Thomas Proctor v. Safeway, Inc. ( 2022 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20‐3425
UNITED STATES OF AMERICA ex rel.
THOMAS PROCTOR,
Plaintiff‐Appellant,
v.
SAFEWAY, INC.,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Central District of Illinois.
No. 3:11‐cv‐3406 — Richard Mills, Judge.
____________________
ARGUED SEPTEMBER 9, 2021 — DECIDED APRIL 5, 2022
____________________
Before KANNE, HAMILTON, and ST. EVE, Circuit Judges.
ST. EVE, Circuit Judge. Relator Thomas Proctor alleges that
Safeway, Inc. knowingly submitted false claims to govern‐
ment health programs when it reported its “retail” price for
certain drugs as its “usual and customary” price, even though
many customers paid much less than the retail price. As a re‐
sult, the government effectively subsidized Safeway’s low
prices for cash customers by reimbursing Safeway based on
2 No. 20‐3425
the higher retail price. The district court granted Safeway’s
motion for summary judgment, concluding that Safeway’s
pricing practices were “objectively reasonable” and no “au‐
thoritative guidance” cautioned against its interpretation of
the relevant Medicare and Medicaid regulations.
While this case was pending before the district court, it
was an open question in this circuit whether the Supreme
Court’s decision in Safeco Ins. Co. of America v. Burr, 551 U.S.
47 (2007) applied to the False Claims Act (“FCA”). In United
States ex. rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir.
2021), however, we answered that question and held that
Safeco does apply to the FCA’s scienter requirement. In other
words, a defendant does not act with reckless disregard as
long as its interpretation of the relevant statute or regulation
was objectively reasonable and no authoritative guidance
warned the defendant away from that interpretation. We also
clarified that a failure to satisfy the Safeco standard for reckless
disregard precludes liability under the FCA’s actual
knowledge and deliberate indifference provisions, which con‐
cern higher degrees of culpability.
The central remaining question in this appeal is whether a
footnote in a Centers for Medicare and Medicaid (“CMS”)
manual constitutes “authoritative guidance” under Safeco. We
hold that it does not. CMS can (and did) revise the manual at
any time, and a single footnote in a lengthy manual does not
support treble damages liability in this case. The other sources
of guidance Relator has identified are unpersuasive because
they do not come from the agency. Accordingly, we affirm the
district court’s grant of summary judgment in favor of
Safeway.
No. 20‐3425 3
I. Background
This case requires us to consider yet again whether a de‐
fendant properly reported its usual and customary (“U&C”)
prices for prescription drugs when seeking reimbursement
from government programs, including Medicare Part D and
Medicaid. Before setting out the facts of this case, we briefly
survey the regulatory landscape.
Medicare Part D is a federal prescription‐drug benefit ad‐
ministered by the Department of Health and Human Services
through the CMS. CMS awards contracts to plan “sponsors,”
or private insurance companies. 42 C.F.R. § 423.505. Sponsors
contract with middlemen known as Pharmacy Benefit Man‐
agers (“PBMs”) to administer an insurance plan’s prescrip‐
tion‐drug benefits. 42 U.S.C. § 1395w‐112(b)(1); 42 C.F.R.
§ 423.505(i). In turn, PBMs negotiate and contract with phar‐
macies to set prescription drug prices, process claims, and re‐
imburse pharmacies. PBM contracts specify how pharmacies
are reimbursed for prescription drugs. See 42 U.S.C. § 1395w‐
111(i). Notably, the government makes direct payments only
to plan sponsors, not PBMs or pharmacies.
Medicaid is a partnership between the federal government
and the states that provides healthcare coverage to economi‐
cally disadvantaged individuals. State Medicaid programs set
their own reimbursement criteria for prescription‐drug
claims, but CMS partially funds and oversees the programs.
The parties agree that the U&C price of a prescription drug
generally refers to “the cash price charged to the general pub‐
lic.” They disagree as to what “the general public” means and
whether Safeway correctly reported its U&C prices when
seeking reimbursement under Medicare Part D and Medicaid.
4 No. 20‐3425
We held in United States ex rel. Garbe v. Kmart Corp., 824 F.3d
632 (7th Cir. 2016) that discount‐program prices for prescrip‐
tion drugs were offered to “the general public,” so it is now
settled in this circuit that pharmacies should report those
prices as U&C. Id. at 645. Crucially, however, the relevant con‐
duct in this case preceded our decision in Garbe.
Prior to Garbe, federal regulations did not make clear
whether the U&C price for a particular drug includes lower
prices offered through pharmacy discount programs. The rel‐
evant Medicaid regulation provides that agency payments for
prescription drugs “must not exceed, in the aggregate,” phar‐
macies’ “usual and customary charges to the general public.”
42 C.F.R. § 447.512(b). The regulation does not define “to the
general public.” Id. § 447.512(b)(2). Medicare regulations, by
comparison, define U&C as the price “a customer who does
not have any form of prescription drug coverage for a covered
Part D drug” pays. 42 C.F.R. § 423.100. But PBMs are free to
adopt alternative definitions of U&C with pharmacies by con‐
tract. See 42 U.S.C. § 1395w‐111(i). Another Medicare regula‐
tion requires plan sponsors to include terms in their contracts
with PBMs and other downstream entities stipulating that
those entities “must comply with all applicable Federal laws,
regulations, and CMS instructions.” 42 C.F.R.
§ 423.505(i)(4)(iv). We need not decide whether the Medicaid
definition of U&C applies to Safeway’s contracts with
PBMs—for purposes of reimbursement under Medicare
Part D—because the parties have stipulated that U&C means
“the cash price charged to the general public.”
A. Factual Background
The following facts are undisputed unless otherwise
noted. Safeway is a nationwide grocery chain that operates
No. 20‐3425 5
pharmacies in many of its stores. Safeway pharmacies serve
customers with commercial insurance plans and government
health programs, including Medicare Part D, TRICARE, the
Federal Employee Health Benefits Program, and state Medi‐
caid programs. In 2006, the year Medicare Part D went into
effect, Wal‐Mart introduced a low‐priced generics program in
which all pharmacy customers could receive a 30‐day supply
of popular generic drugs for just $4. Wal‐Mart reported these
prices as its U&C prices, meaning that it received a lower re‐
imbursement rate from PBMs.
Pharmacies like Safeway developed a variety of strategies
to compete with Wal‐Mart. Between 2006 and 2015, Safeway
offered three discount programs for prescription drugs at var‐
ious times and in various locations around the country. The
differences among the three programs affect our analysis of
their legality under the FCA, so we discuss them in some de‐
tail below.
1. Individual Price Matching
Between 2006 and 2015, Safeway pharmacists had discre‐
tion to match competitors’ lower prices after verifying the
published or advertised prices of certain drugs. To receive a
discount, Safeway customers needed to request a price match,
and the lower price applied only to the transaction on the date
requested. After verifying a competitor’s price, the pharma‐
cist would manually override the original price at the point of
sale. Safeway did not report price matches as the U&C price
for a given drug. There is no evidence that participating phar‐
macies advertised or otherwise publicized the existence of
price matching. On July 15, 2015, Safeway discontinued price
matching in all of its stores.
6 No. 20‐3425
2. The $4 Generics Program
Beginning in March 2008, Safeway offered certain generic
prescription drugs for $4. The “$4 Generics Program” was
limited to four of Safeway’s geographic divisions, as well as
five pharmacies in its Denver division. The specific drugs
available at this rate changed over time, but when Safeway
listed a generic drug on its “formulary,” customers could re‐
ceive a 30‐day supply of that drug for $4, a 60‐day supply for
$8, and a 90‐day supply for $12. All customers were eligible
for these prices, including cash customers, participants in
government health programs, and customers with private in‐
surance. The parties agree that Safeway reported $4 as the
U&C price for drugs on its formulary at locations participat‐
ing in the $4 Generics Program. Safeway advertised the avail‐
ability of its $4 generics formulary until July 2010, when it dis‐
continued the program.
3. Discount Club Programs
Beginning in March 2008, Safeway introduced its Match‐
ing Competitor Generic Program (“MCGP”) in five other ge‐
ographic divisions. The MCGP offered certain generic drugs
for the same price as the $4 Generics Program: $4 for a 30‐day
supply, $8 for a 60‐day supply, and $12 for a 90‐day supply.1
The primary difference between the two programs was that
MCGP prices were not offered to all customers automatically.
To receive discounted prices, customers needed to pay in cash
(without using insurance) and fill out an enrollment form.
There was no fee to enroll, and the enrollment form collected
1If a drug was not included on Safeway’s formulary, MCGP members re‐
ceived 10% off of branded drug prescriptions and 20% off of generic drug
prescriptions.
No. 20‐3425 7
information that Safeway often already had, including a cus‐
tomer’s address, birthdate, dependents, and phone number.
Unlike Safeway divisions participating in the $4 Generics Pro‐
gram, divisions participating in the MCGP did not report
these prices as their U&C prices. Customers enrolled in the
MCGP could also obtain a lower price by requesting that Safe‐
way match a competitor’s price.
With one exception not relevant to this appeal,2 Safeway
terminated the MCGP program in July 2010 and replaced it in
all divisions with the Loyalty Membership Program (“LMP”).
The LMP was functionally identical to the MCGP: all a cus‐
tomer needed to do in order to receive a discount was pay in
cash and fill out an enrollment form. There was no enrollment
fee, and the enrollment form provided no meaningful infor‐
mation to Safeway. Once again, Safeway did not report prices
offered through this program as its U&C prices. Safeway di‐
visions participating in the MCGP and LMP advertised the
benefits of the programs to varying degrees. Safeway discon‐
tinued the LMP on July 15, 2015, the same day it discontinued
its individual price‐matching program.
***
Safeway concedes that, had it reported its discounted drug
prices from the MCGP and LMP programs as its U&C prices,
it would have lost revenue. In fact, one Safeway executive es‐
timated that Safeway would have lost $65 million annually if
it had adopted Wal‐Mart’s $4 generics program nationwide.3
2 The MCGP continued in Safeway’s Northern California division be‐
tween March 2010 and July 15, 2015.
3Safeway disputes the accuracy of this estimate but does not appear to
dispute that a Safeway employee provided the estimate in January 2008.
8 No. 20‐3425
Relator’s expert estimated that Safeway received $127 million
more in reimbursements from government health programs
than it would have if it reported its price‐match and discount‐
club prices as its U&C prices.
The parties dispute whether the industry understanding
of U&C at the time included “retail prices.” Safeway contends
that during the relevant period, membership‐club transac‐
tions accounted for just 26.9% of its total cash sales. Because
most cash customers did not receive a discount, Safeway in‐
sists its discounted prices could not have been its U&C prices.
Relator responds that between 2011 and 2015, discounted
sales accounted for a majority of Safeway’s total cash sales.
And for the top 20 generic drugs sold annually, Safeway sold
the vast majority of those drugs at discounted rates. For ex‐
ample, in 2009, 65% of Safeway’s cash sales for top 20 generics
were at discounted rates. By 2014, 88% of cash sales for top 20
generics were at discounted rates. Relator contends these sta‐
tistics reveal that Safeway’s discounted rates were actually its
U&C prices.
Meanwhile, Safeway received a variety of communica‐
tions from CMS, state Medicaid programs, and PBMs about
U&C price reporting. On October 11, 2006, CMS issued a
“Lower Cash Price Policy” memorandum to “All Part D
Sponsors” from the Director of the Medicare Drug Benefit
Group. The memorandum included a revised answer to a
question on the Frequently Asked Questions section of CMS’s
website. A single footnote in the memorandum provided the
following example:
We note that in cases where a pharmacy offers a lower
price to its customers throughout a benefit year, this
would not constitute a “lower cash price” situation that
No. 20‐3425 9
is the subject of this guidance. For example, Wal‐Mart
recently introduced a program offering a reduced price
for certain generics to its customers. The low Wal‐Mart
price on these specific generic drugs is considered Wal‐
Mart’s “usual and customary” price, and is not consid‐
ered a one‐time “lower cash” price. Part D sponsors
consider this lower amount to be “usual and custom‐
ary” and will reimburse Wal‐Mart on the basis of this
price. To illustrate, suppose a Plan’s usual negotiated
price for a specific drug is $10 with a beneficiary copay
of 25% for a generic drug. Suppose Wal‐Mart offers the
same generic drug throughout the benefit for $4. The
Plan considers the $4 to take the place of the $10 nego‐
tiated price. The $4 is not considered a lower cash
price, because it is not a one‐time special price. The
Plan will adjudicate Wal‐Mart’s claim for $4 and the
beneficiary will pay only a $1 copay, rather than a $2.50
copay. This means that both the Plan and the benefi‐
ciary are benefiting from the Wal‐Mart “usual and cus‐
tomary” price, and the discounted Wal‐Mart price of
the drug is actually offered with the Plan’s Part D ben‐
efit design. Therefore, the beneficiary can access this
discount at any point in the benefit year, the claim will
be adjudicated through the Plan’s systems, and the
beneficiary will not need to send documentation to the
plan to have the lower cash price count toward
TrOOP.4
4 “TrOOP” stands for true out‐of‐pocket cost, meaning the amount a Med‐
icare Part D beneficiary must pay before catastrophic coverage kicks in.
See David Slaughter, Coordination of Benefits Handbook ¶ 516 Medicare Part
D – Voluntary Prescription Drug Program (2021).
10 No. 20‐3425
On December 15, 2006, CMS incorporated this footnote ver‐
batim into its Medicare Prescription Drug Benefit Manual (the
“CMS Manual”).5 A Safeway executive circulated this version
of the CMS Manual to pharmacy staff in an email four days
later.
Relator notes that several PBMs also communicated with
Safeway about the meaning of U&C. On October 27, 2006, for
example, Medco sent Safeway a reminder that “by contract,”
a pharmacy’s U&C price is “the lowest net price a cash patient
would have paid on the day that the prescription was dis‐
pensed inclusive of all applicable discounts. These discounts
include … [a] competitor’s matched price, or other discounts
offered [to] customers.”6 Similarly, in January 2007, Coventry
Health Care sent Safeway a memo regarding its interpretation
of U&C, explaining that Safeway needed to include “any ap‐
plicable discounts” in its U&C pricing. Caremark’s February
2007 provider manual echoed this understanding of U&C.7
Around the same time, some state Medicaid programs ex‐
pressed a similar interpretation of U&C. Effective February 1,
2007, Oregon Medicaid amended its model contract for
5 Centers for Medicare & Medicaid Services, Chapter 14—Coordination of
Benefits, in Medicare Prescription Drug Benefit Manual 19 n.1 (2006),
https://perma.cc/MW6AH4P6.
6 Relator did not provide a copy of Safeway’s contract with Medco until it
moved for leave to supplement the record under Fed. R. Civ. P. 59(e), after
the district court had entered summary judgment in favor of Safeway.
7 Safeway notes that, in a separate lawsuit, a Caremark executive declared
that Caremark did not include membership club prices as “applicable dis‐
counts” for purposes of U&C. Safeway also points to its 2010 contract with
Express Scripts, another PBM, which defined U&C to include a $4 generics
program but excluded price matching.
No. 20‐3425 11
pharmacies to make clear that U&C must include any dis‐
counts. In April 2008, Texas Medicaid issued an “Rx Update”
notifying pharmacies that they should report discounted
prices as U&C prices. And in September 2008, Colorado’s De‐
partment of Health Care Policy and Financing issued a “Pro‐
vider Bulletin” stating that discount prices must be reported
as U&C prices for Medicaid claims.8
Before 2016, no federal court of appeals had weighed in on
the proper interpretation of “usual and customary.” As noted
above, that changed with this court’s decision in Garbe. Like
Safeway, Kmart created a discount club for generic drugs not
long after the Medicare Part D program went into effect. Un‐
like Safeway, Kmart charged discounted prices to “nearly all
its cash customers,” in large part because barriers to joining
were “almost nonexistent.” Garbe, 824 F.3d at 636, 643. A cus‐
tomer could join immediately by paying a onetime $10 fee. Id.
at 643. This court concluded that “[r]egulations related to
‘usual and customary’ price should be read to ensure that
where the pharmacy regularly offers a price to its cash pur‐
chasers of a particular drug, Medicare Part D receives the ben‐
efit of that deal.” Id. at 644. In passing, we observed that the
CMS Manual footnote quoted above supported this interpre‐
tation. Id. (citing CMS Manual at 19 n.1). By the time we de‐
cided Garbe, however, Safeway had already discontinued its
membership and price‐matching programs.
B. Procedural Background
Relator filed this qui tam suit under seal on behalf of the
United States, the District of Columbia, and ten states. The
8 Note that Relator brought this suit on behalf of Colorado and nine other
states, but not Oregon or Texas.
12 No. 20‐3425
federal government declined to intervene, and the case was
unsealed in 2015.9 The district court ultimately granted Safe‐
way’s motion for summary judgment, relying on the Supreme
Court’s decision in Safeco. Relator moved for reconsideration
under Rule 59(e) and requested leave to supplement the rec‐
ord with PBM contract terms defining U&C price. The district
court denied both requests, and Relator timely appealed.
After the parties submitted their briefs on appeal, this
court announced its decision in United States ex rel. Schutte v.
SuperValu, Inc., 9 F.4th 455 (7th Cir. 2021). There, we held that
Safeco applied to the FCA’s scienter provision, meaning that a
defendant does not act with “reckless disregard” as long as its
interpretation of the relevant statute or regulation is “objec‐
tively reasonable” and no “authoritative guidance” warned it
away from that interpretation. Id. at 465. In doing so, we
joined every other circuit to address the issue. Id. (citing
United States ex rel. Streck v. Allergan, 746 F. Appʹx 101, 106 (3d
Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690
F. Appʹx 551, 552 (9th Cir. 2017); United States ex rel. Donegan
v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th
Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d
281, 284 (D.C. Cir. 2015)); see also United States ex rel. Sheldon v.
Allergan Sales, LLC, 24 F.4th 340, 344 (4th Cir. 2022) (joining
consensus).10 Before oral argument in this case, we asked the
parties for supplemental briefing in response to Schutte.
9 Colorado also declined to intervene, and the district court dismissed
claims asserted on its behalf with prejudice.
10 We decline the dissent’s call to revisit our decision in Schutte. No court
of appeals majority opinion—before or after Schutte—has agreed with the
dissent’s position that Safeco does not apply to the FCA.
No. 20‐3425 13
II. Discussion
We review the district court’s grant of summary judgment
de novo. United States v. Luce, 873 F.3d 999, 1005 (7th Cir.
2017). Summary judgment is appropriate when there is no
genuine dispute of material fact, and the moving party is en‐
titled to judgment as a matter of law. Id.; Fed. R. Civ. P. 56(a).
A. Legal Standards
The False Claims Act prohibits the submission of materi‐
ally false claims for payment to the government. 31 U.S.C.
§ 3729(a)(1)(A); Univ. Health Servs., Inc. v. U.S. ex rel. Escobar,
579 U.S. 176, 190 (2016). Relators—whistleblowers who bring
civil suits on behalf of the government—may seek treble dam‐
ages and are entitled to a share of the proceeds. 31 U.S.C.
§§ 3729(a)(1), 3730(d). To prevail, a relator must establish that
a claim was false (the falsity prong) and that the defendant
acted “knowingly” (the scienter prong). Id. § 3729(b)(1)(A).
The outcome of this case hinges on the scienter prong.
The FCA defines “knowingly” as having “(i) [ ] actual
knowledge of the information; (ii) act[ing] in deliberate igno‐
rance of the truth or falsity of the information; or (iii) act[ing]
in reckless disregard of the truth or falsity of the information.”
Id. The Supreme Court has cautioned that the FCA is not “a
vehicle for punishing garden‐variety breaches of contract or
regulatory violations.” Escobar, 579 U.S. at 194. To mitigate
“concerns about fair notice and open‐ended liability,” the
FCA’s scienter requirement is “rigorous.” Id. at 192.
Our recent decision in Schutte resolves several of the issues
originally briefed in this appeal. Namely, we have already de‐
termined that Safeco applies to the FCA’s “reckless disregard”
language, and that a defendant’s subjective intent is irrelevant
14 No. 20‐3425
for purposes of that inquiry. Schutte, 9 F.4th at 465–66. In
Safeco, the Supreme Court interpreted an analogous scienter
requirement in the Fair Credit Reporting Act (“FCRA”) and
held that a defendant does not act with reckless disregard un‐
der the FCRA as long as its interpretation of the relevant stat‐
ute or regulation was “objectively reasonable” and no “au‐
thoritative guidance” counseled against that interpretation.
Safeco, 551 U.S. at 70 & n.20. In Schutte, we joined four other
circuits in applying the Safeco scienter standard to the FCA.
Schutte, 9 F.4th at 465 (collecting cases). “A defendant might
suspect, believe, or intend to file a false claim, but it cannot
know that its claim is false if the requirements for that claim
are unknown.” Id. at 468 (emphasis in original). Moreover, if
a relator cannot show that a defendant acted with reckless dis‐
regard under Safeco, then the FCA claim fails, regardless of
whether the relator can point to evidence of the defendant’s
subjective awareness that its interpretation might be wrong.
Applying Safeco to the facts in Schutte, we concluded that
the relator failed to satisfy Safeco’s demanding scienter stand‐
ard. As in this case, the relator accused a defendant‐pharmacy
(SuperValu) of submitting false claims to the government by
reporting its “retail” prices as its U&C prices, even though
many customers paid a lower price by requesting a price
match. Id. at 461. Also like this case, pharmacists overrode the
price SuperValu would otherwise charge to insured custom‐
ers, manually entered the price‐matched cost, and processed
the sale as a cash transaction. Id. SuperValu’s price‐matching
program clearly ran afoul of Garbe, in that SuperValu was
denying Medicare and Medicaid the benefit of the deal it gave
to participants in its price‐matching program. Garbe, 824 F.3d
at 644. Nonetheless, we held that the Medicaid definition of
U&C (the price that a pharmacy “charges to the general
No. 20‐3425 15
public”) was open to multiple interpretations, and Super‐
Valu’s interpretation was permissible prior to Garbe. Schutte,
9 F.4th at 469–70 (quoting 42 C.F.R. § 447.512(b)). Put differ‐
ently, Garbe reached only the falsity prong of an FCA claim
based on U&C price reporting, not scienter.
Turning to Safeco’s authoritative guidance inquiry, we
concluded in Schutte that the same CMS Manual footnote at
issue here was insufficiently specific to warn SuperValu that
its price‐matching program fell within the definition of U&C
price. Schutte, 9 F.4th at 471. We noted that the footnote “says
nothing about price‐match programs,” and the bulk of the
footnote discussed Wal‐Mart’s $4 generics program. Id. at 472.
Because “Safeco suggests that authoritative guidance must
have a high level of specificity to control an issue,” the foot‐
note could not serve as authoritative guidance. Id. at 471. In
so holding, we expressly reserved the question whether the
CMS Manual amounted to “authoritative” guidance even
though it was not binding on the agency. Id.
Returning to the facts in this case, all agree that after Garbe,
reporting a pharmacy’s retail price as its U&C price would
satisfy the FCA’s falsity prong. But the time period at issue—
2006 to 2015—precedes our decision in Garbe. This appeal
thus presents the following questions: (1) whether Safeway’s
interpretation of U&C during the relevant period was objec‐
tively reasonable, and (2) whether authoritative guidance
warned it away from that interpretation.
B. Objectively Reasonable Interpretation
Safeway used both price‐matching and discount clubs in
various divisions. We have already concluded that, prior to
Garbe, the definition of U&C price was open to multiple
16 No. 20‐3425
reasonable interpretations, one of which would exclude price‐
matching. Schutte, 9 F.4th at 469–70. Safeway’s price‐matching
program differed from SuperValu’s in that a price match did
not apply automatically to refills. Id. at 461. Instead, Safeway
customers needed to request a price match each time they
filled a prescription. For the same reasons that SuperValu’s
interpretation of U&C—as excluding price‐matching—was
objectively reasonable in Schutte, Safeway’s interpretation
also passes muster here.
We had no reason to consider discount clubs in Schutte,
but the analysis is similar. By enrolling in either the MCGP or
the LMP and paying in cash, Safeway customers gained ac‐
cess to lower prices for generic drugs than Safeway reported
as its U&C prices. The enrollment form for both programs did
not provide Safeway with any meaningful information, and
there was no enrollment fee, as in Garbe. Notwithstanding this
minimal barrier to entry, Safeway argues that the lower prices
it offered to discount‐club participants were not “charged to
the general public” because customers were not automatically
enrolled in either program.
With the benefit of hindsight, it is easy to criticize Safe‐
way’s interpretation of U&C as applied to its discount clubs.
Safeway effectively used its enrollment forms as a fig leaf to
disguise a Wal‐Mart‐style generics program without report‐
ing those prices as U&C. The only thing separating club mem‐
bers from “the general public” was the fact that they took an
affirmative step to enroll.11 As we explained in Schutte,
11 Safeway concedes that a customer must do more than simply walk into
a store in order to be eligible for a discount. Otherwise, there would be no
No. 20‐3425 17
however, an interpretation of U&C that excludes discounted
prices available only to program participants “is not incon‐
sistent with the text of the U&C price definition.” Schutte, 9
F.4th at 469 (citing Garbe, 824 F.3d at 644; 42 C.F.R.
§ 447.512(b)). The mechanism by which a customer received a
discount may have differed (price matching or a discount
club), but the effect was the same: cash customers paid a
lower price than the retail price. In the absence of authorita‐
tive guidance warning that U&C must include these dis‐
counts, Safeway’s interpretation was not objectively unrea‐
sonable at the time.
C. Authoritative Guidance
In order for guidance to be “authoritative,” it must “come
from a source with authority to interpret the relevant text.”
Schutte, 9 F.4th at 471. Safeco may not have “flesh[ed] out the
boundaries” of the term “authoritative guidance,” but “at
minimum,” such guidance “must come from a governmental
source.” Id. That means we may only consider binding prece‐
dent from the courts of appeals or appropriate guidance from
the relevant agency. Id. (citing Safeco, 551 U.S. at 70); accord
Purcell, 807 F.3d at 289; Sheldon, 24 F.4th at 353.
As in Schutte, any variations in the PBM contract defini‐
tions of U&C are irrelevant in this context because they did
not come from the agency.12 PBMs and pharmacies are of
way to distinguish between “the general public” and program partici‐
pants.
12 Likewise, to the extent that state Medicaid definitions of U&C differ
from the federal definition, those differences have no bearing on our
analysis. As explained in note 9, the district court dismissed Relator’s
18 No. 20‐3425
course free to agree to their own definitions by contract. See
42 U.S.C. § 1395w‐111(i). But doing so does not convert a “gar‐
den‐variety breach[] of contract” into a false claim. Escobar,
579 U.S. at 194.
In addition to the source of the purported guidance, we
also consider whether that guidance was sufficiently specific.
Schutte, 9 F.4th at 471–72. This standard “duly ensures that
defendants must be put on notice before facing liability for
allegedly failing to comply with complex legal requirements.”
Sheldon, 24 F.4th at 350. In Safeco, the Court concluded that a
letter from the Federal Trade Commission (“FTC”) to the de‐
fendant was insufficiently authoritative because it “did not
canvass the issue.” Safeco, 551 U.S. at 70 n.19. An FTC staff
member wrote the letter to an insurance company lawyer, and
the letter explicitly stated that it was “an informal staff opin‐
ion ... not binding on the Commission.” Id.13 Safeco itself
demonstrates that guidance is not “authoritative” merely be‐
cause it comes from the relevant agency: the guidance must
also be specific enough to put a defendant on notice that its
conduct is unlawful.
Colorado claims with prejudice after Colorado declined to intervene.
Relator’s proffered guidance from other state Medicaid programs is
irrelevant because Relator is not bringing claims under those states’
parallel FCA statutes.
13 The FTC’s current website explains that the purpose of warning letters
is to “warn of possible law violations”; such letters “are not formal enforce‐
ment actions, and they may or may not be followed by FTC legal action.”
Federal Trade Comm’n, About FTC Warning Letters, https://www.ftc.gov/
news‐events/media‐resources/truth‐advertising/about‐ftc‐warning‐
letters (last visited Apr. 4, 2022) (emphasis added).
No. 20‐3425 19
With those principles in mind, we apply them to the only
relevant guidance relator has identified: the CMS Manual.14
1. Specificity
Once again, our decision in Schutte forecloses relator’s ar‐
gument that the CMS Manual was sufficiently specific to
warn Safeway that customer‐initiated price‐matching fell
within the definition of U&C. We observed in Schutte that
price‐matching could fluctuate based on the prices that Su‐
perValu’s local competitors charged. Schutte, 9 F.4th at 472.
This potential for regional variation made SuperValu’s price‐
matching program a poor fit for the CMS Manual’s Wal‐Mart
example. Here, the CMS Manual was also insufficiently spe‐
cific to address Safeway’s ad hoc price‐matching program.
Safeway’s membership clubs present a closer question.
The CMS Manual footnote explains in detail why discount
prices in Wal‐Mart‐style generics programs should be treated
as U&C prices. Indeed, in Schutte, we interpreted the footnote
as “clarif[ying] that a pharmacyʹs consistent, lower‐price of‐
fers are included within U&C prices.” Id. Here, once a Safe‐
way customer enrolled in the MCGP or LMP, he or she gained
access to a 30‐day supply of popular generics for $4—the ex‐
act same pricing structure as Wal‐Mart’s generics program.
Safeway even reported its own $4 generics program as U&C
between 2008 and 2010. Because the CMS Manual may have
14 Relator also points to the October 2006 CMS memorandum, which con‐
tained an identical footnote. We decline to treat that document as author‐
itative guidance for two reasons. First, the memorandum was addressed
to plan sponsors, not pharmacies like Safeway. Second, the Supreme
Court’s rejection of the FTC letter in Safeco suggests that an informal com‐
munication is insufficiently authoritative even if it originates from the rel‐
evant agency. See Safeco, 551 U.S. at 70 n.19.
20 No. 20‐3425
been specific enough to put Safeway on notice that it should
have reported its membership‐club prices as its U&C prices,
we consider the open question in Schutte: whether guidance
must be “binding” to amount to “authoritative guidance” un‐
der Safeco.
2. Binding vs. Nonbinding Guidance
Safeco does not explicitly require that agency guidance be
binding on the agency, but dicta suggest the Court might im‐
pose such a requirement. Specifically, the Court observed that
the FTC “has only enforcement responsibility, not substantive
rulemaking authority, for the provisions in question.” Safeco,
551 U.S. at 70. Our own case law lends support for such a dis‐
tinction. In Van Straaten v. Shell Oil Prods. Co. LLC, 678 F.3d
486 (7th Cir. 2012), we applied Safeco to an analogous provi‐
sion of the Fair and Accurate Credit Transactions Act
(“FACTA”). We rejected an FTC “bulletin” as a relevant
source of guidance because it “not only lacks a definition but
also has no authoritative effect; it is neither an exercise in no‐
tice‐and‐comment rulemaking nor the outcome of adminis‐
trative adjudication.” Id. at 488.
Safeway argues that Van Straaten already requires that
agency guidance be binding for purposes of Safeco’s scienter
standard. We read Van Straaten more narrowly. In context, the
language quoted above is dicta. Nonetheless, Safeway is cor‐
rect that CMS cannot rely on the Manual in enforcement pro‐
ceedings because it “lack[s] the force of law.” Christensen v.
Harris Cnty., 529 U.S. 576, 587 (2000) (explaining that “inter‐
pretations contained in policy statements, agency manuals,
and enforcement guidelines … lack the force of law” and are
“entitled to respect” only to the extent that they have the
No. 20‐3425 21
“power to persuade”) (quoting Skidmore v. Swift & Co., 323
U.S. 134, 140 (1944)).15
Setting aside whether Safeco requires that guidance be
binding on the agency, we conclude that the CMS footnote
does not constitute authoritative guidance for several reasons.
First, the guidance Relator relies on is a single footnote in a
fifty‐seven‐page chapter of the voluminous Medicare Pre‐
scription Drug Benefit Manual. The Coordination of Benefits
chapter, where the footnote appears, does not discuss U&C
pricing anywhere except the footnote. And the placement of
the footnote within a section titled “Beneficiary Cash Pur‐
chases” suggests that the guidance was directed at correctly
calculating a Part D enrollee’s out‐of‐pocket costs, rather than
setting out requirements for pharmacies seeking reimburse‐
ment under Medicare and Medicaid.16
We also find it significant that the footnote went in and out
of the Manual during the relevant period. After making its
debut in December 2006, the footnote was removed in 2013—
two years before Safeway ended its discount programs and
15 Accord Baylor Cnty. Hosp. Dist. v. Price, 850 F.3d 257, 261–64 (5th Cir.
2017) (applying Skidmore deference to a different CMS Manual because it
lacked the force of law); Clarian Health W., LLC v. Hargan, 878 F.3d 346,
355–56 (D.C. Cir. 2017) (observing that yet another CMS Manual merely
set forth enforcement priorities and was not binding in agency adjudica‐
tions).
16The text preceding the footnote reads: “The [Part D] enrollee must take
responsibility for submitting the appropriate documentation to his or her
plan in order to have the amount count toward his or her total drug spend
and TrOOP balances.” CMS Manual at 19.
22 No. 20‐3425
price‐matching nationwide.17 Relator has not explained why
Safeway should be liable for claims submitted after the cur‐
rent version of the Manual went into effect.18 How can agency
guidance be “authoritative” under Safeco when that guidance
no longer exists? And if CMS removed the footnote without
explanation in 2013, was the footnote really “authoritative”
during the preceding years or merely illustrative?
In light of the totality of the circumstances, we are not con‐
vinced that treble damages liability should hinge on a single
footnote in a lengthy manual that CMS can, and did, revise at
any time. Such an outcome would raise serious due process
concerns because defendants may not receive adequate notice
of the agency’s shifting interpretation.19 See Purcell, 807 F.3d
17 See Centers for Medicare & Medicaid Services, Chapter 14—Coordination
of Benefits, in Medicare Prescription Drug Benefit Manual § 50.4.2 (2013),
https://www.cms.gov/Medicare/Prescription‐Drug‐Coverage/
PrescriptionDrugCovContra/downloads/Chapter14.pdf (last visited Apr.
4, 2022).
18Complicating matters further, the relevant section of the current Man‐
ual provides an effective date of June 2010 and an implementation date of
January 2011. Id. at § 50.4.2 (2013).
19 Relator has not argued that CMS’s interpretation of its own regulation
is entitled to deference under the Auer doctrine (also known as Seminole
Rock deference). We therefore take no position on the doctrine’s applica‐
bility to the CMS Manual in this case or Safeco’s authoritative guidance
inquiry more generally. See Auer v. Robbins, 519 U.S. 452, 461 (1997); see
also Kisor v. Wilkie, 139 S. Ct. 2400, 2424 (2019) (noting that courts “must
assess whether [an agency’s] interpretation is of the sort that Congress
would want to receive deference”).
Admittedly, this court in Garbe observed: “An agency’s interpretation
of its own regulation is given ‘controlling weight unless it is plainly
No. 20‐3425 23
at 287 (“Strict enforcement of the FCA’s knowledge require‐
ment helps to ensure that innocent mistakes made in the ab‐
sence of binding interpretive guidance are not converted into
FCA liability ….”); Sheldon, 24 F.4th at 356 (“The False Claims
Act does not assess liability through ambush.”). To avoid this
dilemma, we heed the Supreme Court’s call for “rigorous” en‐
forcement of the FCA’s scienter requirement and conclude
that the CMS footnote is not authoritative guidance in this
case. Escobar, 579 U.S. at 192.
Some circuits have hinted that notice‐and‐comment
rulemaking or binding administrative adjudications are the
gold standards for guidance to be “authoritative” under
Safeco. See Purcell, 807 F.3d at 287; Sheldon, 24 F.4th at 354–55
(concluding that CMS responses to comments on a proposed
rule were not authoritative guidance); Streck, 746 F. App’x at
109 & n.5 (noting that CMS proposed a rule to clarify an
ambiguous statutory definition, but the final rule postdated
the relevant period and therefore could not provide
guidance). Given the circumstances surrounding the
guidance Relator relies on here—a solitary footnote in a
lengthy, nonbinding manual that changed over time—we
need not address that issue. Accordingly, we leave for another
day whether agency guidance must always be binding to
satisfy Safeco’s scienter standard.
erroneous or inconsistent with the regulation.’” Garbe, 824 F.3d at 644
(quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)). But
Garbe predated the Supreme Court’s admonition in Kisor that courts
should not apply Auer deference reflexively. Kisor, 139 S. Ct. at 2414 (cau‐
tioning that “not all reasonable agency constructions of [] truly ambiguous
rules are entitled to deference”). Without briefing on this issue, we decline
to say whether Auer deference should apply here.
24 No. 20‐3425
III. Conclusion
For the foregoing reasons, the district court’s judgment is
AFFIRMED.
No. 20‐3425 25
HAMILTON, Circuit Judge, dissenting. We should reverse
summary judgment for defendant Safeway and overrule
United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th
Cir. 2021). That case misinterpreted the False Claims Act’s
knowledge definition in 31 U.S.C. § 3729(b)(1) to create “a safe
harbor for deliberate or reckless fraudsters whose lawyers can
concoct a post hoc legal rationale that can pass a laugh test.”
9 F.4th at 473 (Hamilton, J., dissenting). We now face a similar
False Claims Act case, but with even stronger evidence of
fraud and an even less plausible post hoc rationale. I respect‐
fully dissent.
My dissent in SuperValu explained why the majority’s ap‐
proach to the False Claims Act’s knowledge requirement is
contrary to the text of § 3729(b)(1), loses sight of its roots in
the common law of fraud, and ignores the history and pur‐
pose of the Act’s “knowledge” provisions. 9 F.4th at 476–80
(Hamilton, J., dissenting); accord, United States ex rel. Sheldon
v. Allergan Sales, LLC, 24 F.4th 340, 357–71 (4th Cir. 2022)
(Wynn, J., dissenting) (disagreeing with Fourth Circuit’s
adoption of our position in SuperValu). Without repeating that
analysis here, this dissent focuses on the more egregious facts
of this case, the high stakes of the manipulation of “usual and
customary” drug prices, and the consequences of our mistake
in SuperValu. If the False Claims Act cannot reach Safeway’s
conduct here, the Act will neither deter nor remedy many
frauds that loot the federal treasury.
Prescription drug prices in the United States are among
the highest in the world. They have long been the subject of
policy debates. A major focus has been the prices that taxpay‐
ers pay to provide drugs under Medicare and Medicaid. Con‐
gress has repeatedly decided as a matter of policy not to allow
26 No. 20‐3425
the government to use its purchasing power to negotiate
lower drug prices for those programs. Congress has also cho‐
sen not to take advantage of the prices that private health in‐
surers are able to negotiate with their buying power, such as
with a “most‐favored‐nation” requirement.
Instead, Congress has chosen to rely on competitive mar‐
ket forces to ensure that taxpayers pay competitive drug
prices in those programs. The strategy caps the price the gov‐
ernment pays at the “usual and customary charges to the gen‐
eral public.” 42 C.F.R. § 447.512(b)(2) (2020). The “general
public,” all parties agree, does not include customers whose
prescription drugs are covered by private insurance, Medi‐
care, Medicaid, or other government programs. The general
public for these purposes is sometimes referred to as cash cus‐
tomers. These cash customers are vastly outnumbered by
Medicare, Medicaid, and private insurance customers. Under
the policy, therefore, determining the “usual and customary”
prices those few cash customers pay has enormous financial
stakes.
And for the chosen policy to work, “usual and customary”
prices must be reported honestly. Given the high stakes, drug
sellers have faced great temptations to cheat. There is ample
evidence that some have cheated, on a grand scale and for
many years.
As the majority opinion notes, when Walmart launched its
$4‐per‐month generics program in 2006, it put pressure on its
competitors to match it. That pressure was magnified by the
“usual and customary” price issue. If a competitor reduced its
retail cash drug prices to match Walmart’s prices, it would
have to tell—or at least should have told—the government
that it had reduced its “usual and customary” prices (as
No. 20‐3425 27
Walmart had). The result should have been, as Congress in‐
tended, reduced prices for Medicare and Medicaid patients’
drugs, taking advantage of the competitive market but mag‐
nifying for providers the effects of any price cuts for cash cus‐
tomers.
That’s not what happened, at least in many cases. The
temptations for prescription drug sellers like SuperValu,
Kmart, and Safeway were obvious and powerful. The False
Claims Act cases in this circuit alone later turned up evidence
of their executives’ creative, desperate, and deceptive efforts
to match Walmart’s prices without reducing the prices the
government would pay.
The creativity and desperation produced efforts that a rea‐
sonable jury could treat as deliberate or reckless fraud. We
saw the lengths SuperValu was willing to go in its case. See 9
F.4th at 461–62; id. at 473–76 (Hamilton, J., dissenting) (Super‐
Valu claimed government reimbursement based on suppos‐
edly “usual and customary” prices for high‐volume drugs
that were as much as eight to fifteen times the discounted
prices that SuperValu charged cash customers most of the
time); see also United States ex rel. Garbe v. Kmart Corp., 824
F.3d 632, 635–37 (7th Cir. 2016) (Kmart charged “nearly all its
cash customers” discounted prices while it submitted “signif‐
icantly” higher “usual and customary” prices to “drive up as
much profit as possible out of [third‐party] programs” (alter‐
ation in original)). The evidence here shows that Safeway was
willing to go even further … at least as long as it could avoid
putting things in writing. If and to the extent the federal
courts tolerate such deception, we enable more fraud in the
present and the future. We also place at a competitive
28 No. 20‐3425
disadvantage the other businesses that resisted the tempta‐
tion to cheat the government.
The majority opinions here and in SuperValu err by misin‐
terpreting the standard of fraudulent intent set forth in the
False Claims Act. The result is a deep and basic anomaly in
the law. Under both the common law and the False Claims
Act, fraud is an intentional wrong. A defendant’s state of
mind is critical. Subjective intent distinguishes fraud from the
proverbial “garden‐variety” breach of contract. Yet following
the mistaken approach in SuperValu, the majority opinion here
turns its back on the evidence of Safeway’s fraudulent intent
at the time it was submitting false claims to the government
to keep its drug reimbursements inflated by tens of millions
of dollars. As Judge Wynn has written, this approach violates
the principle that “‘culpability is generally measured against
the knowledge of the actor at the time of the challenged con‐
duct.’ It also allows the ‘most culpable offenders’ … to craft
their own get‐out‐of‐jail‐free cards whenever they like.” Aller‐
gan Sales, 24 F.4th at 369 (Wynn, J., dissenting) (internal cita‐
tion omitted), quoting Halo Electronics, Inc. v. Pulse Electronics,
Inc., 579 U.S. 93, 104–05 (2016); accord, SuperValu, 9 F.4th at
476–80 (Hamilton, J., dissenting) (explaining majority’s de‐
partures from common law and statutory language and his‐
tory).
We are reviewing a grant of summary judgment, so relator
Proctor is of course entitled to the benefit of conflicts in the
evidence and reasonable inferences drawn from the evidence
favoring him. He has come forward with ample evidence of
fraudulent intent, both in Safeway’s internal decision‐making
and in circumstantial evidence—the sheer scale of the differ‐
ences between Safeway’s real prices for cash customers and
No. 20‐3425 29
the much higher prices it told the government were “usual
and customary.”
Safeway’s responses to the pressure created by Walmart
took several forms. It began with various price‐matching pro‐
grams and then developed a “stealth Membership Program.”
Dkt. 190‐1, at 2. Soon, discounted sales covered the majority
of cash sales. Dkt. 178‐2, at 8 tbl.5. All the while, Safeway kept
claiming reimbursements from Medicare and Medicaid based
on falsely inflated “usual and customary” prices that were no
longer usual or customary. Safeway knew and had good rea‐
son to know that the differences between its actual prices and
its reported prices meant it was defrauding the government.
Safeway recognized the problem immediately. Its solution
was to “keep a low profile,” Dkt. 190‐31, at 2, and to hope that
no one would find out. After the relator blew the whistle, Safe‐
way turned to lawyers to try to rationalize and excuse its de‐
ception. We should not indulge their post hoc rationalizations,
especially with facts as egregious as those here.
Walmart announced its new prices in 2006. Safeway exec‐
utives immediately recognized that the news was “not good
for the business of Pharmacy.” Dkt. 190‐23, at 2. Four days
later, a senior manager emailed other Safeway executives and
explained that “the $4/script would force us to take a huge
margin hit.” Dkt. 190‐24, at 2. He estimated that adopting
Walmart’s approach would result in a loss of $8.7 million in
profits annually, but that figure did “not take into account any
issues [Safeway] may have with U&C.” Id. That estimate was
later updated to a much larger number, an annual loss of $65
million. Dkt. 190‐29, at 2–3.
As Safeway considered its response, the federal govern‐
ment’s Centers for Medicare and Medicaid Services (“CMS”)
30 No. 20‐3425
issued a “Lower Cash Price Policy” Memorandum addressing
Walmart’s program. CMS explained: “The low Wal‐Mart
price on these specific generic drugs is considered Wal‐Mart’s
‘usual and customary’ price, and is not considered a one‐time
‘lower cash’ price.” Dkt. 195‐21, at 2 n.1.
Safeway’s initial response was to match prices in a few di‐
visions, but to keep that a secret from the government. From the
beginning, Safeway chose to claim on paper that it had one
“official company stance” that it would not “change our []
usual and customary price on” price‐matched prescriptions,
Dkt. 190‐5, at 2, but to change its practices and to keep that
secret: “We cannot put any of this in writing to stores,” Safeway
said, Dkt. 190‐6, at 2 (emphasis added). Here are some key
points of Safeway’s price‐matching:
1. The official company policy is that we DO
NOT match Wal‐Mart or HEB program if an un‐
identified customer calls in. This is to avoid trou‐
ble 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 be‐
cause our official policy is we do not match.1
1 Beyond the red flag of the warning against putting anything in writing
to stores, point five in this list suggests that if a customer with insurance
requested a price match on a prescription, employees would record the
sale as if the customer did not have insurance. This practice would have
No. 20‐3425 31
Dkt. 190‐6, at 2 (emphases added). The Director of Pharmacy
Operations confirmed the accuracy of these points in an email
to other Safeway executives. Id. Safeway introduced this pro‐
gram of intentional concealment and deception roughly a
month after the Walmart news and two weeks after the CMS
notice.
As Safeway began implementing this deception, it re‐
ceived more warnings about “usual and customary” prices.
Medco—one of Safeway’s largest pharmacy benefit manag‐
ers—sent Safeway a reminder that by contract, a pharmacy’s
“usual and customary” price is “the lowest net price a cash
patient would have paid on the day that the prescription was
dispensed inclusive of all applicable discounts. These dis‐
counts include … competitor’s matched price, or other discounts
offered customers.” Dkt. 190‐7, at 2 (emphasis added) (inter‐
nal quotation marks omitted). A Safeway director forwarded
the notice to executives and said: “I’m sure this has to do with
the Walmart initiatives. There ‘are’ ramifications to normal
3rd party business. [Medco’s] [l]anguage is pretty similar in
all of our agreements.” Id. She also explained that Safeway
had been trying to “further redefine [U&C]” in its contracts as
excluding “all other discounts that Pharmacy may give with
respect to any particular cash transaction.” Id.
Around that time, CMS incorporated its Lower Cash Price
Policy Memorandum into the CMS Medicare Prescription
Drug Benefit Manual, which is incorporated by reference into
avoided overriding the customer’s copay, which could have alerted the
insurance company of a lower price. The tactic suggests that Safeway was
willing to forgo insurance reimbursements for certain transactions in the
name of program secrecy, which could add further support for inferring
fraudulent intent.
32 No. 20‐3425
drug sellers’ Medicare and Medicaid contracts. See 42 C.F.R.
§ 423.505(i)(4)(iv) (2020). A Safeway director circulated that
manual to pharmacy staff and told them: “Please keep abreast
of those issues that impact your areas.” Dkt. 190‐34, at 2. Then
in early 2007, another big pharmacy benefit manager, Coven‐
try Health Care, sent a notice similar to Medco’s. It explained
that Safeway was required by contract to include “any appli‐
cable discounts” in its “usual and customary” price. That
same Safeway director again forwarded this notice with a
message: “Another [e]xample 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 [notice] from
Medco.” Dkt. 190‐28, at 2. Safeway brushed off these notices
and continued reporting only the much higher non‐dis‐
counted prices as its “usual and customary” prices.
The strategy of concealment continued into 2008, with a
remarkably frank admission. A pharmacy manager emailed
headquarters to say that Nebraska’s Medicaid program told
him that “by matching a price, it becomes our usual & cus‐
tomary and any prescription filled that day has to be priced
as such.” Dkt. 190‐18, at 2. The executive who received that
message forwarded it to six other executives with this cynical
question: “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.” Id. (emphasis added). Catch us if you
can….
A few days later, an executive who received that email ex‐
pressed concerns to a senior vice president: “We may have
some issues with U&C and state medicaids with price match‐
ing….” Dkt. 190‐31, at 4. The executive explained that “if you
[match a] price offer, that becomes your usual and customary
No. 20‐3425 33
for that day and that pricing needs to be extended to medi‐
caid,” which he acknowledged Safeway stores currently were
not doing. Id. at 2. He thus stressed the need to keep things
quiet: “If we advertise this price match—it is going to Alert
the medicaid programs to start looking.… need to keep a low
profile.” Id. (emphasis added). Once again, catch us if you
can….
As the deception and concealment continued, Safeway re‐
ceived more notices that its actions were violating Medicare
and Medicaid requirements. Later that year, a Safeway exec‐
utive received a directive from the Food Marketing Institute
(“FMI”) describing the requirements of the Lower Cash Price
Policy in the CMS Manual. FMI wrote in part:
Since the generic price is your “usual and cus‐
tomary” price, you must submit these claims to
the Part D plan sponsor.… Below is the applica‐
ble section from Chapter 14 of the Medicare Pre‐
scription Drug Benefit Manual. I’ve also pasted
a link to the manual below. Specifically pay atten‐
tion to the foot note at the end.
Dkt. 190‐17, at 2 (emphasis added). The executive forwarded
this notice to the Director of Compliance and other employees
with a message that can be understood as either remarkably
naïve or a cynical effort to deflect responsibility: “Please note
and ensure we are in compliance. Thx.” Id.2
2 We explained in Kmart what this same footnote meant: “The CMS Man‐
ual has long noted that ‘where a pharmacy offers a lower price to its cus‐
tomers throughout a benefit year’ the lower price is considered the ‘usual
and customary’ price rather than ‘a one‐time “lower cash” price’….” 824
F.3d at 644, quoting Centers for Medicare & Medicaid Services, Chapter
34 No. 20‐3425
That executive testified in his deposition in this case that
he assumed his employees were “doing the right thing” and
complying with the rules and regulations, which would in‐
clude reporting discounted prices as the “usual and custom‐
ary” prices. Dkt. 195‐7, at 8–9. They were not. And given the
enormous stakes for Safeway, a jury could reasonably dis‐
count the executive’s claims of innocent ignorance. For the
twenty drugs with the highest overall revenues resulting
from the differences between what cash customers actually
paid and what Safeway told the government were its “usual
and customary” prices, the percentage of discount sales shot
up from 9 percent in 2006 to 49 percent in 2008. Dkt. 178‐2, at
11 tbl.8, 53–54 tbl.30. Safeway continued to report the non‐
discounted prices as its “usual and customary” prices during
this period. Price‐matching continued until 2015. During its
last five years, discount sales accounted for a substantial ma‐
jority of sales—from 75 percent to 88 percent for the top
twenty drugs, Dkt. 178‐2, at 11 tbl.8, and from 56 percent to
66 percent of total cash sales, id. at 8 tbl.5. I have not yet seen
a plausible definition of “usual and customary” prices that
does not include the prices at which a majority of relevant
sales are made.
Over the years, Safeway’s pricing strategy shifted away
from price‐matching and toward the adoption of a “loyalty”
program that Safeway used to conceal its actual “usual and
customary” prices. The loyalty program began in 2008 under
the label Matching Competitor Generic Program and was re‐
branded in 2010 as the Loyalty Membership Program in all
but one division. The two programs were “functionally
14—Coordination of Benefits, in Medicare Prescription Drug Benefit Manual
19 n.1 (2006), https://perma.cc/MW6A‐H4P6.
No. 20‐3425 35
identical,” and members received the same cash price that
Walmart charged for generic prescriptions. Ante at 6–7.
Both programs were designed to deceive the government
by concealing the fact that the discounted prices were actually
being offered to the general public, making those discounted
prices the “usual and customary” prices. To join, a customer
did not need to pay even a modest fee. The customer needed
only to fill out an enrollment form that provided simple de‐
mographic information that Safeway already had. Ante at 6–7;
see also Dkt. 195‐10, at 18‒19. A reasonable jury could infer
that this membership device was merely a fig leaf to rational‐
ize the failure to report the prices as “usual and customary.”
Relator Proctor has offered evidence that that’s just what
Safeway was thinking at the time. Take the following ex‐
change. In 2009, a divisional vice president asked about
adopting a membership program. He observed: “it 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?” Dkt. 190‐33, at 2. A director told him he was exactly right
but needed to be quiet about it:
Off the record that is exactly the angle is getting the
maximum we can from the insurance…. 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).
Id. (emphasis added). By introducing this “stealth” member‐
ship program in bad faith, Safeway thought it could dodge
that same “crushing” impact—an impact that should have
36 No. 20‐3425
saved the federal and state governments tens of millions of
dollars a year.
That kind of thinking remained central to Safeway’s ac‐
tions. When the company switched to the Loyalty Member‐
ship Program in 2010, it also replaced Safeway’s limited $4
generics program. In some regions, Safeway had adopted
Walmart’s approach for a brief period. In those locations,
every customer was eligible for the $4 price, and Safeway had
been reporting honest “usual and customary” prices for those
locations. Ante at 6. Then things changed.
Safeway replaced the generics program with the Loyalty
Membership Program because it wanted to keep offering
competitive prices to customers, but without continuing to
pass those lower prices on to third parties like the federal and
state governments. Relator’s evidence illustrates this narra‐
tive. In 2009, a manager posed a “hypothetical” to the Director
of Finance for Pharmacy: “We pull the $4 programs in Texas,
Eastern, Genuardi’s and Dominick’s and offer the same pro‐
gram; however, as a membership (FREE but customers need
to sign up) program …. What [are] the potential savings if we
make this a membership program? Thereby not affecting our in‐
surance reimbursements.” Dkt. 190‐38, at 3 (emphasis added).
After discussing with others, the manager responded to his
own email and estimated that it would save Safeway eight
million dollars. Id. at 2.
Safeway moved forward with that deceptive strategy. In a
message to participating stores, a director explained: “we will
no longer have an automatic $4 generic program.… 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.” Dkt. 190‐10, at 2 (emphasis added). She emphasized the
No. 20‐3425 37
need to keep that reason secret. The problem was that Safe‐
way would need to convince customers who liked the dis‐
counts to join the new loyalty program to keep the discounts.
How should Safeway explain the change? In a good example
of Orwellian obfuscation of the stealth strategy, she wrote:
“While we do not want to communicate the protection of
Usual and Customary, we do want to communicate to our as‐
sociates and the consumer that the reason we are doing this is
to further enhance our offer so that we can offer them ‘More.’”
Id. at 3.
As this “stealth” membership program continued, Safe‐
way received an additional notice that its position on “usual
and customary” cash prices was dishonest. In 2011, a Safeway
director forwarded to headquarters a message from Care‐
mark regarding “usual and customary” prices: “Please see the
announcement from Caremark. FEP is requiring that we pro‐
vide our best price to them. This would [include] … the $4.00
program in Dominicks, Eastern, and Texas. I do not see a way
around it.” Dkt. 190‐20, at 2.
Even though that particular writer was too honest to find
“a way around it,” others did. The evidence of the money
Safeway took from the government by this deception is aston‐
ishing, going well beyond even the evidence in the SuperValu
case. From 2011 to 2015 discount sales accounted for much
more than a majority of Safeway’s cash prescription sales. Yet
Safeway continued to tell the government that its non‐dis‐
counted prices were its “usual and customary” prices.
Dkt. 178‐2, at 8 tbl.5.
We can illustrate the point with one high‐volume drug,
lovastatin, which is used to reduce cholesterol levels. Between
2008 and 2012, Safeway sold 30‐day supplies of lovastatin at
38 No. 20‐3425
its $4 discount cash price 84 percent of the time. Dkt. 178‐2, at
46 tbl.21. During those years, however, Safeway was claiming
reimbursements from the government by reporting “usual
and customary” prices between $27.14 and $65.99. Id. During
those same years, Safeway sold 90‐day supplies of lovastatin
for $10 in 94 percent of its cash sales of the drug. Id. Yet Safe‐
way claimed reimbursements from the government by report‐
ing “usual and customary” prices between $81.42 and
$108.99. Id. Safeway was claiming government reimburse‐
ments based on claimed prices six to sixteen times higher than
its actual cash prices.
The cumulative effects of the deception were in the tens of
millions of dollars per year. Focus on the twenty drugs where
the government lost the most money: Safeway sold those
drugs at discount cash prices far more than half the time from
2009 to 2015: 65 percent of the time in 2009, 74 percent of the
time in 2010, 82 percent in 2011, 81 percent in 2012, 83 percent
in 2013, 88 percent in 2014, and 75 percent in 2015. Dkt. 178‐2,
at 11 tbl.8. During those years, Safeway continued to claim its
“usual and customary” prices were the prices used in the
small fraction of cash sales that were not discounted.
In its defense, Safeway argues that everyone should ignore
all of those cash sales in its loyalty program. The lawyers’ the‐
ory is that those prices far below the reported “usual and cus‐
tomary” prices were offered only to members, not to the “gen‐
eral public.” Recall, however, that to “join” the loyalty pro‐
gram, a customer simply had to fill out a form that provided
Safeway with demographic information it already had, and,
of course, agree to pay cash for prescriptions. Customers did
not need to pay even the nominal $10 fee that we rejected in
Kmart. See 824 F.3d at 643–45. Even the majority
No. 20‐3425 39
acknowledges the point: “Safeway effectively used its enroll‐
ment forms as a fig leaf to disguise a Wal‐Mart‐style generics
program without reporting those prices as U&C. The only
thing separating club members from ‘the general public’ was
the fact that they took an affirmative step to enroll.” Ante at
16.
But the majority opinion then draws the wrong conclu‐
sion. It asserts that any “interpretation of U&C that excludes
discounted prices available only to program participants ‘is
not inconsistent with the text of the U&C price definition.’”
Ante at 16–17, quoting SuperValu, 9 F.4th at 469. The majority
adds: “With the benefit of hindsight, it is easy to criticize Safe‐
way’s interpretation of U&C as applied to its discount clubs.”
Ante at 16.
In fact, however, relator’s theory does not depend on
hindsight. The contemporaneous evidence of Safeway’s
choices to hide what it was doing, and of its reasons for those
choices, easily permits the inference that Safeway knew at the
time that it was carrying out a fraud and needed to conceal it.
Remember some of the evidence quoted above: Safeway
would match Walmart prices while maintaining on paper an
“official company policy” of no price‐matching, and “We can‐
not put any of this in writing to stores.” We “need to keep a
low profile” for our price matches. “My question is how the
state of Nebraska will know that we offered to match any
price out there.” Asked whether the loyalty program was de‐
signed to address “the insurance angle,” a Safeway executive
answered: “Off the record that is exactly the angle is getting
the maximum we can from the insurance.” Safeway also
knew it could not be candid about why it was shifting cus‐
tomers from a few honestly reported discount programs to
40 No. 20‐3425
the new loyalty program: “While we do not want to com‐
municate the protection of Usual and Customary….”
For these reasons, and the reasons explained in my dissent
in SuperValu, we should not double down on our earlier mis‐
take. We should instead overrule SuperValu and reverse sum‐
mary judgment here.