The United States of America v. Safeway, Inc.

IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

SPRINGFIELD DIVISION

UNITED STATES OF AMERICA, and The )

STATES OF CALIFORNIA, COLORADO, )

DELAWARE, HAWAII, ILLINOIS, )

MARYLAND, MONTANA, NEW JERSEY, )

NEW MEXICO, NEVADA, VIRGINIA, and )

The DISTRICT OF COLUMBIA, ex rel. )

THOMAS PROCTOR, )

)

Plaintiffs, )

)

v. ) Case No. 11-cv-3406

)

SAFEWAY INC., )

)

Defendant. )

OPINION

RICHARD MILLS, United States District Judge:

Safeway, Inc. moves for summary judgment based on the U.S. Supreme

Court’s Safeco’s decision.

I. INTRODUCTION

Safeway’s reporting of its usual and customary prices between 2006 and 2015

and whether it violated the False Claims Act (“FCA”) is at issue in this case.1

Safeway seeks summary judgment under Safeco Insurance Co. of Am. v. Burr, 551

1 The Relator’s amended complaint also includes separate counts alleging Safeway violated ten state law

and District of Columbia False Claims (or similarly titled) Acts. The claims asserted on behalf of the

State of Maryland have since been dismissed with prejudice.

U.S. 47 (2007), contending that the FCA imposes an “objective standard” for the

knowledge element which Safeway claims the Relator is unable to meet. The

Relator alleges Safeco, which addressed the Fair Credit Reporting Act, does not

apply to the FCA and, even if it did, Safeway acted knowingly and thus is liable

under the FCA.

The issue is whether the standard articulated in Safeco applies to the FCA and

its scienter requirement, as some federal courts of appeal have held. In United States

ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), the United States Court

of Appeals for the Seventh Circuit held that a pharmacy’s “usual and customary

prices” included its “discount” prices if the terms of the “discount programs” were

offered to the general public and were the lowest prices for which the pharmacy’s

drugs were “widely and consistently available.” Id. at 645. The court found that

government programs such as Medicare and Medicaid are entitled to the same

benefit. See id.

Garbe was decided almost one year after Safeway’s challenged programs

were discontinued. Safeway claims that, between 2006 and 2015, its actions were

objectively reasonable because there was no authoritative guidance as to how to

define “usual and customary price” in conjunction with membership or discount

programs. The Relator contends Safeway simply ignored the ample authority

warning it away from its interpretation.

II. FACTUAL BACKGROUND

Safeway is a grocery retailer. Between October 1, 2006 and July 31, 2015,

Safeway operated pharmacies located inside grocery stores in 20 states and the

District of Columbia. Safeway’s pharmacies served customers with prescription-

drug benefits provided by both commercial plans and government programs,

including Medicare Part D, TRICARE, the Federal Employees Health Benefits Plan,

and state Medicaid programs.

Safeway alleges that for claims covered by third-party insurance, third-party

payers typically reimbursed pharmacies based on a formula defined by contract

between the payer and the pharmacy. The Relator disputes the information in the

cited Stipulation supports that statement. Citing another Stipulation, the Relator

alleges the contracts are irrelevant to the extent that “Safeway did not reference the

pricing terms of specific contracts when setting its list prices that were reported as

its U&C prices.”

Safeway alleges that for many years before the relevant time period, and

consistent with industry practice, “usual and customary price” was understood

within the industry to mean the retail cash price that the pharmacy charged to the

“general public” – i.e., the price automatically charged to a majority of a pharmacy’s

cash-paying customers for a particular drug (specific to dose and quantity), on a

particular day, and at a particular store, without the customer having taken any

affirmative action to obtain the price. The Relator disputes that the industry

understanding of usual and customary price involved or included “retail prices,” and

neither the cited deposition excerpts nor Defendant’s expert Michael Jacobs’ Report

even contains the word “retail.” Rather, Safeway’s expert accurately stated the

“PBM [Pharmacy Benefit Manager] Industry Definition of U&C Price” is “generally

understood to be the cash price charged to the general public.” Julie Spier

(Safeway’s Division Manager/Director of Pharmacy Operations for the State of

Texas) testified that her “personal definition” of usual and customary price includes

the “cash price” or “price to customers without insurance.” Mr. Jacobs’ and Ms.

Spier’s testimony is also consistent with Safeway Executive Michael Topf’s

understanding that U&C is “a cash price.” Safeway claims that Ms. Spier’s

“personal definition” is immaterial because Relator offers it as evidence of

Safeway’s subjective state of mind, which is irrelevant under Safeco.

Government payers

The federal government provides beneficiaries of the Medicare Part D,

TRICARE and FEP programs with prescription-drug benefits through relationships

with “Sponsors,” which are private, state-licensed insurance companies. See 42

C.F.R. § 423.505. Sponsors, in turn, often contract with various PBMs that

administer prescription-drug benefits provided by the specific Part D plan. See 42

U.S.C. § 1395w-112(b)(1). The PBMs then enter into contractual relationships with

pharmacies, including Safeway.

Safeway alleges contracts between the PBMs and Safeway governed the terms

by which Safeway was required to submit claims to the PBMs and, in turn, whether

and how much the PBMs would pay Safeway for dispensing drugs to their

beneficiaries. Federal regulations forbid the Centers for Medicare and Medicaid

Services (“CMS”) from setting any of the terms in those contracts. 42 U.S.C. §

1395w-111(i). The Relator disputes that the contracts between the PBMs and

pharmacies were the only source of the terms by which Safeway was required to

submit claims to the PBMs and, in turn, whether and how much the PBMs should

pay Safeway for dispensing drugs to their beneficiaries. The Relator further disputes

that the cited regulations forbid CMS from setting any of the terms in Medicare Part

D contracts because the cited statute does not contain a blanket prohibition. Section

1395w-111(d)(2)(A) provides that the Secretary of HHS “has the authority to

negotiate the terms and conditions of the proposed bid submitted and other terms

and conditions of a proposed plan.”

Medicaid is an entitlement program that provides healthcare coverage to

economically disadvantaged populations. State governments set their own benefits

and eligibility, while the federal government (through CMS) provides and shares the

outlays for the services.

States reimburse pharmacies that dispense prescription drugs to Medicaid

beneficiaries based on reimbursement methodologies set through state statutes and

regulations. Safeway claims that the particular methodologies vary, but generally

dictate that Medicaid will pay the lowest of various prices, including a pharmacy’s

usual and customary price, which Safeway says is the price charged to a majority of

a specific pharmacy’s cash paying population. The Relator disputes Safeway’s

characterization of usual and customary price, particularly that there is any majority

requirement for usual and customary price.

PBM and pharmacy understanding of usual and customary

Safeway alleges during the relevant period, PBMs responsible for

administering government healthcare programs through their contracts with

pharmacies understood usual and customary to exclude discounts that are only

available to customers who have taken affirmative action to become eligible for the

reduced prices. The Relator disputes the assertion that PBMs understood usual and

customary prices to exclude discounts. Moreover, the Relator disputes Safeway’s

use of the phrase “customers who have taken affirmative action.”

Safeway alleges that PBM executives interpreted the phrase “usual and

customary price” to exclude membership discounts or price matching programs like

Safeway’s. The Relator disputes Safeway’s assertion, claiming that the declarations

cited in support are attempts to reinterpret the contractual usual and customary

provisions based on Defense Counsel’s “misrepresentations” of Safeway’s discount

programs.

Safeway alleges that while concluding that the discounts would have no

impact on usual and customary pricing, many pharmacies offered membership

discount programs that required customer initiation and action to receive a discount.

Large pharmacy chains including Walgreens, Kmart, CVS Health, SuperValu,

Albertsons and Rite Aid offered these types of programs. The Relator claims it is

immaterial that other previous or current False Claims Act defendants committed

the same type of “fraud.” The Relator also contends the undisputed

contemporaneous evidence establishes that Safeway knew its price matches would

impact its usual and customary prices.

Walmart’s and Safeway’s $4 generic programs

In September of 2006, Walmart attempted to disrupt the pharmacy industry

by introducing low-priced generic drugs, pricing 30-day supplies of popular generic

drugs at $4. On September 21, 2006, certain Safeway employees received an email

discussing the Walmart $4 generic drug discount program. The same day, Safeway’s

Vice President of Pharmacy Dave Fong forwarded a news article to Chief Financial

Officer Robert Edwards noting that Walmart’s $4 program was not good for the

pharmacy business and drug store sector prices would be dropping. On September

25, 2006, Safeway’s Senior Manager of Financial Planning and Analysis Michael

Topf emailed other Safeway executives noting that the $4 prices for generic

prescriptions would lead to a “margin hit.” Topf’s email estimated an $8.7 million

annual margin hit on Safeway’s cash business if Safeway lowered its price for drugs

on Walmart’s $4 list to $4. Other retail pharmacies such as Target, Kroger, HEB

and Kmart offered competing versions of Walmart’s $4 discount generic drug

programs. On October 26, 2006, Chuck Posterick, Safeway’s Regional Pharmacy

Manager, emailed Glen Davis, its Director of Pharmacy Operations, pertaining to

“Wal-Mart and Coupon Discussion Points,” which stated in part:

1. The official company policy is that we DO NOT match Wal-Mart or HEB

program if an unidentified customer calls in. This is to avoid trouble with the

media or competitors.

2. If a regular customer known to you asks if we will match either program,

the answer is YES. . . .

. . . .

5. Do not discount copays to $4.00. Fill the Rx as cash – Do not bill to the

third party.

6. We cannot put any of this in writing to stores because our official policy

is we do not match.

Safeway alleges that because all Walmart customers received these lower

prices without having to take any action, the $4 prices became Walmart’s usual and

customary prices for its reimbursement submissions, as these prices were charged to

everyone in the “general public.” The Relator notes that Walmart properly reported

its discounted prices as its usual and customary price to all Government Healthcare

Programs because those prices were widely and consistently offered to the public.

The “dilemma” posed by Walmart’s $4 program for Safeway was that if Safeway

adopted a similar program, then $4 would be the usual and customary price for those

drugs, which Safeway would have to offer to third parties. On October 21, 2006,

Glen Davis emailed his subordinates about “Price Matching” and explained, in part,

“See the attached list of Generics Walmart is covering for the $4/30 days supply.

Our official company stance is we are not going to change our usual and customary

price on these items. Cash customers on these items represent less th[an] 0.6% of

our sales.”

On October 11, 2006, CMS issued a Memorandum to all Part D Sponsors

which answered frequently asked questions relating to CMS’s “Lower Cash Price

Policy.” A footnote in the Memorandum specifically referenced Walmart’s program

offering a reduced price for certain generics to its customers.

On December 15, 2006, CMS incorporated its Lower Cash Price Policy into

the CMS Medicare Prescription Drug Benefit Manual Chapter 14, Section 50.4.2 at

p. 19 n.1 (2006). Safeway claims this assertion is immaterial in that the cited

footnote is not authoritative guidance, because it is consistent with Safeway’s

objectively reasonable interpretation of the law and because the Relator offers it as

evidence of Safeway’s subjective state of mind, which is irrelevant under Safeco.

On December 19, 2006, Ash Yerasi (Safeway’s Director of Managed Care and

Marketing) circulated CMS’s Medicare Prescription Drug Benefit Manual Chapter

14 to Safeway pharmacy staff which stated in part: “Please keep abreast of those

issues that impact your areas.”

On October 27, 2006, a Medco representative sent an email to Safeway

representatives regarding “Usual and Customary (U&C) pricing provision

reminder.” The email stated in part that by contract, a pharmacy’s U&C “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 included a

“competitor’s matched price,” among other discounts. The email further provided

“it is expected that” Medco member claims “will be submitted through

TelePAID/POS by pharmacy submitting appropriate pharmacy U&C pricing.”

Yerasi circulated Medco’s notice to Fong, Topf and other Safeway employees, while

stating in part: “I’m sure this has to do with the Walmart initiatives. There ‘are’

ramifications to normal 3rd party business. Language is pretty similar in all of our

agreements. . . .”

On January 2, 2007, Coventry Health Care (a plan administered by PBM

Caremark) sent Safeway a notice, dated December 29, 2006, that stated in part:

Generic Drug Discount Programs and Usual & Customary Charges

As Generic Drug Discount programs become more prevalent amongst retail

pharmacies, we are reminding you that as a participating pharmacy for

Coventry Health Care, Inc., you are required to bill either the Pharmacy

Program Administrator or the Member the lowest possible price for the drug.

Per our contract in Section I. “Definitions,” 1.24 “U&C” we define it as:

“Usual and Customary Charge” means the lowest price Pharmacy would

charge to a particular customer if such customer were paying cash for an

identical prescription on that particular day, exclusive of sales tax or other

amounts claimed. This price must include any applicable discounts offered

to attract customers.

Ash Yerasi circulated the email and memorandum to twelve people in the Safeway

pharmacy department, including Dave Fong and his staff, and stated that the

Coventry notice is, “Another Example of how plans are reacting, ie, any modified

price needs to be offered to the 3rd party if meets U&C definition. Received a similar

not[e] from Medco.”

In December 2006, Safeway received a notice from the State of Nebraska

regarding usual and customary charges. The Nebraska notice provided in part:

Price Matching: When a pharmacy lowers its usual and customary price for

a prescription (for example: to match a competitor’s price), all claims

submitted to Medicaid for the same drug and quantity dispensed during

that business day must also be billed at the lowered price.

On February 1, 2007, Oregon sent a proposed amendment to a Pharmacy Network

Agreement with the State of Oregon, which stated in part:

“‘Usual and Customary Charge’ means the minimum retail price charged by

Pharmacy for a Covered Drug in a cash transaction (in the quantity dispensed),

on the date the prescribed drug is dispensed, as reported to PBA by the

network pharmacy, including any discounts or special promotions offered on

that date.”

A February 13, 2007 excerpt from the Caremark provider manual stated in relevant

part:

The Caremark Provider Manual defines Usual and Customary as:

“Usual and Customary Price or U & C” means the lowest price Provider

would charge to a particular customer if such customer were paying cash for

an identical prescription on that particular day at that particular location. The

price must include any applicable discounts offered to attract customers.

Additionally, “Provider must submit all claims for Pharmacy Services related

to Covered items for Eligible Persons electronically through the applicable

claims system.”

In an email to a pharmacy manager dated February 14, 2007, Julie Spier

stated, in part: “The deal is that as long as the [Third Parties] will pay at this level

we want to leave it there so that we can make as much off of them for as long as

possible. You can always price match as long as you do not go below cost.” A

February 16, 2007 email from Glen Davis provided in part: “When I set prices I look

at what third party plans pay[] us and then try to set the retail around the highest

[Third Party] reimbursement rate. . . . The reason I do this is because 90% plus of

our business is third party and we have the provisions of the plan’s price or the U&C

which ever is lower.”

Starting in March 2008, Safeway introduced its own $4 Generics Program, a

pricing program for certain generic drugs, in certain divisions, including Texas,

Dominick’s/Illinois, Eastern/Genuardi’s, some pharmacies in its Denver division,

and Vons stores in the Las Vegas area. Under this program, Safeway created a list

of generic drugs, known as a “formulary,” that would be part of the program, which

changed over time as drugs were added or removed. Each drug on the $4 Generics

Program’s formulary was assigned a set list price of $4 for a typical 30-day supply,

$8 for a typical 60-day supply and $12 for a typical 90-day supply.

According to Safeway Financial Planning & Analysis employee Lori

Kennedy, the adoption of a $4 price for the Walmart list of generic drugs nationwide

would result in a $65 million annual financial hit to Safeway’s margin. However,

Michael Topf testified that this estimate was a “[w]ild-ass guess.” If business were

to quadruple, moreover, Safeway’s profits could have increased.

On April 4, 2008, Safeway’s top executives met to discuss $4 generic

prescriptions and the meeting included a presentation titled “Generic Pricing

Strategy & Response to Kroger.” The presentation estimated that implementing a

company-wide $4 generic pricing program would cost $46,879,230 and that doing

nothing (i.e. not responding at all to grocery competition) “could result” in a loss of

approximately $75 million in profit based on grocery sales.

Safeway executives Jesse Talamantez (National Director of Pharmacy Supply

Chain and Category Management Marketing & Advertising) and Steve Scalzo

(Division Manager/Director of Pharmacy Operations for Dominick’s (Illinois)) at

times characterized Safeway’s $4 Generics Program offered in its Dominick’s,

Eastern and Texas divisions as a “true” $4 program.

In April 2008, in Safeway divisions offering the $4 Generics Program, the

prices offered for drugs on Safeway’s formulary were included in Safeway’s

reporting of the usual and customary price. “The $4 pricing became the Safeway

U&C for all program formulary drugs during that period.” Starting in early 2008,

Safeway also introduced its Matching Competitor Generics Program in certain

divisions that were not participating in the $4 Generics Program, including in

Phoenix, Denver, Portland, Seattle and Vons/Southern California divisions.

According to Safeway, five pharmacies in the Denver division (but not the rest of

the Denver division) instead participated in the $4 Generics Program.

Safeway claims that no screening process or membership was required for the

$4 Generics Program. Because the discounted prices under the program were

automatically charged to all customers, both cash-paying and those insured by third-

party payers, Safeway states that it considered the discounted prices to be its retail

cash prices to the “general public.” The Relator disputes these facts on the basis

they misrepresent Safeway’s stipulation and the deposition excerpts on which they

are allegedly based.

During the operation of its $4 Generics Program, Safeway reported the

discounted prices for drugs included on the program’s formulary as the usual and

customary prices to all third-party payers. Safeway discontinued the $4 Generics

Program in 2010.

Ad hoc price matching and usual and customary price

The Relator asserts Safeway data shows that between October 1, 2006 and

July 31, 2015, Safeway overrode the higher usual and customary prices it reported

to Third Party payers (health insurers, including Government Healthcare Programs)

in at least 5,626,027 cash transactions. Safeway disputes this allegation which is

based on the report of the Relator’s expert, Ian Dew, claiming that Dew incorrectly

identifies, and vastly overstates, the number of price override transactions Safeway

reported to third parties during this period.

The Relator alleges that from 2006 through July 15, 2015, Safeway

pharmacies would give a price match to any customer who requested a price match

to a lower competitor’s price. Safeway disputes this assertion on the bases that price

matching was available only if “based on a pharmacist’s discretion” and if specific

circumstances were present—such as to prevent the loss of a cash customer.

The Relator further asserts Safeway’s price match cash prices were not

reported as Safeway’s usual and customary price to health insurers (including

Government Healthcare Programs) that required the reporting of usual and

customary prices. Safeway claims that, because it required customers to initiate a

price-match transaction, it considered price matching to be a special, ad hoc pricing

component that varied by drug and by location, which did not alter Safeway’s list-

pricing formulas or retail prices for the relevant drugs and therefore was not reported

as Safeway’s usual and customary price.

Safeway evaluated and monitored the impact of their competitors’ $4 discount

programs, including the number of prescriptions that were being transferred from

Safeway to Walmart, Target and Kmart. Safeway alleges that starting in 2006, some

of its pharmacies received authority to match competitors’ prices for certain drugs if

specific circumstances were present. Specifically, pharmacists could honor a price-

match request if: (1) the customer initiated the price match transaction, such as by

requesting a price match or quoting a competitor’s price to the pharmacist; (2) the

pharmacist verified the competitor’s price; and (3) the customer paid for the drug in

cash, without using any insurance benefits. The Relator disputes these alleged facts,

claiming they misrepresent the language of and attempt to add limitations to

Safeway’s Stipulations ¶¶ 3-4, on which they are allegedly based.

The Matching Competitor Generics Program was a Safeway pharmacy

discount program that required customers to pay cash and fill out an enrollment form

to obtain $4 generic and other discounted drugs. Because the club-membership

prices were not Safeway’s retail prices, Safeway did not report them to third-party

payers as its U&C prices.

In April 2008, Texas Medicaid issued an Rx Update discussing discounted

prices and U&C. Under “Pass Along Savings from Pharmacy Prescription Discount

Plans,” the Texas notice stated:

Based on requirements in the Texas Administrative Code, pharmacies that use

a prescription discount plan (such as the Wal-Mart $4 Rx Program) or who

actively match the plan prices, should reflect the discounted prices in their

Medicaid prescription claims. The discounted prices should be submitted in

the Usual and Customary price for claims paid by Texas Medicaid, CHIP,

CSHCN, and KHC. For plans that require membership, pharmacies are asked

to enroll all of their Medicaid and other state program patients. Requiring a

special identification card does not disqualify Medicaid clients from receiving

the discounted pricing.

On April 7, 2008, a Safeway Pharmacy Manager sent an email regarding “Matching

Competitor Generic Pricing” to Safeway Pharmacy Division Director Joe Cooper

stating, in pertinent part:

Hi Joe, I contacted our nebraska Medicaid program today, and they said by

matching a price, it becomes our usual & customary and any prescription

filled that day has to be priced as such. Otherwise it leaves a red flag which

could encourage an audit. So, until our system is loaded with the updated,

special priced generics we should refrain from any low-price matching.

The same day, Cooper forwarded that email to six Safeway executives with the

messages, “FYI Does anyone think we have an issue here? My question is how the

state of Nebraska will know that we offered to match any price out there.”

On April 10, 2008, Safeway’s Group Director of Pharmacy Operations, Chris

Gong, sent an email to Dave Fong, stating in part, “From Alan’s research on U & C

on the five states, it is stated and implied that if you matcha [sic] price offer, that

becomes your usual and customary for that day and that pricing needs to be extended

to Medicaid on those drugs that are covered under medicaid.” Gong’s email further

stated, in part:

If we advertise the price match—it is going to Alert the medicaid programs to

start looking. As I have said in the beginning, Walmart, Kroger etc is okay

because the $4 is their U and C and is extended to Medicaid—need to keep

a low profile.

On August 1, 2008, Dave Fong received an email from Cathy Polley, a

representative of the Food Marketing Institute, regarding the “Generic Discount

Program and Billing to Medicare Part D,” which stated in part:

Given the expanding number of companies offering discount generic

programs to their customers, I wanted to pass along a reminder from CMS

regarding the proper handling of these prescriptions for Medicare Part D

patients. Since the generic price is your “usual and customary” price, you

must submit these claims to the Part D plan sponsor. This will ensure the

patient record is complete, the prescription will count toward the TrOOP

[true-out-of-pocket], step-therapy can be initialed, etc. Below is

the applicable section from Chapter 14 of the Medicare Prescription

Drug Benefit Manual. I’ve also pasted a link to the manual below.

Specifically, pay attention to the foot note at the end.

Fong forwarded the email to subordinates, including Director of Compliance Mary

Ward, in addition to Glen Davis, Merle Jarvill (Director of Managed Care at Safeway

and President of its wholly-owned PBM, Avia Partners) with an instruction stating,

“Please note and ensure we are in compliance. Thx[.]”

In September 2008, Colorado issued a Provider Bulletin regarding “Pharmacy

Discount Programs,” which stated in part:

Pharmacies who offer prescription discount programs must use their

discounted prices as the usual and customary charge on Medicaid claims.

Pharmacies should not submit higher prices on Medicaid claims than

prices offered to the general public. As part of its ongoing compliance

monitoring requirements, the Department’s Pharmacy and Program

Integrity Sections are coordinating claims reviews pharmacies offering

listed drugs at the usual and customary price of $4. Beginning October 1,

2008, pharmacy providers promoting the $4 prescriptions will receive

lists of claims paid at more than $4 for those drugs.

A December 1, 2008 Walgreens Health Initiatives Manual defined “Usual and

Customary” as follows: “The usual and customary price refers to the cash price

including all applicable customer discounts, coupons or sale price which a cash-

paying customer would pay at the pharmacy.”

A January 1, 2009, Caremark Network Update included a “miscellaneous

reminder” pointing to the definition of the U&C price in its February 13, 2007,

Provider Manual that “Provider must submit all claims for Pharmacy Services

related to Covered Items for Eligible Persons electronically through the applicable

claims system,” and that “Caremark is auditing for appropriate Usual and Customary

pricing during several audit processes, including on-site visits.”

A March 4, 2009 Catalyst Rx contract defined “Usual & Customary” as “the

price at which a Pharmacy Service is available for sale to the public at the individual

Network Pharmacy providing said Pharmacy Service.”

Safeway used an Auto-Refill program for which individuals under a Medicare

Part D Insurance plan were eligible. When asked about the program Merle Jarvill

explained, “The system would identify after a certain amount of time that a

prescription was ready to be refilled and the pharmacies would refill it and let the

member know that the prescription was ready for pickup.” Safeway claims its

systems required customers to request a price match every time a prescription was

filled regardless of whether the prescription was automatically scheduled to be filled

as part of the auto-refill program.

Safeway alleges price-matched prescriptions amounted to, at most, just 1.4%

of Safeway’s prescriptions during the relevant time period and only 17.6% of total

cash sales during the relevant time period. The Relator disputes Safeway’s assertion

on the basis that Safeway is comparing drugs that were routinely price-matched to

drugs that were never price-matched and also is relying on incomplete or erroneous

data.

Safeway alleges that because it required customers to initiate a price-match

transaction, it considered price matching to be a one-time special price. A price

match transaction did not alter Safeway’s list-price pricing formulas or retail prices

for the other relevant drugs. The Relator disputes these facts because customers

could obtain a price match without requesting one through Safeway’s auto refill

program. That program automatically provided customers the same lower price they

had received previously and did not require the customer to take any action other

than paying the discounted prescription refill.

Safeway claims that, to document a price match, the pharmacist had to

manually override the retail price at the point of sale to reduce it to the competitor’s

price and the overridden price would be maintained in Safeway’s online claims

processing system. The Relator disputes this fact in that Safeway has misconstrued

Safeway’s Stipulation ¶ 4(a) on which it is allegedly based by substituting the word

“retail” for “original” and inserting “Safeway’s online claims processing system” for

“the PDX system.”

Safeway discontinued price matching in all stores by July 15, 2015.

Safeway’s membership discount programs

Between early 2008 and July 2010, Safeway evaluated transitioning certain

$4 Generics stores to a membership or “opt-in” program. On March 4, 2009,

Safeway’s then-Corporate Pharmacy Category Manager Jose Alcaine sent an email

with the Subject line “$4 Generics” to Lori Kennedy, Michael Topf and Jesse

Talamantez, stating in part:

“Hypothetical: We pull the $4 programs in Texas, Eastern, Genuardi’s

and Dominick’s and offer the same program; however, as a membership

(FREE but customers need to sign up) program:

1. What is the current cost of the $4 program in the divisions mentioned

above?

2. What is the potential savings if we make this a membership program?

Thereby not affecting our reinsurance reimbursements.

3. Lastly, Mike. . . do you think if we change our program to a membership

program and Walmart does not, do you think we will lose scripts?

On March 4, 2009, Alcaine responded to his own email, calculating that the

“Total cost= $10 million,” and stating that “If we change the plan to a membership

program, the assumption is that only 20% of the $4 scripts are cash and these are the

individuals who would sign up for the membership program. Based on this

assumption the membership program would cost us $2 million thereby potentially

saving us $8 million.”

Starting in March 2008, Safeway introduced a membership discount program

transactions in certain divisions. From 2008 to 2010, the program was called the

Matching Competitor Generic Program (“MCGP”) and in 2010 its name changed in

most divisions to the Loyalty Membership Program (“LMP”) (except in one

geographic division, where the MCGP branding remained in place).

Safeway alleges the total number of membership discount program

transactions never approached a majority of Safeway’s cash transactions. According

to the Relator’s expert, the discount program transactions amounted to at most 26.9%

of total cash sales during the relevant time period and only 2% of total prescriptions

Safeway filled. The Relator disputes that the total number of membership discount

program transactions amounted to 2% of total prescription sales or 26.9% of total

cash sales because Safeway is comparing drugs that were routinely discounted to

drugs that were never discounted. Moreover, the Relator clams Safeway is relying

on incomplete and suspect data.

Safeway alleges that for members of these membership special pricing

programs, Safeway created a list of generic drugs to be sold at $4 for a 30-day

supply, $8 for a 60-day supply, and $12 for a 90-day supply. The Relator disputes

that Safeway’s membership program prices were “special” because they were

available to everyone. For drugs not on this list, Safeway provided members with

discounts of 10% on brand prescriptions and 20% on generic prescriptions.

Members of the programs could also obtain a price match to a local competitor’s

price upon customer request and pharmacist verification of that price. The Relator

also disputes that price matches were only available upon customer request and

pharmacist verification.

Safeway alleges that, to become a member of its programs, customers had to

opt-in through affirmative actions: they had to decide to (1) fill out and submit an

enrollment form agreeing to the program’s terms and conditions, (2) provide their

contact information (including address, email and phone number), and (3) pay in

cash. Safeway claims that between 2006 and 2015, only 7.4% of Safeway’s

prescription drug claims were paid in cash, while the overwhelming majority

(92.6%) were submitted to insurance companies. The Relator disputes those

percentages and questions the accuracy of the data, claiming it has not undergone

the canonicalization processes used by the Relator’s expert to exclude anomalies

from the analysis. Safeway also asserts that customers who did not decide to

affirmatively enroll in the program—whether because they did not decide to

affirmatively enroll in the program’s terms and conditions, provide their contact

information, or pay in cash—were not offered the program’s special discounts, and

instead had to pay the usual retail rate. The Relator claims there is no support in

Safeway’s Stipulation for the assertion that, if customers did not decide to

affirmatively enroll in the program, they “were not offered the program’s special

discounts, and instead had to pay the usual retail rate.” The Relator alleges

customers were still eligible to receive matched prices during the MCGP and LMP

programs instead of paying the “usual retail rate.” Moreover, it is immaterial under

Seventh Circuit precedent because it does not matter whether or not the discounted

prices were given through a club or price matching.

Safeway alleges that because the club membership discount prices were not

Safeway’s retail prices, Safeway did not report them to third-party payers as its usual

and customary prices. The Relator disputes this assertion as not supported by

Safeway’s Stipulation ¶ 4.2 Membership prescription drug sales were processed

through Avia Partners (formerly known as SMCRX), a wholly owned subsidiary of

Safeway.

2 Safeway’s Stipulation ¶ 4 provides in part, “To obtain the discounted prices offered under the program,

the customer had to (a) pay cash; and (b) fill out a Prescription Membership Program Enrollment Form

that spelled out the program’s terms and conditions. The discounts provided through the [club

membership] program were not reported to health insurers that required the reporting of U&C prices.”

On May 28, 2009, Safeway’s then-Director of Finance for Pharmacy/Main

Meals & Ingredients, Michael Topf, emailed Steve Scalzo (Division

Manager/Director of Pharmacy Operations for Dominick’s) stating, in part that: “In

Phoenix where they already have a successful $4 match program, at the most 20%

of the customers eligible for $4 generics actually take us up on it. Thus we are able

to get the benefit of offering the program while only suffering 20% of the cost.”

Steve Scalzo stated that this meant for the 80% of customers that did not take

advantage of Safeway’s $4 match, Safeway was getting some kind of higher

reimbursement from third parties. However, Topf testified that a large percentage

of customers would not opt in, stating “I’d say at least 80 percent of our cash

customers were not taking advantage of the price match, even though it was offered.”

In a May 28, 2009 email, Topf stated in part, “The obvious downside is if we

upset customers with the switch but with the right communication I hope we can

minimize the lost customers since anyone who wants the $4 generic price can still

get it.”

In June of 2009, Safeway was again discussing a proposal to move its Illinois

(Dominick’s) stores from a $4 discount program to a “$4 Membership” program. In

an email to Michael Topf and others, then-Vice President of Finance for the

Dominick’s Division, Brian Baer, stated in part:

[I]t seems like to me this whole thing revolves @ the insurance angle –

to get the $10 per item from them vs the $4 cash price. . . . . am I off?

Need to know a lot more about the -sign_up program . . . . is there

other parameters?

Topf responded to Baer’s June 17, 2009 email as follows:

Off the record that is exactly the angle getting the maximum we can from

the insurance (it may be more like 8-10/script). This is the reason why

Walgreen’s and CVS never launched this program is because the hit on

the third party insurance would have crushed them (take the impact to

us and multiply by 10).

In July of 2010, Safeway introduced its LMP in all divisions other than

NorCal. The MCGP and the LMP offered the exact same features and benefits to

their respective members. As divisions introduced the LMP in July 2010, the $4

Generics Program and the MCGP were discontinued in those divisions.

The discounts provided under the MCGP and the LMP were not reported to

health insurers (including Government Healthcare Programs) that required the

reporting of usual and customary prices. Safeway claims the discounts were not

reported because club-membership discount prices were not Safeway’s retail prices.

In a June 17, 2010 email, Safeway’s Division Manager/Director of Pharmacy

Operations for the State of Texas Julie Spier wrote in part:

The main reason for going to a membership program is to protect our Usual

and Customary price which should have a positive impact on our gain. The

majority of our contracts have a clause that they will reimburse us at the

agreed contact price or our usual and customary whichever is cheaper.

Please let store operations know of this change and transition period in case

they get any questions (Most likely this will not happen until after the

launch). While we do not want to communicate the protection of Usual and

Customary, we do want to communicate to our associates and the consumer

that the reason we are doing this is to further enhance our offer so that we can

offer them “More.”

Julie Spier provided the following instructions to Safeway’s Texas Division in

conjunction with the July 17, 2010 transition from the $4 Generics Program to the

membership program (LMP):

This need is going to be magnified by the moving on July 17th from the

automatic $4 generic list to a membership program (in order for the patient

to get a $4 generic they will need to sign up for our new membership

program). We are going to this membership program to try to protect some

of our gain dollars. All of our plans reimburse using a contracted formula

for reimbursement or our usual and customary whichever is less. If we have

$4 generics, we automatically have to give all the insurance companies the

$4 too.

With the implementation - for each of the previous $4 generics the pharmacy

will need the process first on the patients regular insurance to see what their

copay is and if it is more than the $4 generics – the pharmacy will need to

reverse the claim and then move it over to the membership. This is very

important so that we are able to put as much as we can back to the bottom

line.

In an email dated April 12, 2011, Spier characterized Safeway’s programs as “going

from $4 generic to stealth Membership Program.”

A July 12, 2011 Caremark FEP Network Update defined U&C as follows:

“Usual and Customary Price” . . . means the lowest price Provider would

charge to a particular customer if such customer were paying cash or utilizing

a Promotional Pricing program for an identical prescription or on that

particular location. For the purposes of this definition, “Promotional Pricing”

means any discounts given or offered to the general public by Provider,

including but not limited to:

• Discounts given or offered through membership, club, subscription

programs;

• Cash rebates;

• Coupons; and

• Other promotional or price discounts including free medications.

On or about July 15, 2011, Merle Jarvill received Caremark’s July 12, 2011

Caremark Network Services FEP Notice that was sent to Safeway. On July 15,

Jarvill emailed Jewel Hunt (Safeway Group Vice President, Pharmacy Health and

Wellness), Alan Pope (Safeway internal counsel), and Brian Pavur (Group Director

of Pharmacy Operations), the Caremark FEP notice and stated:

Please see the announcement from Caremark. FEP is requiring that we

provide our best price to them. This would be 10% of[f] brands, 20% off

generics, and the $4.00 program in Dominicks, Eastern and Texas.

I do not see a way around it. Alan,[] what are your thoughts?

On May 2, 2012, Caremark sent Pharmacy Audit Tips to Safeway which

stated in part:

Usual and Customary Amount U&C

Pharmacies shall provide the member with the pharmacy’s Usual and

Customary amount (U&C) in the event the U&C is less than member’s

copay amount. Pharmacies should continue to submit the claim to

Caremark even if the member choses to pay the U&C amount. Many

health plans also require submitting an accurate U&C on all claims

transactions.

A June 18, 2013 Prescription Solutions/Optum contract defined “Usual and

Customary Charge” as “mean[ing] the price, that a cash paying customer pays

Company for Drug Products, devices, products and/or supplies.”

A November 12, 2012 Caremark-administered Health Net plan sent to

Safeway stated as follows:

Recently Health Net has received numerous reports from members of

pharmacy claims not being submitted for processing when members pay

the Usual and Customary (U&C) amount for a prescription. All claims must

be submitted to Health Net via the CVS Caremark claims processing system

even when the member is paying the U&C amount.

Timely submission of all member claims, even when the U&C is lower than

the member’s copayment, provides Health Net with a complete utilization

record and keeps the member’s prescription history up-to-date.

Submitting claims to Health Net/CVS Caremark ensures:

• The member’s true-out-of-pocket (TrOOP) amount is accurate. TrOOP

amount accuracy is required by the Centers for Medicare and Medicaid

Services (CMS) and allows members to maximize their benefit.

• The member pays the lowest amount available under their benefit – the

lower of the copay or U&C.

• A complete prescription history for accurate case management. Without

an accurate prescription history, it can appear that either the member is

non-compliant or the physician is not managing their care according to

national standards or guidelines.

The Relator alleges Safeway data shows that between January 1, 2008 and

July 31, 2015, Safeway sold approximately 8.5 million prescriptions through its

discount clubs at lower cash prices than the usual and customary prices it reported

to Third Party payers (health care insurers). Safeway disputes the Relator’s

assertion. It specifically disputes that Relator’s expert report provides the correct

number of prescriptions Safeway sold through its discount programs between

January 1, 2008 and July 31, 2015. Safeway claims Ian Dew overstates cash sales

and special pricing arrangement sales. According to the corrected data, Safeway

sold approximately 8.1 million prescriptions through its discount programs during

that period.

The Relator next alleges that between October 1, 2006 and July 31, 2015,

Safeway sold approximately 14.2 million prescriptions through cash price overrides

or discount clubs at lower cash prices than the U&C prices its reported to Third Party

payers. Safeway disputes that Relator’s expert report provides the correct number

of prescriptions Safeway sold through cash price overrides or discount clubs during

that period.

The National Council for Prescription Drug Programs’ (“NCPDP”) definition

of “usual and customary charge” is, in part, the “Amount charged cash customers

for the prescription exclusive of sales tax or other amounts claimed” which

“represents the value that a pharmacist is willing to accept as their total

reimbursement for dispensing the product/service to a cash-paying customer.”

Price match transactions were cash sales where the Safeway pharmacist would

manually override the original price at the point of sale (cash register) to reduce it to

the competitor’s price.

On November 29, 2018, Bretta Grinsteinner, Assistant Vice President for

Network Management at PBM Prime Therapeutics, executed a Supplemental

Declaration providing context for the original declaration she signed at the request

of counsel for Safeway. Paragraph 2 of the Supplemental Declaration states as

follows:

As stated in paragraph 21 of the Declaration, Defendant’s counsel provided

the factual descriptions contained in the Declaration about Defendant’s

programs and practices. With respect to the statements in paragraphs 10 and

13-20 of the Declaration, I have no personal knowledge regarding the

accuracy of any representations made by Defendant or Defendant’s actual

price matching practices and membership programs. Plaintiff’s counsel has

offered to provide information and documents regarding Defendant’s price

matching practices and membership programs. Prime did not conduct a

review of Safeway’s price matching practices or membership programs during

the relevant time period and is not opining on Defendant’s compliance with

Usual & Customary (U&C) reporting regulations and requirements.

Accordingly, the Declaration should not be construed as a determination of

the propriety of Defendant’s U&C price reporting.

Safeway terminated all membership special pricing programs company-wide

effective July 15, 2015.

III. DISCUSSION

Safeway alleges that under Safeco, it cannot be liable under the FCA because

it reported usual and customary pricing in a way that was objectively reasonable and

the FCA prohibits only knowing violations of clearly established law. Before the

Seventh Circuit’s decision in Garbe, the law on usual and customary pricing was not

clearly established. Safeway asserts that its position is objectively reasonable and,

because reasonable minds could differ on whether membership discount and price-

matching programs affect usual and customary prices and there was no authoritative

guidance on that question, Safeway is entitled to summary judgment.

The Relator claims that Safeco is inapposite because the FCA already has a

knowledge standard, which is different from the “willful” standard discussed in

Safeco. Moreover, even assuming Safeco has any applicability, the Relator alleges

binding precedent establishes it is far narrower than Safeway represents.

Additionally, the Relator asserts that even if Safeway’s interpretation was

objectively reasonable, there was authoritative guidance which warned it away from

its discount program scheme.

Legal 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).

Safeco’s application to this case

(1)

Safeway states that its motion raises a pure question of law under Safeco—

whether Safeway violated the FCA by failing to treat its discount prices—provided

to cash-paying customers through member-only discount programs and price-

matching—as its usual and customary price for government programs.

The FCA provides for liability if a person “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. 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, Safeway alleges 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). In U.S. ex rel.

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

with approval and found 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.

Safeway contends 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. U.S. ex rel. Yannacopoulos v. General Dynamics, 652 F.3d 818, 836 (7th Cir.

2011) (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).

Given 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 because the Seventh Circuit has

approved the principle, the Court agrees with those circuit courts and finds that

Safeco’s standard applies to the FCA and its scienter requirement.

(2)

Citing U.S. ex rel. Berkowitz v. Automation Aids, Inc., 896 F.3d 834 (7th Cir.

2018), the Relator notes that scienter can be satisfied by showing that defendants

acted with reckless disregard if “defendants had reason to know of facts that would

lead a reasonable person to realize that the defendants were causing the submission

of a false claim or that the defendants failed to make a reasonable and prudent inquiry

into that possibility.” Id. at 842 (citation omitted). The relator in Berkowitz was

president of a company that held a supplies contract with the General Service

Administration (GSA). See id. at 838. The defendants were competitors who held

similar contracts. See id. GSA required that these vendors could “only offer and

sell U.S.-made or other designated country end products to governmental agencies.”

Id. The relator alleged defendants violated the FCA by making material false

statements and presenting false claims to the United States regarding the selling of

products from non-designated countries. See id. at 838-39. Although the relator

presented evidence of GSA notices directing some defendants to remove non-

compliant products from their inventories, the court found that relator had not

sufficiently alleged that defendants acted with reckless disregard of the truth or

falsity of the information provided to the government. See id. at 842-43. While

acknowledging the difficulty for a relator to allege with accuracy what occurs inside

the operations of a competitor, the Seventh Circuit stated that does not relieve the

relator of “his obligation to adequately plead all of the elements of an FCA claim or

to fully investigate his claim before filing a complaint.” Id. at 843. The Relator

asserts Berkowitz and other Seventh Circuit cases establish that the FCA scienter

standard is much broader than Safeway claims.

The Relator further asserts Safeco is about “willful” violations of the FCRA,

while this case is about “reckless disregard,” “deliberate indifference” or “actual

knowledge” of FCA violations. The statutory definitions of knowing and knowingly

“set[] a fairly low standard, making it easier for the United States to prevail in FCA

actions.” U.S. ex rel. Chandler v. Cook, County, Ill., 277 F.3d 969, 976 (7th Cir.

2002). However, Safeco suggests that the same standard should be used whether the

violation is alleged to be knowing or reckless. 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.” See Safeco, 551 U.S. at 70

n.20. Safeway states that the issue here is how to establish reckless disregard when

the law is unsettled. Safeco has provided guidance in that regard.

“To establish liability under the FCA, the defendant must have acted with

‘actual knowledge,’ or with ‘deliberate indifference’ or ‘reckless disregard’ to the

possibility that the submitted claim was false.” King-Vassel, 728 F.3d at 712.3 The

3 In King-Vassel the court determined that, based on factual determinations such as a mother’s

testimony she had provided the doctor-defendant with the child’s Medicaid information, never paid out of

pocket for the child’s appointments and based on the submission of paperwork suggesting the doctor-

defendant had been compensated by Medicaid for the child’s prescriptions, a reasonable jury could find

Seventh Circuit stated it had previously defined “reckless disregard” as “innocent

mistakes or negligence.” Id. The court noted other definitions of “reckless

disregard” and found that plaintiff would need only show that defendant had reason

to know of facts that would lead a reasonable person to realize he or she was causing

the submission of a false claim (based on a Black’s Law Dictionary definition) or

that defendant “failed to make a reasonable and prudent inquiry into that possibility”

(per a Senate Report definition). Id. at 713. King-Vassel addresses facts that the

actor knows or has reason to know, see id. at 713-14, not whether the applicable law

is established as in Safeco.

As Safeway explains, if there is more than one reasonable interpretation of the

applicable legal standard and no authoritative guidance, a party may think it knows

what the law requires. Absent authoritative guidance on the issue, however, a party

cannot know what is required or deliberately or recklessly ignore what is required.

Accordingly, if a defendant adopts one of multiple reasonable interpretations, its

“subjective intent” is legally irrelevant if there is “an interpretation that could

reasonably have found support in the courts.” Safeco, 511 U.S. at 70 n.20.

The Relator alleges there is ample evidence of Safeway’s actual knowledge

and evasion of its obligations. Between 2006 and 2015, Safeway received numerous

that plaintiff established the defendant recklessly disregarded the fact that the child had received Medicaid

assistance. See King-Vassel, 728 F.3d at 713.

notices from various PBMs and Medicaid programs referencing the contractual and

regulatory expectations concerning Safeway’s reporting of usual and customary

prices. In most cases, however, these notices are not authoritative guidance or are

not inconsistent with Safeway’s interpretation of usual and customary price.

The Relator further asserts the record shows that Safeway executives were

very aware of the ramifications of Walmart’s $4 generic discount program on its

business. They assessed those consequences in determining whether to match the

program, initially deciding that Safeway would not change its “usual and customary

price” for generic drugs. PBMs such as Medco and Coventry and state Medicaid

programs issued notices regarding definitions and/or explanations of usual and

customary prices. Moreover, Safeway’s Provider Manual in 2007 from Caremark

defined usual and customary price to “include any applicable discounts offered to

attract customers.”

Safeway introduced its Matching Competitor Generics Program in certain

divisions that did not adopt the $4 Generics Program. Unlike with the $4 Generics

Program, those discounted prices were not reported to the Third Party health

insurers. In April 2008, Safeway received notices from the States of Texas and

Nebraska reminding Safeway that discounted prices should be submitted as its usual

and customary price. The Relator contends that email records show that Safeway

executives wanted to keep Safeway’s manipulation of its usual and customary prices

secret. Safeway received notices from PBMs and Medicaid programs advising it to

comply with directions regarding its discount programs.

The Relator claims that in 2009, Safeway contemplated eliminating the $4

Generics program in order to save money in pursuit of the highest possible profits.

In June and July 2010, a Safeway executive stated that dropping the $4 Generics

program and going to a Loyalty Membership Program would have a positive

economic impact.

The Relator asserts it was not reasonable for Safeway to ignore and

deliberately circumvent the express notices it received warning of its obligation to

report its actual usual and customary price. Although Safeway executives knew that

its membership discounts and price-matching programs set its usual and customary

prices, they chose to ignore that in order to seek higher profits. Accordingly, the

Relator contends Safeco does not affect Safeway’s submission of false claims

“knowingly.”

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

however, Safeway could not actually know it was 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.

(3)

The Relator next claims binding precedent establishes Safeco is considerably

narrower than Safeway represents. Citing Van Straaten v. Shell Oil Prods. Co., 678

F.3d 486 (7th Cir. 2012), the Relator asserts Safeco is simply an analysis of

“willfulness” under the FCRA. The Seventh Circuit stated the Supreme Court

defined “willful” in Safeco and noted “only a reading that is ‘objectively

unreasonable’ can be deemed a ‘willful violation.’” Id. at 489. The statutory

standard in Safeco “concerns objective reasonableness, not anyone’s state of mind.”

Id. at 491. In Murray v. New Cingular Wireless Servs., Inc., 523 F.3d 719 (7th Cir.

2018), the Seventh Circuit applied Safeco in discussing “recklessness” under the

FCRA. See id. at 726. The court in Murray found that, while “[i]t would be reckless

today” to adopt the defendant’s position, “it was not reckless to act as [defendant]

did in 2003” before Safeco provided authoritative guidance. See id. at 727.

Moreover, the Relator asserts that since Safeco was decided, the Seventh

Circuit has never applied it in an FCA case and instead has articulated a different

and broader knowledge standard. However, the Supreme Court did not limit Safeco

to the FCRA, stating “that a common law term in a statute comes with a common

law meaning, absent anything pointing another way.” Safeco, 551 U.S. at 58. The

FCA does not point another way.

The Relator also cites a Court of Federal Claims case and two district court

cases in noting some courts have rejected the application of Safeco in FCA cases.

However, those cases are not persuasive given the appellate authority holding

otherwise.

The Relator alleges Safeway overextends Safeco’s discussion of

“recklessness” by arguing it is exempt from liability when there is any “objective”

reasonable interpretation of a legal obligation offered at any time, even if Safeway

did not adopt that interpretation or actually knew it was violating a legal obligation.

In Halo Elecs., Inc. v. Pulse Elecs., Inc., 136 S. Ct. 1923 (2016), a patent case,

the Relator claims the Supreme Court rejected the broad application of Safeco

advanced by Safeway in noting that “culpability is generally measured against the

knowledge of the actor at the time of the challenged conduct.” Id. at 1933. The

Court in Halo stated it had observed in Safeco that a person is reckless if he acts

“knowing or having reason to know of facts which would lead a reasonable man to

realize” his actions are unreasonably risky. Id. (quoting Safeco, 551 U.S. at 69).

The Court in Halo noted that in Safeco it determined the defendant did not recklessly

violate the FCRA because its interpretation had “a foundation in the statutory text”

and the defendant lacked authoritative guidance that might have persuaded it to take

a different view. Id. “Nothing in Safeco suggests that we should look to facts that

the defendant neither knew nor had reason to know at the time he acted.” Id. The

Relator contends the court of appeals cases relied on by Safeway for the proposition

that Safeco provides the controlling scienter standard for cases brought under the

FCA should be disregarded because the cases either pre-date Halo or do not address

it, instead relying on Safeco and its progeny’s interpretation of “reckless disregard”

without considering what Halo said about the issue.

As Safeway notes, the Supreme Court in Halo was considering § 284 of the

Patent Act, which afforded district courts the discretion to “increase the damages”

without specifying any “precise rule or formula” for doing so. See Halo, 136 S. Ct.

at 1931-32. Unlike the FCA and FCRA, § 284 sets no scienter standard for enhanced

patent damages. The standard is left to the discretion of the courts, which over the

years have established such damages should not “be meted out in a typical

infringement case, but are instead designed as a ‘punitive’ or ‘vindictive’ sanction

for egregious infringement behavior. . . . characteristic of a pirate.” Id. at 1932. The

Patent Act’s subjective intent standard turns on the concept of “bad-faith

infringement,” which the Court explained “is an independent basis for enhancing

patent damages.” See id. at 1933 n.*. The Court instructed courts to apply sound

legal principles and award enhanced damages under the Patent Act in “egregious

cases typified by willful misconduct.” Id. at 1934. Accordingly, Safeco and Halo

address different issues.

The Relator asserts Safeway’s reliance on the D.C. Circuit’s decision in

Purcell should be rejected because Purcell relies heavily on footnote 20 in Safeco

which the Relator claims the Supreme Court “walked back” in Halo. However, the

Court did not walk back that footnote except as it applies to patent cases. In another

footnote, the Court in Halo stated:

Respondents invoke a footnote in Safeco where we explained that in

considering whether there had been a knowing or reckless violation of

the Fair Credit Reporting Act, a showing of bad faith was not relevant

absent a showing of objective recklessness. But our precedents make

clear that “bad-faith infringement” is an independent basis for enhancing

patent damages.

Halo, 136 S. Ct. at 1933* (internal citations and citation omitted). The above

passage from Halo does not walk back Safeco’s objectively reasonable standard.

The first sentence reaffirms the standard and notes that a bad faith showing is not

necessary with respect to the FCRA unless there is objective recklessness. The

second sentence notes that “bad-faith infringement” is a consideration in

determining damages under the Patent Act.

Additionally, the statement in Halo regarding whether courts “should look to

facts that the defendant neither knew nor had reason to know,” id., does not affect

Safeco’s holding as to objectively reasonable interpretations of the law.

The Relator further claims Safeway’s cases citing Purcell are distinguishable

because those cases interpreted only the “reckless disregard” prong of the FCA’s

scienter standard or otherwise did not consider the other two prongs that provide

alternative ways of establishing scienter. The Relator contends the circuit court

cases cited by Safeway conflict with the Seventh Circuit cases interpreting

“knowing” violations of the FCA and ignore more recent Supreme Court precedent.

The Relator notes that Safeco concerns “willfully” failing to comply with the

FCRA, not a knowing violation of the FCA. Even if Safeco was applicable to

“reckless disregard” in this FCA case (one of three independent ways a defendant

can act knowingly), the Supreme Court’s decision in Halo makes clear that Safeco

does not mean what Safeway claims it does.

As Safeway notes, however, three courts of appeals in cases that post-date

Halo have applied Safeco to the FCA without invoking Halo. These include the

Third Circuit in Streck, the Eighth Circuit in Donegan and the Ninth Circuit in

McGrath. Accordingly, the Court concludes that Halo is limited to the patent

context. Halo did not apply Safeco and does not alter Safeco’s objectively

reasonable standard.

Based on the foregoing, this Court agrees with those courts of appeal that have

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.

Safeway and the Safeco standard

The Relator next contends Safeway cannot even meet the standard that it

advocates. And that Safeway misrepresents the case law and relies on “guidance”

that has nothing to do with the “usual and customary” price for pharmacy claims.

The Relator alleges Safeway misrepresents Relator’s counsels’ prior statements

concerning guidance in attempting to manufacture confusion over the meaning of

usual and customary price before the Seventh Circuit’s decision in Garbe.

Moreover, Safeway relies on facially irrelevant hospital and ambulance resources

that are taken out of context to manufacture support for its “objectively reasonable”

interpretation. The Relator further alleges the district court cases relied on by

Safeway are inapposite.

Safeway contends the Relator is simply attempting to avoid Safeco’s

objectively reasonable standard because summary judgment is required based on

what it claims was Safeway’s objectively reasonable position at the time. Moreover,

the cases Safeway cites are not offered as the only or best interpretation of the law,

but to confirm at the time of the alleged conduct that “[t]he statutory text and relevant

court and agency guidance allow[ed] for more than one reasonable interpretation.”

Safeco, 551 U.S. at 70. This Court in U.S. ex. rel. Schutte v. SuperValu, Inc., 2019

WL 3558483, (C.D. Ill. Aug. 5, 2019) implicitly recognized there was no court of

appeals guidance on the meaning of usual and customary price until May 2016, when

the Seventh Circuit issued its decision in Garbe.4 In determining whether a price-

match program required inclusion in usual and customary pricing, this Court relied

on Garbe, explaining that it “cannot disregard applicable Seventh Circuit

precedent,” and holding that “Garbe makes clear that Medicare Part D and Medicaid

are entitled to the benefit of the [U&C] price regularly offered by a pharmacy to its

cash customers.” Schutte, 2019 WL 3558483, at *6.

Safeway alleges Garbe came too late for it to be warned from its reasonable,

contrary interpretation. Safeway stopped all of the challenged programs no later

than July 2015, almost one year before Garbe was decided. Therefore, the guidance

from Garbe came after Safeway submitted all of the allegedly false claims in this

case and thus has no bearing on whether Safeway violated the FCA.

4 The first sentence of the relators’ motion for partial summary judgment in Schutte also suggests that

prior to Garbe, the way to determine usual and customary pricing with respect to a price match program

was not settled: “The Seventh Circuit opinion in United States ex rel. James Garbe definitively addressed,

as a matter of law, how usual and customary (“U&C”) prescription drug pricing is to be determined and

why the Medicare Part D and Medicaid programs are entitled to the benefit of discounted cash prices.”

Case No. 11-3290, D/E 164, at 1.

Safeway asserts that in pleadings in this case and Schutte, the Relator’s

counsel has alleged Garbe “clearly established” the meaning of usual and customary

pricing as it relates to price matching. The Relator characterized Safeway’s pre-

Garbe authority as “consist[ing] of random, facially irrelevant, non-binding OIG

materials (a letter, an advisory opinion and proposed non-final rules)” that, “[u]nlike

the controlling opinion issued by the Seventh Circuit in Garbe . . . do not even

address U&C pricing for prescription drugs and instead consider a different

provision of the U.S. Code not at issue here.” Schutte, D/E 315, at 5. Safeway

claims it is undisputed that no court of appeals had spoken on the issue at the time

of the conduct at issue.

The Relator claims Safeway misrepresents Relator’s counsel’s statements

regarding guidance as to the meaning of usual and customary prices pre-Garbe.

Moreover, the Relator alleges the “irrelevant, nonbinding OIG materials” relied on

by SuperValu in Schutte and Safeway here are not pertinent with respect to the

pharmacy transactions in this case.

Safeway alleges 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.’” U.S. ex. Rel. Garbe v. Kmart Corp., 73 F. Supp.2d 1002, 1014,

1017 (S.D. Ill. 2014). 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, Safeway claims the issue was one “as to which there is

substantial ground for difference of opinion.” 28 U.S.C. § 1292(b).

For these reasons, Safeway claims the Relator cannot, as a matter of law, point

to “sufficient record evidence that there was ‘guidance from the court of appeals’ or

relevant agency ‘that might have warned [Safeway] away from the view it took.’”

Purcell, 807 F.3d at 289 (quoting Safeco, 551 U.S. at 70).

Objective reasonableness of Safeway’s position

Safeway claims that, regardless of the current legal status after Garbe, its

position was objectively reasonable between 2006 and 2015. Prevailing industry

understanding considered the “usual and customary price” to be the undiscounted

retail price for cash-paying customers. Safeway’s usual and customary prices did

not include exceptions to those same prices through either (1) membership programs

that discounted prices only for customers who took affirmative steps to enroll, or (2)

customer-initiated and pharmacist-verified price matches of a local competitor’s

price. Safeway contends that, even if its interpretation of governing law was wrong,

it was still objectively reasonable under Safeco, which warrants summary judgment

in its favor.

(1)

Safeway further states that before, while and after its allegedly fraudulent

conduct took place, numerous courts have issued rulings either adopting Safeway’s

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

multiple interpretations. Safeway cites a number of district court decisions both

from within and outside the Seventh Circuit showing how different courts have

interpreted the phrase. See 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); Klaczak v. Consolidated Medical Transport, 458 F. Supp.2d

622, 679-80 (N.D. Ill. 2006) (crediting testimony that “there is generally no

requirement that a discount be offered to Medicare” and “there’s no absolute

guidelines that I’m aware of for setting that standard”); 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,” Safeway alleges it cannot 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. Based on the

aforementioned district court cases and the lack of any controlling authority at the

time, it would be difficult to describe Safeway’s pre-Garbe position as objectively

unreasonable.

Safeway claims that other entities shared it view. It states that the Academy

of Managed Care Pharmacy, a leading nonprofit professional organization of

pharmacists, defined “usual and customary” as the “undiscounted price that

individuals without drug coverage would pay at retail.” The Relator asserts Safeway

has mischaracterized one sentence out of an Academy of Managed Care Pharmacy

discussion of usual and customary price and presented it out of context, in failing to

explain that the “discount” clearly refers to contractual discounts, as opposed to the

cash price paid by someone without a negotiated discount. The “Glossary” in the

full version of the Academy of Managed Care Pharmacy document defines “usual

and customary price” as “The price for a given drug or service that a pharmacy would

charge a cash paying customer without the benefit of insurance provided through a

payer or intermediary with a contract with the pharmacy.”

Safeway notes the record includes affirmations from PBMs and other leading

pharmacies reaching the same conclusion. See Schutte, 2019 WL 3558483, at *1

(describing SuperValu and Albertsons’ price-match program); Garbe, 824 F.3d at

636 (describing Kmart’s discount program); 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”); Garbe, Case No. 15-1502, D/E 17 at 10 (stating Rite Aid’s position that

U&C “does not include reduced prices offered to members of drug-discount-

programs, because those reduced prices are available only to those individuals who

actually enroll in the program—not to the ‘general public’”).

Safeway also points to the Expert Report of Leslie Norwalk, an attorney and

former Acting Administrator for CMS who drafted some of the applicable

regulations, and states that “by submitting its own regular cash price as its U&C

price,” Safeway did not “cause[] any damage to the Medicare Part D. program.”

Moreover James Kevin Gorospe, a private consultant and former Chief of Pharmacy

Policy for California’s Medicaid program, notes that during the relevant time period

for its litigation, Safeway operated pharmacies in 22 states and participated in the

Medicaid programs of each state. Gorospe described the approaches of the 22 states

as follows: (1) states that clearly could not or did not enforce U&C definitions that

attempted to include individualized competitor price matching or membership-club

pricing; (2) states in which “U&C reporting did not require Safeway to report the

prices charged to patients pursuant to competitor price matching,” based on the

definition of U&C;5 and (3) “states that had State Plans, statutes, and/or regulations

that could be interpreted as requiring pharmacies engaged in a competitor price

matching program to report those matched prices to state Medicaid programs, at least

for some portion of the relevant time period.”

Safeway claims the agency guidance that did exist affirmatively supported its

view that membership-only and price-matching programs did not control usual and

customary prices. Instead of suggesting discounted prices are usual and customary

prices, CMS regulations have distinguished between the two. Safeway further

asserts other Medicare guidance documents show that discounts offered by a

pharmacy may fall below the cost of a prescription obtained under a Medicare

5 This second group includes 19 of the 22 states in which Safeway did business.

prescription drug plan. That could not happen if the mere offer of membership

discount programs or price matching supplanted the existing U&C price.

The Relator contends Safeway wrongly claims that CMS treated “discount

prices” and usual and customary price as mutually exclusive. However, CMS stated

that even discounts which are obtained through a “discount card” are considered

“usual and customary prices” when they are offered throughout the benefit year. See

Garbe, 824 F.3d at 644 (quoting CENTERS FOR MEDICARE & MEDICAID

SERVS., Chapter 14—Coordination of Benefits, in MEDICARE PRESCRIPTION

DRUG BENEFIT MANUAL 19 n.1 (2006), https://perma.cc/MW6A-H4P6).

Safeway’s contracts with PBMs are clear on this point and often defined usual

and customary price as including “applicable discounts,” though the Relator asserts

Safeway ignores them here because they contradict its litigation position. Safeway

was aware of its PBM contracts and CMS’s position on its discount programs at the

time it engaged in its FCA violations. The Relator further claims there is no evidence

that Safeway ever saw or considered the unrelated and inapplicable “guidance” cited

by its counsel in the instant motion.

Safeway claims enforcement guidance from the Department of Health &

Human Services Office of Inspector General (“HHS-OIG”) likewise instructed that

“usual” charges need not include “free or substantially reduced charges to (i)

uninsured patients or (ii) underinsured patients who are self-paying,” such as cash

customers like those using Safeway’s membership programs.

The Relator asserts Safeway’s reliance on hospital discounts is misplaced

because Safeway is not a hospital and its discount programs were offered to everyone

regardless of insurance status or any other distinguishing criteria. From 2011 to

2015, Safeway sold prescriptions at “discount” cash prices more often than it sold

them at its reported usual and customary price and in 2010 Safeway “discounted”

close to half of its cash prescription sales. Safeway notes it is irrelevant whether the

guidance concerned a pharmacy or a hospital, Medicare Part D or a state Medicaid

regulation, private pharmacy sales or sales to Medicare beneficiaries, or a discovery

order or a motion for summary judgment. The significance of any case or other

authority concerns its definition of usual and customary pricing and/or whether the

phrase is susceptible to multiple interpretations.

Safeway states the Government Accountability Office (“GAO”), in an official

report to Congress, explains that “usual and customary price” means the

“undiscounted price individuals without drug coverage would pay.” Safeway claims

GAO’s guidance excludes far more from usual and customary pricing than

Safeway’s more conservative interpretation, in that the government interpreted the

U&C to exclude all discounts while Safeway only excluded discounts through

programs that require affirmative enrollment.

The Relator claim Safeway’s reliance on a letter transmitting a GAO report

on usual and customary price trends that refers to U&C price as the “undiscounted

price individuals without drug coverage would pay” is misplaced. According to the

Relator, Safeway’s assertion that “[t]he government interpreted U&C to exclude all

discounts” is not a reasonable conclusion to draw from the cover letter.

The Relator states that the Court should disregard Safeway’s post hoc

interpretation of usual and customary price. The regulations, longstanding guidance,

industry understanding of usual and customary price and Safeway’s contracts

establish its routinely available lower cash discount program prices should have been

submitted as its usual and customary price.

The record does contain evidence that Safeway executives had concerns about

how to properly determine its usual and customary price. These individuals were

particularly worried about Safeway’s potential financial losses depending upon how

usual and customary price was defined and how many entities received the benefit

of that price. Some executives expressed views that questioned whether Safeway

could legally avoid reporting discount or price-match programs prices as its usual

and customary prices. However, these subjective views are not enough for the

conduct to be “knowingly” or “recklessly” illegal under the FCA. See Purcell, 807

F.3d at 287, 290.

Certainly, various Government Healthcare Programs and other third parties

expressed views regarding “usual and customary price” that conflicted with

Safeway’s interpretation. However, none of these emails or other documents

expressing other views constitute authoritative guidance. Moreover, they do not

address the objective reasonableness of Safeway’s position.

Before Garbe, there was guidance from CMS, HHS-OIG and the GAO in the

form of regulations, memoranda, manuals, enforcement, guidance official reports to

Congress supporting Safeway’s interpretation. In many cases, these materials

distinguished between discount and U&C prices. There was also authority that

supported the Relator’s interpretation that was eventually recognized in Garbe. To

establish an FCA violation, the Relator must show there was a clear rule forbidding

Safeway’s position at the time of the conduct. See, e.g., Yannacopoulos, 652 F.3d

at 836 (noting that “mere differences in interpretation growing out of a disputed legal

question” do not violate the FCA). Guidance documents alone would not be

sufficiently authoritative. If there are competing interpretations that are supported

by court decisions or other authority, then Safeway’s conduct would not be

objectively unreasonable under Safeco.

(2)

The Relator claims that, even if Safeway’s interpretation was objectively

reasonable, there existed controlling authority of which Safeway was aware in 2006

that directly warned Safeway away from its discount program scheme. Moreover,

Safeway misrepresents that it was not until Garbe that the definition of usual and

customary price was established. The Relator asserts the parties in Garbe agreed

what usual and customary price meant—they simply argued what the “general

public” was and the Seventh Circuit rejected Kmart’s attempt to hide its true cash

price. See Garbe, 824 F.3d at 643 (noting “Kmart argues that the ordinary meaning

of ‘general public’ excludes customers who join a discount program” and finding

“[o]ur reading of ‘general public’ is consistent with the regulatory structure that gave

rise to the ‘usual and customary’ price.”). Safeway disputes the Relator’s assertion

that any authoritative guidance—in the form of appellate court cases or agency

regulations—warned it away from its objectively reasonable interpretation of usual

and customary.

The Relator further claims neither the Seventh Circuit in Garbe nor this Court

in SuperValu originated the understanding of usual and customary price as the “cash

price offered to the general public,” even though the Relator claims Safeway acts as

if it was. In seeking partial summary judgment in SuperValu, the relators stated

Garbe “was no innovation.” See Case No. 11-3290, D/E 164, at 10. The Court’s

Opinion granting the Relator’s motion quotes Garbe discussing regulations and

cases interpreting usual and customary price. The Relator contends these authorities

have indicated for decades that usual and customary price is the cash price offered

to the general public. Safeway simply ignored the preexisting requirement that it

not charge the Government any more than the cash price offered to the general

public.

Safeway alleges the understanding of “cash price offered to the general

public” begs the question of what, precisely, “cash price offered to the general

public” is and must it include membership club prices or price matches? This Court

in Schutte based its decision on Garbe, “apply[ing] the law that was so clearly

established by the Seventh Circuit,” as the relators in Schutte alleged in their motion

for partial summary judgment. Schutte, 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 was

sufficiently debatable to be addressed.

This Court’s prior Opinion in Schutte on the relators’ motion for partial

summary judgment under Garbe noted the Seventh Circuit had considered certain

non-authoritative guidance documents bearing on the meaning of U&C and its

application to the meaning of discount programs. See Schutte, 2019 WL 3558483,

at *5-6.

Safeway alleges CMS’s informal guidance documents also supported its

interpretation. CMS in 2006 issued a non-binding Memorandum to Part D Sponsors

addressing Walmart’s $4 generic program. Safeway claims that, consistent with its

own understanding and practice, CMS explained that Walmart’s low prices on

specific generics were the U&C prices for those drugs. Safeway says that is why

when it offered a $4 Generics program of its own to all customers, it reported those

prices as its U&C. The logical extension of this is that discount programs unlike

Walmart’s—that offered “special” prices unavailable to the usual customer and not

adjudicated through the Plan’s systems—did not affect U&C. Safeway asserts that

although an informal guidance document like this would not have been sufficiently

“authoritative” to warn Safeway away from its interpretation, the fact that it actually

supported Safeway’s view bolsters its entitlement to summary judgment. See

Safeco, 551 U.S. at 70 & n.19.

The Relator claims that Safeway, like SuperValu before, ignores undeniably

authoritative instructions from CMS that directly addressed Safeway’s conduct and

warned it away from the path it chose. The Seventh Circuit and this Court noted,

“The CMS Manual has long noted that ‘where a pharmacy offers a lower price to its

customers throughout a benefit year’ the lower price is considered the ‘usual and

customary’ price rather than ‘a one-time ‘lower cash’ price,’ even where the cash

purchaser uses a discount card.” Garbe, 824 F.3d at 644 (quoting CENTERS FOR

MEDICARE & MEDICAID SERVS., Chapter 14—Coordination of Benefits, in

MEDICARE PRESCRIPTION DRUG BENEFIT MANUAL 19 n.1 (2006),

https://perma.cc/MW6A-H4P6); Schutte, 2019 WL 3558483, at *6 (C.D. Ill. Aug.

15, 2019) (same).

The Relator claims Safeway simply chose not to follow the authoritative

guidance that its discount programs were “considered the ‘usual and customary’

price rather than a ‘one-time “lower cash price.’” The court in Garbe stated, “The

‘usual and customary’ price requirement should not be frustrated by so flimsy a

device as Kmart’s ‘discount programs.’” Garbe, 824 F.3d at 645.

However, the CMS Manual does not constitute “authoritative guidance” under

Safeco, which provides that authoritative guidance documents must be “binding on”

an agency. Safeco, 561 U.S. at 70 & n.19 (noting that guidance documents “not

binding on” the agency are not sufficiently authoritative to warn defendants away).

Courts have noted that documents such as the CMS Manual, which did not go

through notice and comment, are not binding as a matter of law. See e.g., Clarian

Health West, LLC v. Hargan, 878 F.3d 346, 356 (D.C. Cir. 2017) (“the [Medicare

Claims Processing Manual] instructions bind neither CMS nor the Board in

adjudications”); see also Hoctor v. U.S. Dep’t. of Agric., (7th Cir. 1996) (agency

rules “intended to bind” must go through notice and comment); Baylor Cty. Hosp.

Dist. v. Price, 850 F.3d 257, 261-64 (5th Cir. 2017) (finding CMS State Operations

Manual persuasive but not having the force of law). Because the CMS Manual is

not binding, it does not constitute authoritative guidance.

The Relator claims that even if “reckless disregard” is the only way to

establish knowledge under the FCA, Safeway’s motion should still be rejected

because its price-match and discount programs were not an “objectively reasonable”

attempt to circumvent existing usual and customary price requirements, especially

given the contrary CMS directives and based on Safeway’s actual knowledge it was

doing something wrong.

However, the CMS “directives”

are not really directives—they were guidance documents but not authoritative

guidance. As the Court earlier noted, Safeco’s interpretation of “willfulness”

encompasses both “knowing” and “reckless” violations of a statute. See Safeco, 551

U.S. at 57. Thus, Safeco’s holding applies to recklessness and higher levels of intent.

Safeway did not violate the FCA by “act[ing] in reckless disregard of the truth or

falsity of the information,” see 31 U.S.C. § 3729(b)(1)(A), unless there was

authoritative guidance at the time that its interpretation of “usual and customary

price” was incorrect.

Safeway could not recklessly or knowingly violate the law between 2006 and

2015 when the law relating to the impact of membership discount and price matching

programs on usual and customary prices was not clear. Because there was no

authoritative guidance warning Safeway away from its interpretation of the law

before Garbe, the Court finds that Safeway’s position at that time was objectively

reasonable. Accordingly, Safeway is entitled to summary judgment under Safeco.

IV. CONCLUSION

For the reasons stated herein, this Court finds persuasive the decisions of the

Third, Eighth, Ninth and D.C. Circuits, which held that Safeco’s objective scienter

standard applies to the FCA. Between 2006 and 2015, there was some authority in

support of both parties on the issue of how membership discount and price matching

programs affect usual and customary prices. The Seventh Circuit in Garbe added

“the question whether the district court correctly identified the ‘usual and customary’

price” to the three issues certified by the district court. Garbe, 824 F.3d at 637.

Garbe definitively answered the question as to the impact of discount and price

matching programs on usual and customary price.

Before Garbe, however, there was not authoritative guidance that warned

Safeway away from what was an objectively reasonable position. Although

Safeway’s internal communications show it was concerned about whether

membership discount/price matching programs resulted in those prices becoming

the usual and customary price, there was no guidance from the courts of appeals or

binding authority from the applicable agency. Accordingly, the Relator cannot meet

Safeco’s objective scienter standard and thus cannot establish the FCA’s “knowing”

element as a matter of law. Safeway is entitled to summary judgment.

Ergo, the motion of Defendant Safeway, Inc. for summary judgment under

the Supreme Court’s Safeco decision [d/e 176] 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 are Dismissed without Prejudice.

The Clerk will terminate the Defendant’s motion for case management

procedures regarding related Safeco motions for summary judgment [d/e 180].

The Clerk will enter Judgment.

ENTER: June 12, 2020

FOR THE COURT:

/s/ Richard Mills

Richard Mills

United States District Judge