclosure

of the scope and operation of their Price Match Program.

A number of summary judgment motions are pending. Among the issues in

each is whether the Relators can meet the FCA’s “knowing” element.

III. DISCUSSION

Summary judgment standard

Summary judgment is appropriate if the motion is properly supported and

“there is no genuine dispute as to any material fact and the movant is entitled to

judgment as a matter of law.” See Fed. R. Civ. P. 56(a). The Court views the

evidence and construes all reasonable inferences in favor of the non-movant. See

Driveline Systems, LLC v. Arctic Cat, Inc., 936 F.3d 576, 579 (7th Cir. 2019). To

create a genuine factual dispute, however, any such inference must be based on

something more than “speculation or conjecture.” See Harper v. C.R. England, Inc.,

687 F.3d 297, 306 (7th Cir. 2012) (citation omitted). “The court does not assess the

credibility of witnesses, choose between competing reasonable inferences, or

balance the relative weight of conflicting evidence.” Driveline Systems, 36 F.3d at

579 (internal quotation marks omitted). Ultimately, there must be enough evidence

in favor of the non-movant to permit a jury to return a verdict in its favor. See

Springer v. Durflinger, 518 F.3d 479, 484 (7th Cir. 2008).

FCA and applicable law

The Defendants allege the summary judgment motions in this case raise the

same dispositive legal question as the summary judgment motion based on Safeco

in Proctor—that being whether the Relators can establish that Defendants’ position

on the meaning of usual and customary prices was objectively reasonable based on

the standard announced by the United States Supreme Court in Safeco Ins. Co. v.

Burr, 551 U.S. 47 (2007). The Defendants assert the Court’s recent decision

applying Garbe regarding usual and customary prices cannot meet the Safeco

standard as to any pre-Garbe conduct.

(1)

To create a factual dispute on an FCA claim, a relator must establish a

knowing falsehood. See United States ex rel. Yannacopoulos v. Gen. Dynamics, 652

F.3d 818, 840 (7th Cir. 2011). The FCA provides for liability if a person “knowingly

presents, or causes to be presented, a false or fraudulent claim for payment or

approval,” see 31 U.S.C. § 3729(a)(1)(A), or “knowingly makes, uses, or causes to

be made or used, a false record or statement material to a false or fraudulent claim.”

31 U.S.C. § 3729(a)(1)(B). A person acts “knowingly” for purposes of the FCA if

he: “has actual knowledge of that information;” “acts in deliberate ignorance of the

truth or falsity of the information;” or “acts in reckless disregard of the truth or falsity

of the information.” 31 U.S.C. § 3729(b)(1)(A). No proof of specific intent to

defraud is required. 31 U.S.C. § 3729(b)(1)(B).

In Safeco, the Supreme Court examined the scienter requirement of the Fair

Credit Reporting Act (“FCRA”). The Court noted that “where willfulness is a

statutory condition of civil liability, we have generally taken it to cover not only

knowing violations of a standard, but reckless ones as well.” Safeco, 551 U.S. at 57.

The Court further observed that the common law has generally judged

“recklessness” according to an objective standard and that Safeco’s conduct could

not meet the statute’s scienter requirement absent an “objectively unreasonable”

interpretation of the statute’s legal requirements. See id. at 58-60. The argument

that “evidence of subjective bad faith can support a willfulness finding even when

the company’s reading of the statute is objectively reasonable” is unsound. Id. at 70

n.20. “Congress could not have intended” to make a defendant liable for knowing

or reckless violations if the defendant “followed an interpretation that could

reasonably have found support in the courts, whatever [its] subjective intent may

have been.” Id. Given that recklessness requires awareness of an objective risk, a

defendant cannot act recklessly—let alone knowingly--if the apparent risk it took

was “not objectively unreasonable.” Id. at 69.

Because “‘reckless disregard’ . . . is the most capacious of the three” mental

states, see United States v. King-Vassel, 728 F.3d 707, 712 (7th Cir. 2013), it follows

that if a relator is unable to prove recklessness, he also would not be able to establish

actual knowledge or deliberate indifference.

The Supreme Court in Safeco thought it significant that defendant did not have

“the benefit of guidance from the courts of appeals or the Federal Trade Commission

(FTC) that might have warned it away from the view it took.” Id. at 70. No such

guidance existed except for a letter “written by an FTC staff member to an insurance

company lawyer.” Id. at 70 n.19. Because of this lack of guidance, “Safeco’s

reading was not objectively unreasonable” and fell well short of constituting reckless

disregard. Id. at 70.

The United States Court of Appeals for the Seventh Circuit has not addressed

whether Safeco’s standard with respect to the FCRA applies to the FCA and its

scienter requirement. However, every court of appeals to consider the issue has

held that it does. See U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 290 (D.C.

Cir. 2015) (noting that under the FCA’s knowledge element, the inquiry involves the

“objective reasonableness” of the defendant’s interpretation of an ambiguous term

and whether the defendant was warned away from that interpretation); U.S. ex rel.

Streck v. Allergan Inc., 746 F. App’x 101, 106 (3d Cir. 2018) (quoting Purcell and

stating that because of the “knowing” requirement, “the FCA does not reach an

innocent, good-faith mistake about the meaning of an applicable rule or regulation.

Nor does it reach those claims made based on reasonable but erroneous

interpretations of a defendant’s legal obligations.”); U.S. ex rel. McGrath v.

Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017) (finding that scienter under

the FCA could not be established because defendant’s good faith interpretation of a

key term in the applicable regulation was reasonable); U.S. ex rel. Donegan v.

Anesthesia Associates of Kansas City, PC, 833 F.3d 874, 879-80 (8th Cir. 2016)

(concluding FCA scienter could not be established under Safeco barring evidence of

government guidance warning a regulated defendant away from an otherwise

reasonable interpretation of an ambiguous regulation). The court in U.S. ex rel.

Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017) cited Safeco with

approval and found the trial testimony supported the defendant’s assertion that a

“reasonable interpretation of any ambiguity inherent in a regulation belies the

scienter necessary” to violate the FCA. Id. at 657-58 & n.39.

This high bar is important in that it “avoid[s] the potential due process

problems posed by ‘penalizing a private party for violating a rule without first

providing adequate notice of the substance of the rule.’” Purcell, 807 F.3d at 287.

The Defendants contend that, as those courts of appeal have found, the Supreme

Court’s analysis of the common-law definition of recklessness with respect to the

FCRA in Safeco applies with equal force regarding the FCA. The Seventh Circuit

has endorsed that principle, stating that “mere differences in interpretation growing

out of a disputed legal question” involving a contractual term cannot violate the

FCA. Yannacopoulos, 652 F.3d at 836 (internal quotation marks). Because the FCA

requires a knowingly false statement, 31 U.S.C. § 3729(a)(1)(B), a defendant lacks

knowledge if “the particular false statements were the result of a difference in

interpretation or even negligence.” U.S. ex rel. Marshall v. Woodward, Inc., 812

F.3d 556, 561-62 (7th Cir. 2015).

In Proctor, this Court noted that every court of appeals to address the issue

has found that the Supreme Court’s analysis of the common-law definition of

recklessness as to the FCRA in Safeco applies equally to the FCA and that the

Seventh Circuit had approved the principle. This Court agreed with those circuit

courts and found that Safeco’s standard applies to the FCA and its scienter

requirement.

Relying on Garbe, this Court previously determined that Defendants’

“discount cash prices” offered through a Price Match Program “are the usual and

customary prices.” The issue now is whether the Defendants’ interpretation of

“usual and customary price” was objectively reasonable at the time of their Price

Match Program. If there was more than one reasonable interpretation of “usual and

customary price” and Defendants’ interpretation was consistent therewith, a

defendant should not be treated as a “knowing or reckless violator.” See Safeco, 551

U.S. at 70 n.20. “Congress could not have intended such a result for those who

followed an interpretation that could reasonably have found support in the courts.”

Id. Additionally, the Seventh Circuit’s decision to address whether the district court

correctly identified the “usual and customary” price, see Garbe, 824 F.3d at 637,

suggested the issue was one “as to which there is substantial ground for difference

of opinion” at the time. 28 U.S.C. § 1292(b).

The question becomes whether “there was ‘guidance from the courts of

appeals’ or relevant agency ‘that might have warned [the Defendants] away from the

view they took.’” Purcell, 807 F.3d at 289 (quoting Safeco, 551 U.S. at 70). The

Price Matching Programs at issue ran between 2006 and 2016. Garbe was decided

on May 27, 2016. The mandate issued on July 26, 2016, which was after the

Defendants had submitted almost all of their allegedly false claims. Moreover, the

United States Supreme Court denied certiorari in Garbe on January 9, 2017, see 137

S. Ct. 627, after the Defendants had stopped their Price Match Programs altogether.

Accordingly, Garbe could not have warned the Defendants away from the view they

took. Unless there was some other guidance such as a contract, binding agency rule

or court of appeals decision prohibiting Defendants’ interpretation of the “usual and

customary” price at the time of their Price Matching Programs, then Defendants

conduct would have been objectively reasonable and not knowingly false.

If an objectively reasonable interpretation of the law supported its conduct,

however, the Defendants could not actually know they were violating a legal

obligation. Otherwise, two actors could engage in the same conduct on the exact

same facts and be subject to different liability under the FCA based on how they

subjectively interpret the law. Such a result is not permitted under Safeco. This

“[s]trict enforcement of the FCA’s knowledge requirement” serves to prevent a party

from becoming liable due to an innocent mistake, thereby “avoiding the potential

due process problems posed by penalizing a private party for violating a rule without

first providing adequate notice of the substance of the rule.” Purcell, 807 F.3d at

287. The court in Purcell overturned a jury verdict finding FCA violations because

the defendants “could reasonably have concluded” their conduct was permitted, even

though defendants subjectively believed they were wrong and one witness “knew”

they were wrong. See id. Subjective intent is “irrelevant” if a defendant has a

reasonable interpretation. See id. at 290. In order for the conduct to be “knowingly”

or “recklessly” illegal, therefore, an authoritative interpretation must exist stating

that it is. Here, there does not appear to be any such authoritative interpretation.

(2)

The Defendants first contend their interpretation was objectively reasonable

because their Price Match Programs did not impact the usual and customary price

given that the governing contracts and regulations did not equate discounted prices

with the usual and customary price. Even if their interpretation is wrong, the

Defendants assert it is at least a reasonable one.

The Defendants further note that before, while and after their allegedly

fraudulent conduct took place, numerous courts have issued rulings either adopting

their position or acknowledging that the phrase “usual and customary” is susceptible

to multiple interpretations. They point to district court decisions both from within

and outside the Seventh Circuit showing how different courts have interpreted the

phrase. See Forth v. Walgreen Co., 2018 WL 1235015, at *5 (N.D. Ill. Mar. 9, 2018)

(noting Walgreen’s assertion that “because cash-paying customers need to opt in to

the [discount program] and pay a yearly membership fee to access [discount] prices,

such prices cannot qualify as U&C prices”); Madison v. Mississippi Medicaid

Comm’n, 86 F.R.D. 178, 188 n.*** (N.D. Miss. 1980) (stating discount prices

offered to a portion of customers “would be excluded from the usual and customary

calculations unless the patients receiving the favorable prices represent more than

50 percent of the store’s prescription volume”); U.S. ex rel. Garbe v. Kmart Corp.,

73 F. Supp.3d 1002, 1015 (S.D. Ill. 2014) (stating “with respect to government

programs . . . U&C is defined by the relevant contract and/or payer sheet of the

PBMs [and] [w]ith respect to state Medicaid programs, U&C is defined by statute

or regulation”); Corcoran v. CVS Health, 2017 WL 3873709, at *14 (N.D. Ca. Sept.

5, 2017) (finding that specific terms of each PBM contract controlled whether

defendants were “required to submit the [discount] program prices as U&C” and

concluding none did), rev’d, 779 F. App’x 431, 433 (9th Cir. June 12, 2019) (finding

there were genuine issues of material fact concerning the meaning of U&C which

required the reversal of summary judgment); U.S. ex rel. Gathings v. Bruno’s, Inc.,

54 F. Supp.2d 1252, 1257 (M.D. Ala. 1999) (“This court agrees that, in the context

of the federal and Alabama regulations, ‘[usual and customary charge to the] general

public’ refers to customers paying the prevailing retail price.”).

Based on those authorities showing there was more than one reasonable

interpretation of “usual and customary price,” the Defendants allege they cannot be

treated as a “knowing or reckless violator.” See Safeco, 551 U.S. at 70 n.20. Id.

Based on the aforementioned district court cases and the lack of any controlling

authority at the time, it would be difficult to describe the Defendants’ pre-Garbe

position as objectively unreasonable.

The Defendants allege Garbe confirms this was an unsettled legal question at

the time. The district court in Garbe had held that U&C means “cash price to the

general public,” and that “members of Kmart’s generic discount programs are part

of the ‘general public.’” Garbe, 73 F. Supp.2d at 1014, 1017. The district court

certified three questions for interlocutory appeal under 28 U.S.C. § 1292(b) and the

Seventh Circuit “added the question whether the district court correctly identified

the “usual and customary” price.” Garbe, 824 F.3d at 637. Based on the standard

under § 1292(b) that district judges are directed to employ, the Defendants allege the

issue was one “as to which there is substantial ground for difference of opinion.” 28

U.S.C. § 1292(b).

As noted earlier, this Court based its previous Order on Garbe, “apply[ing]

the law that was so clearly established by the Seventh Circuit,” as the Relators

alleged in their motion for partial summary judgment. D/E 164, at 2; see also 2019

WL 3558483, at *6 (“Garbe makes clear that Medicare Part D and Medicaid are

entitled to the benefit of the usual and customary price regularly offered by a

pharmacy to its cash customers.”). By adding “whether the district court correctly

identified the ‘usual and customary’ price” to the issues certified by the district court

in Garbe, see Garbe, 824 F.3d at 637, the Seventh Circuit appeared to determine the

issue of generic drug discount programs and usual and customary price was

sufficiently debatable to be addressed.

Medicaid claims

The Defendants contend the Relators have not shown any facts demonstrating

that Defendants knowingly submitted false claims that were material to the

Government’s payment decision as to the four Medicaid programs that are still at

issue.

The Court finds that, as in the appellate court cases interpreting Safeco—

including Purcell, Streck, Hixson and others—there was no authoritative guidance

from any court of appeals or CMS at the time the Defendants submitted the relevant

claims that could have warned them away from their objectively reasonable

interpretation. As the Defendants note, Garbe was the only decision this Court

applied when concluding that “discount cash prices are the usual and customary

prices” under the California, Illinois, Utah and Washington Medicaid programs.

The Seventh Circuit decided Garbe in May 2016 and the mandate was issued

and became effective on July 26, 2016, meaning the parties in Garbe were bound by

the decision. Fed. R. App. P. 41. In January 2017, the Supreme Court denied

certiorari in Garbe, after all the alleged false claims had been submitted in this case.

No court of appeals had determined that discount cash prices constituted the usual

and customary prices before the Seventh Circuit decided Garbe. Accordingly, there

was no appellate court guidance to warn the Defendants away from their position.

The Defendants point out there is still no appellate guidance in most states where

they operated. There also was no controlling state authority at the time in the form

of the Medicaid laws in effect for California, Illinois, Utah and Washington which

addressed individualized price-matching as part of the usual and customary

definition. To the extent that any state changed its usual and customary price

definition to include price matching, material changes to State Medicaid plans must

first receive federal approval pursuant to 42 C.F.R. § 430.12(c)(1)(ii). The effective

usual and customary definitions in the relevant states which lacked federal approval

could not have included individualized price match programs.

The meaning of the usual and customary provisions of these state regulations

is at least ambiguous, which would make it impossible for the Relators to establish

that the claims are false. See Safeco, 551 U.S. at 70 n.20 (noting that if “the statutory

text and relevant court and agency guidance allow for more than one reasonable

interpretation, it would defy history and current thinking to treat a defendant who

merely adopts one such interpretation as a knowing or reckless violator”). Before

Garbe, the meaning of “usual and customary” within the pharmacy industry did not

encompass individualized price-matching as defined by State Medicaid legal

authorities. In certain instances when a statute, regulation or provider manual

language was unclear, the Defendants sought clarification regarding whether a

particular state’s U&C definition applied to their individualized Price Match

Program.

Based on the foregoing, the Defendants could not have acted knowingly or

deliberately indifferent or in reckless disregard of whether they were required to

submit the lower price-match amount as their usual and customary prices.

Accordingly, the Court concludes that no material facts show that Defendant could

have acted knowingly under the FCA as to the applicable claims submitted to

Medicaid.

Alleged false claims submitted to Medco Health Solutions

The Relators moved for partial summary judgment contending that, as a

matter of law, the Defendants submission of inflated false claims for payment to

Medco Health Solutions, Inc., results in FCA liability.

Medco is a Pharmacy Benefit Manager that processed claims for certain

Medicare Part D beneficiaries. The Relators allege the Defendants submitted

inflated false claims for payment to Medco by misrepresenting their usual and

customary prices charged by the Defendants for prescriptions sold to GHP

beneficiaries by failing to report the discounted cash prices offered through their

Price Match Program to the general public at their pharmacies nationwide. The

Defendants contend no evidence supports a finding that they knowingly submitted

any false claims to Medco.

Based on the October 27, 2006 email to the Defendants’ executives, the

Relators allege the Defendants knew that Medco required their Medicare Part D

claims for payment to be limited to the lower of the negotiated price or the usual and

customary price. The Defendants knew that Medco expressly required that their

usual and customary price include “all applicable discounts” including a

“competitor’s matched price.”

The Relators also note that in a December 2007 email to his colleagues,

SuperValu’s Director of Managed Care Contracting, Ron Richmond, wrote that the

Price Matching Program used a “stealthy approach.” He warned of the “very broad”

financial implications if the Price Matching Program became more of a “rule” or

routine. The Relators allege the Defendants’ approach allowed them to hide

discounted prices from Pharmacy Benefit Managers while still offering price

incentives to attract and keep pharmacy customers.

In June 2008 Maxine Johnson, Director of Managed Care Operations, advised

other SuperValu executives that Medco viewed Walgreens’ $4 discount program to

be its usual and customary price. However, the Relators contend that Defendants

continued to offer and provide their cash price match guarantee to the general public

at its pharmacies nationwide, while hiding this information from GHPs such as

Medco.

The Relators further assert that, from the outset in 2006, SuperValu executives

were aware of the financial implications if they reported their discounted price

matches as their usual and customary price to third party payers. SuperValu

calculated potential losses of approximately $70 million annually were it to

implement a program such as Walmart’s. Additionally Dan Salemi, SuperValu’s

Vice President of Pharmacy Services, had reservations about offering a generic

discount card because that would necessarily involve public dissemination of the

discount prices offered in the Price Match Program. Salemi was concerned that

public disclosure of the discount prices would result in Medco reducing the

Defendants’ reimbursements correspondingly.

The record does show that Defendants’ executives expressed concerns about

the financial hit if their Price Match Programs became widely known and they had

to report their individualized price matches as their usual and customary prices. As

the Court stated in Proctor, regardless of the Defendants’ subjective beliefs and/or

their internal motivations, it is the contracts or other authoritative guidance that

controls. Between 2006 and 2012, the Defendants’ contract with Medco did not

define usual and customary price. Upon Medco’s acquisition by Express Scripts,

Inc., the December 2009 contract between Express Scripts and Defendants (and later

versions executed by the parties) that excluded price matches from the definition of

usual and customary price controlled the submission of Defendants’ claims for

reimbursement from that time forward. The record does not show that Express

Scripts ever objected to Defendants’ price-match practices, viewed price matches as

affecting usual and customary prices or otherwise objected to the Defendants’ usual

and customary submissions.

The Defendants relied on the contracts and did not act with actual knowledge,

or in deliberate ignorance or reckless disregard, when submitting their regular cash

prices as their usual and customary prices—rather than the lower price-match

amounts. Moreover, the Defendants attempted to clarify usual and customary terms

when the need arose.

The Court further notes that Bill Strein’s 2006 email to Defendants, which

references “competitor’s matched price” as requiring submission as U&C price

under Medco’s pharmacy’s network agreements, could be interpreted to refer to

universal price matching as opposed to individualized price matching. The record

does not show that Medco specifically reviewed or challenged Defendants’ price-

match practices, viewed Defendants’ price matches as affecting U&C prices, or

otherwise objected to Defendants’ U&C submissions.

Based on their reasonable interpretation of the contracts and good faith belief

they had complied with the definitions of usual and customary price, the Court

concludes that Defendants did not knowingly violate the FCA with respect to the

claims submitted to Medco.

Medicare Part D, TRICARE and FEHBP claims

The Defendants also move for partial summary judgment on the basis they did

not knowingly submit false claims for payment to the federal healthcare programs

Medicare Part D, TRICARE or the Federal Employee Health Benefits Program by

reporting their own usual and customary prescription-drug prices instead of local

competitors’ prices, which Defendants occasionally price-matched.

As the Court has noted, the Defendants’ individualized price matching did not

affect the usual and customary prices, as defined in their contracts with Pharmacy

Benefit Managers. Any such obligation to include individualized price matching

would have been governed by the contracts. The record shows that the Defendants

sought guidance from the Pharmacy Benefit Managers if there was a question about

whether price matches would affect usual and customary price.

When the claims were submitted to GHPs between 2006 and 2016, the

Defendants did not have actual knowledge, were not deliberately indifferent and did

not recklessly disregard any contractual provision defining the usual and customary

price when they submitted their regular cash prices and not the lower price-match

amounts to Medicare Part D, TRICARE and the Federal Employees Health Benefit

Programs. The Seventh Circuit had not yet decided Garbe so the Parties did not

have the benefit of that decision in determining whether individualized price

matching constituted the usual and customary price.

Accordingly, no material facts indicate the Defendants could have acted

knowingly under the FCA when submitting claims for payment to Medicare Part D,

TRICARE and FEHBP. The Defendants are entitled to summary judgment.

IV. CONCLUSION

For the reasons stated herein and, consistent with its decision in Proctor, the

Court concludes that Safeco’s objective scienter standard applies to the FCA. The

Defendants’ individualized Price Matching Program had been discontinued by the

time the Supreme Court denied certiorari in Garbe. Accordingly, the Defendants

could not look to the reasoning of Garbe in determining whether its individualized

price matches had to be reported as its usual and customary price. There was no

other guidance in the form of contracts, court of appeals decisions or binding

authority from the applicable agency, which means that Relators cannot meet the

FCA’s scienter requirement. See Purcell, 807 F.3d at 287-88. As the Court noted

in Proctor, there was authority is support of both parties as to how price matching

affected usual and customary price. However, there was no binding authority

warning the Defendants away from their position.

“[W]ithout knowledge of falsity there cannot be a knowingly false claim”

under § 3729 of the FCA. United States ex rel. Hill v. City of Chicago, 772 F.3d

455, 456 (7th Cir. 2014). Having determined that the Relators cannot establish the

FCA’s knowing element as a matter of law, the Court concludes that the Defendants

are entitled to summary judgment.

Ergo, the Defendants’ Motion for Partial Summary Judgment as to Medicaid

claims [d/e 168] is GRANTED.

The Relators’ Second Motion for Partial Summary Judgment relating to False

Claims submitted by Defendants’ to Medco Health Solutions, Inc. [d/e 169] is

DENIED.

The Defendants’ Motion for Partial Summary Judgment as to Medicare Part

D, TRICARE and FEP claims [d/e 175] is GRANTED.

The False Claims Act claims asserted in Count I are Dismissed with Prejudice.

Pursuant to 28 U.S.C. § 1367(c)(3), the Court declines to exercise

supplemental jurisdiction over the remaining state law claims.

The state law claims asserted in Counts II through XIII are Dismissed without

Prejudice.

The Clerk will terminate the Defendants’ Motion for Case Management

Procedures regarding related Safeco Motions for Summary Judgment [d/e 320].

The Clerk will enter Judgment in favor of the Defendants and terminate this

case.

ENTER: July 1, 2020

FOR THE COURT:

/s/ Richard Mills

Richard Mills

United States District Judge