# United States of America v. Supervalu Inc

> District Court, C.D. Illinois · July 1, 2020

URL: https://www.frixlaw.com/law-library/cases/10135928

## Case

- **Court:** District Court, C.D. Illinois
- **Decided:** July 1, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10135928

## How later opinions describe it (automated extraction)

- 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”
- 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
- 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
- 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

## Opinion text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10135928. Public record. Not legal advice.