District Court Agrees ‘Reasonable Interpretation’ Standard in Safeco Decision Applies to FCA; United States District Court for the Central District of Illinois No. 11-cv-3406, U.S. and multiple states ex rel. Thomas Proctor v. Safeway Inc.


The district court granted the defendant’s motion for summary judgment in a qui tam case alleging it had knowingly failed to report accurate usual and customary prescription drug pricing to government healthcare programs. The relator alleged the defendant knowingly withheld discounted pricing, but the defendant argued there was no clear guidance on whether it was required to report certain discounts as usual and customary pricing. The court agreed, finding the guidance submitted by the parties contradictory; some supported the relator’s position and some supported the defendant’s interpretation. The court also found the guidance cited by the relator was not authoritative, because it had not gone through the notice and comment process, and therefore it was not binding on the agency or defendant. The court also agreed that the Supreme Court’s decision in Safeco applied to the FCA. Because the defendant’s interpretation of the reporting rules was reasonable and because there was no authoritative guidance to the contrary in place at the time of the alleged misconduct, the court held the defendant could not be held liable for FCA violations.

Safeway Inc. moved for summary judgment in a qui tam case alleging it failed to accurately report its usual and customary prices for pharmaceuticals, arguing that summary judgment was warranted based on the Supreme Court’s Safeco’s decision.

Generally, the relator alleged that from October 2005 to July 2015, Safeway provided significant pricing discounts to enough customers that those lower prices should be considered its usual and customary pricing, which the company is required to report to third-party health insurers that require it, including the federal government.

Safeway challenged the very premise of the complaint, arguing 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 disputed that representation, alleging that the contracts are irrelevant because they were not referenced when Safeway set the reported list prices that were reported as usual and customary prices.

Safeway argued that the industry definition of usual and customary means the retail cash price 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. For state Medicaid programs, Safeway explained that programs will pay the lowest of various prices, including the U&C price, which Safeway argued is the price charged to a majority of a specific pharmacy’s cash-paying population. The relator argued that the U&C price is generally understood to be the cash price actually charged to the general public and disputed that there is a “majority of customers” requirement for U&C price.

Safeway argued that its contracts with third-party pharmacy benefit managers 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. The defendant also argued that CMS is statutorily precluded from setting any of the terms of those contracts under Medicare Part D. The relator also disputed these contentions.

Safeway argued that PBMs understood that usual and customary pricing did not include discounts that are only available to customers who have taken affirmative action to become eligible for the reduced prices. This definition excluded membership discounts or price matching programs. The relator disputed all these contentions and argued that Safeway knew its price match program would impact its U&C pricing.

Central to the case was Safeway’s attempt to match $4 prescription drug pricing offered by Walmart. While the company did not adopt a blanket $4 price for certain generic drugs, it allowed pharmacies to offer this pricing to regular customers who requested it. Pharmacies were directed not to bill third-party payers for any $4 prescriptions and Safeway did not put the policy in writing.

According to Safeway, because customers did not have to request the $4 pricing from Walmart, that price became Walmart’s usual and customary pricing for the covered drugs. The relator noted that Walmart accurately reported these prices, while Safeway did not.

In 2006, CMS issued a “Lower Cash Price Policy,” which allowed beneficiaries to purchase lower cost prescriptions with cash, rather than using their Medicare card, and to submit the amount for credit against their total annual out of pocket costs. Also in 2006, a PBM representative sent an email to Safeway representatives reminding them that 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, including competitor price matches. In January 2007, another PBM defined U&C as the lowest price a pharmacy would charge to a particular customer if that customer were paying cash for the prescription, including any discounts. Several states issued similar guidance.

In March 2008, Safeway introduced its own $4 price for generic drugs. In April 2008, the Safeway divisions offering the $4 program reported those prices as their usual and customary prices. Safeway also launched a program allowing non-participating divisions to match competitor’s generic drug pricing. Safeway discontinued the program in 2010.

The relator argued that between October 1, 2006 and July 31, 2015, Safeway overrode the higher usual and customary prices it reported to third-party payers in at least 5,626,027 cash transactions. Safeway disputes this allegation, claiming that the relator’s expert witness incorrectly identified, and vastly overstated, the number of price override transactions Safeway reported to third parties during this period.

The relator also alleged that Safeway pharmacies would give a price match to anyone who requested one, while Safeway argued that price matching was available at the pharmacist’s discretion and only if specific circumstances were present, such as to prevent the loss of a case customer. The relator alleged Safeway had no such limitations.

The relator next alleged that Safeway’s price match cash prices were not reported as its usual and customary price to health insurers that required them. According to Safeway, 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. Under the official program, Safeway required customers to pay cash and fill out a program enrollment form to obtain $4 pricing, so it did not consider this price a usual and customary price.

Safeway contended that price-matched prescriptions amounted to, at most, just 1.4 percent of its prescriptions during the relevant time period and only 17.6 percent of total cash sales. The relator argued that Safeway based this calculation on a comparison of drugs that were routinely price-matched to drugs that were never price-matched and also relied on incomplete or erroneous data.

The relator also argued that Safeway’s auto-refill program would automatically price match, and therefore the customer did not have to make a special request for a lower price, undermining Safeway’s argument that its price matching offers represented an ad hoc price that did not alter Safeway’s list-price pricing formulas or retail prices for the other relevant drugs. The relator also asserted that customers did not have to opt-in to a loyalty program to receive the discounts in the first place.

Overall, the relator alleged that between January 2008 and July 2015, Safeway sold approximately 8.5 million prescriptions through its discount clubs at lower cash prices than the usual and customary prices reported to third party payers. Also, the relator alleged that between October 2006 and July 2015, Safeway sold approximately 14.2 million prescriptions through cash price overrides or discount clubs at lower cash prices than the U&C prices it reported. Safeway argued these numbers were overstated.

In its motion for summary judgment, Safeway argued that under the Supreme Court’s decision in 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. Safeway asserted that its position was 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 argued that Safeco was 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 argued that the ruling is far narrower than Safeway assumed. Further, the relator argued that even if Safeway’s interpretation was objectively reasonable, there was authoritative guidance that warned it away from its discount program scheme.

The court began with a consideration of the Safeco decision. In Safeco, the Supreme Court examined the scienter requirement of the Fair Credit Reporting Act. In short, where a defendant’s reading of a statute is objectively reasonable, its conduct could not meet the scienter requirement. The court reasoned Congress did not intend to make a defendant liable for knowing or reckless violations, if the defendant followed a reasonable interpretation of a statute or regulation. The court also found it significant that the defendant did not have the benefit of guidance from the courts of appeals or the government that might have warned it away from its interpretation.

While the Seventh Circuit has not addressed whether Safeco’s standard with respect to the FCRA applies to the FCA and its scienter requirement, Safeway argued that every court of appeals to consider the issue held that it does. 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 agreed that Safeco’s standard applies to the FCA and its scienter requirement.

Arguing against that conclusion, the relator noted that scienter can be satisfied by showing that defendants acted with reckless disregard if the 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. The relator also argued that Safeco is about “willful” violations of the FCRA, while this case is about “reckless disregard,” “deliberate indifference” or “actual knowledge” of FCA violations. According to the relator, the statutory definitions of knowing and knowingly set a fairly low standard, making it easier for the United States to prevail in FCA actions.

However, the court noted that Safeco suggests that the same standard should be used whether the violation is alleged to be knowing or reckless. The court found it illogical to find a defendant knowingly or recklessly violated a statute when the text and relevant court and agency guidance allow for more than one reasonable interpretation.

The relator alleged there is ample evidence of Safeway’s actual knowledge and evasion of its obligations. Between 2006 and 2015, Safeway received numerous notices from various PBMs and Medicaid programs referencing the contractual and regulatory expectations concerning Safeway’s reporting of usual and customary prices. However, the court found that in most cases, these notices were not authoritative guidance or were not inconsistent with Safeway’s interpretation of usual and customary price.

The relator also argued that Safeway executives were very aware of the ramifications of Walmart’s $4 generic discount program on its business, and considered those consequences when determining their own pricing strategy. The relator noted that several states issued direct reminders stating that discounted prices should be submitted as the usual and customary price. According to the relator, Safeway’s email records show that executives were aware of the implications of these notices and knowingly chose not to report accurate U&C pricing.

However, the court explained that when an objectively reasonable interpretation of the law supports a defendant’s conduct, the defendant could not know it was violating a legal obligation. Otherwise, two entities could engage in the same conduct on the same facts and be subject to different liability, based on how they subjectively interpret the law. A strict interpretation of the FCA’s knowledge requirement serves to protect a party from liability due to innocent mistakes and avoids the potential due process problems posed by penalizing an entity for violation a rule without first providing adequate notice of the rule. In order for conduct to be knowingly or recklessly illegal, there must be an authoritative interpretation of the rule, which the court found did not exist here.

Next, the relator argued that Safeco is considerably narrower than Safeway maintained, because the ruling was simply an analysis of “willfulness” under the FCRA. The relator also argued the Seventh Circuit had never applied Safeco in an FCA case and instead has articulated a different and broader knowledge standard. However, the district court noted 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, unless other guidance states otherwise. The court held the FCA contains no such language.

In sum, the court 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.

Next, the relator argued that Safeway cannot meet its own standard and that the defendant misrepresented the case law and relied on guidance that has nothing to do with the U&C price for pharmacy claims. The relator also argued Safeway relied on irrelevant hospital and ambulance resources that are taken out of context to manufacture support for its “objectively reasonable” interpretation.

In response, Safeway maintained that the case it cited were not offered as the only or best interpretation of the law, but to confirm at the time of the alleged conduct that the statutory text and relevant court and agency guidance allowed for more than one reasonable interpretation. The court agreed that 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, which was decided after the timeline of the alleged misconduct in this case.

Safeway maintained that Garbe confirmed that the question of U&C pricing at issue was unconfirmed at the time it engaged in its price matching program, and therefore its position from 2006 to 2015 was objectively reasonable. Prevailing industry understanding considered the “usual and customary price” to be the undiscounted retail price for cash-paying customers. Even if its interpretation was wrong, Safeway maintained it was reasonable. The defendant submitted statements from CMS officials and agency guidance supporting its view, including a report from GAO and enforcement guidance from the HHS Office of Inspector General. Safeway also cited court rulings that either adopted its position or acknowledged that the phrase “usual and customary” is susceptible to multiple interpretations.

Based on these authorities, Safeway maintained it could not be considered a knowing and reckless violator. The court agreed it would be difficult to describe Safeway’s pre-Garbe position as objectively unreasonable.

The relator argued that there was no evidence Safeway considered the agency guidance quoted in its defense and that its arguments ignore the fact that its PBM contracts often defined U&C pricing as including applicable discounts. The relator also cited CMS guidance stating that even discounts which are obtained through a “discount card” are considered “usual and customary prices” when they are offered throughout the benefit year. The relator urged the court to ignore Safeway’s post hoc interpretations and argued that the regulations, longstanding guidance, industry understanding of usual and customary price and Safeway’s contracts all established that the routinely-available discount program prices should have been submitted as its usual and customary price.

The court agreed that the evidence showed Safeway executives were concerned about the financial impact of reporting discount pricing as its usual and customary pricing. However, their subjective views were not enough for the conduct to be “knowingly” or “recklessly” illegal under the FCA. While some government and third party healthcare programs offered guidance hat conflicted with Safeway’s interpretation, the court found that none of the emails or policy documents constituted authoritative guidance. Moreover, they did not address the objective reasonableness of Safeway’s position.

Generally, the court found the pre-Garbe guidance contradictory. Before Garbe, there was guidance from CMS, HHS-OIG and GAO 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. The court explained that the relator had to show there was a clear rule forbidding Safeway’s position, in place at the time of its conduct, to establish an FCA violation. Where there were competing interpretations supported by court decisions or other authority, then Safeway’s conduct would not be objectively unreasonable under Safeco.

Still, the relator argued that Safeway was aware of controlling authority that directly warned it away from its discount program scheme. The relator also argued that a definition of U&C pricing was established before Garbe, because the parties in that case had agreed on a definition, but simply argued about the meaning of “general public.” The relator maintained that various authorities had long established that usual and customary price is the cash price offered to the general public, and that Safeway simply ignored the preexisting requirement that it not charge the government any more than the cash price offered to the general public.

Again, Safeway argued these definitions are open to reasonable alternative interpretations of the meaning of “case price offered to the general public” and whether that must include discounts and price matching. Safeway cited again to informal agency guidance supporting its interpretation. The relator argued Safeway ignored authoritative CMS instructions to the contrary.

The court held that the CMS Manual does not constitute “authoritative guidance” under Safeco, which held that authoritative guidance documents must be binding on an agency, because the manual did not go through notice and comment. Further, while various CMS “directives” were guidance documents, they were not authoritative guidance. The court held Safeway could not violate the FCA by acting in reckless disregard, 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 found that Safeway’s position at that time was objectively reasonable, and granted the motion for summary judgment.

FCA - Proctor v. Safeway Inc