In a new decision that could have a significant impact on the persistent efforts of relators to reach otherwise lawful conduct and characterize it as a violation of the Anti-Kickback Statute (AKS), the US Court of Appeals for the Second Circuit squarely held that in False Claims Act (FCA) cases predicated upon the AKS, the concept of “willfulness” requires the government or relator to plead, and prove, that the defendant acted knowing that its conduct is unlawful, even if it is not aware of the AKS specifically.
The court rejected a proposed rule that would require only that the defendant intentionally provide “remuneration” (i.e., something of value) while knowing generally that such remuneration is prohibited. In key language, the court emphasized that the proper focus is on whether the defendant knew that its own conduct violated the law, rather than whether the law generally imposes sanctions on conduct that may appear similar. The court analyzed the relator’s allegations of scienter in detail and found that they did not, separately or in combination, show the defendant knew the particular conduct at issue was unlawful.
In United States ex rel. Hart v. McKesson Corp.,[1] the relator, Adam Hart, alleged that in exchange for providers promising to use McKesson as their primary wholesale supplier of branded and generic drugs, McKesson granted providers free access to certain “Business Management Tools” that allowed those providers to determine which McKesson drugs to purchase in order to maximize their profits and minimize the risk that their Medicare reimbursement rate would fall below the actual cost they paid for their drugs.[2] In doing so, according to Hart, McKesson violated the AKS, and in turn the FCA, by providing the Business Management Tools as an unlawful kickback to induce customers to buy from McKesson.[3]
The district court dismissed Hart’s Second Amended Complaint’s FCA claim on scienter grounds, concluding, as summarized by the Second Circuit, that “to act ‘willfully,’ as required for liability under the AKS, a defendant must act knowing that its conduct was unlawful,” and that Hart’s allegations “did not plausibly plead that McKesson acted willfully under that standard.”[4] The AKS provides in relevant part as follows:[5]
Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person . . . to purchase . . . any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony . . . .
The district court also dismissed the Second Amended Complaint’s state law claims under the FCA analogues of various states given that those state law claims were, according to the district court, premised only on a violation of the federal AKS, which Hart failed to allege.[6] Hart declined to file a Third Amended Complaint and appealed the dismissal to the Second Circuit.
In affirming the dismissal of Hart’s FCA claim, the three-judge panel unanimously and unambiguously held that “[t]o act willfully under the AKS, a defendant must act with a ‘bad purpose,’” meaning “‘with knowledge that his conduct was unlawful.’”[7] The defendant need not know of the AKS or have “a specific intent to violate it” to be liable, “provided that the person acts with knowledge that her conduct is, in some way, unlawful.”[8]
The court noted that its “interpretation of the AKS’s willfulness requirement thus protects those (and only those) who innocently and inadvertently engage in prohibited conduct.”[9] The court’s interpretation “aligns with the approach to the AKS taken by several of our sister courts [including the Third, Fifth, Sixth, Seventh, Eighth, and Eleventh Circuits], which have held or implied that to be liable under the AKS, defendants must know that their particular conduct was wrongful.”[10]
In support of its holding, the Second Circuit examined, among other things, the evolution and unsettled nature of the AKS, safe harbors and exceptions to the AKS’s criminal penalties, and the difference between the Civil Monetary Penalty Law’s “knowingly” standard compared to the AKS’s “knowingly and willfully” standard.[11] And, in its analysis, the court went out of its way to note that well-meaning defendants should not be swept into AKS liability:[12]
HHS [US Department of Health and Human Services] has acknowledged that the existence of its safe harbor provisions may not resolve whether a particular arrangement is permissible under the AKS. . . . As a result, even a well-counseled defendant who has taken every effort to comply with the AKS and all other relevant laws could still find herself accidentally in violation of the statute. The same is true for HHS's advisory opinions. A defendant could innocently rely on a published advisory opinion to conclude that her conduct is lawful, even if she is ultimately incorrect. Again, defining “willfully” to require that a defendant act knowing that her conduct is in some way unlawful avoids sweeping in such innocent conduct.
The Second Circuit rejected Hart’s “two alternative interpretations of the term willfully,” finding neither interpretation to be “satisfactory.”[13] Hart’s first alternative interpretation was that “the willfulness requirement may be satisfied through evidence that the defendant ‘(1) intentionally provid[ed] something of value in connection with a medical purchase reimbursed by the government, (2) while knowing that it is illegal to provide things of value in connection with such purchases.’”[14]
The court found that this interpretation was “based on a misreading” of prior Second Circuit law, “would criminalize too much innocent conduct,” and relied on “out-of-circuit opinions [that] do not help [Hart].”[15] In analyzing this interpretation—and particularly the court’s concerns about criminalizing innocent conduct—the court hypothesized an example in which a pharmaceutical company creates a free customer support hotline, noting that the company does not violate the AKS if it “create[d] the hotline out of a good-faith desire to help doctors treat their patients more effectively, without knowing that the hotline violated the AKS or any other law”:[16]
Suppose that a pharmaceutical company creates a free 24/7 customer support hotline to allow providers to ask questions about the company's products. Even if the company is generally aware of the AKS’s prohibition on kickbacks, the company still could create the hotline out of a good-faith desire to help doctors treat their patients more effectively, without knowing that the hotline violated the AKS or any other law. In such circumstances, one could hardly say that the company acted with the “vicious will” that “our criminal law seeks to punish.” But under Hart's proposed definition, the company could suffer criminal penalties anyway if the hotline was deemed prohibited remuneration.
Hart’s second alternative interpretation was, essentially, that “as long as a defendant intentionally performed an act, and that act in fact violated the AKS, the defendant violated the law even if she had no idea that her conduct was unlawful in any way.”[17] The court rejected this argument, which was based on an “outlier opinion from the Fifth Circuit, United States v. St. Junius, 739 F.3d 193 (5th Cir. 2013)” that the court found “unpersuasive” and “not well supported.”[18]
In acknowledging that “understanding the reach of the AKS is a difficult endeavor,”[19] the court’s extended discussion of the statutory and regulatory safe harbors under the AKS, along with the HHS Office of Inspector General (HHS-OIG) advisory opinion process, is especially significant. Although the court noted that no such safe harbors or advisory opinions were at issue in the present case, the court’s analysis provides strong support for the argument that a defendant does not act willfully when its good-faith conduct is similar to that described in the safe harbors or advisory opinions, even if the conduct did not conform flawlessly with those written standards.
After settling on the meaning of “willfulness” under the AKS, the court went on to examine the sufficiency of Hart’s allegations, ultimately concluding that he failed to state a claim. Prior to digging into each allegation, however, the court dismantled Hart’s efforts to establish willfulness by arguing simply that McKesson was aware of the AKS’s prohibitions and still offered things of value—a somewhat familiar refrain on the part of FCA relators[20]:
Hart spends much of this section of his brief arguing that he plausibly alleged willfulness by alleging that McKesson was aware of the AKS’s prohibitions and still offered the Business Management Tools for free, even though McKesson knew that those tools were valuable. That argument fails, as it is nothing more than an attempt to resuscitate his proposed two-factor definition of willfulness, which we have already rejected.
Moving on to Hart’s substantive allegations, Hart first alleged that McKesson destroyed certain documents. The court found this argument to be unpersuasive because Hart alleged destruction taking place after the litigation began; he did “not allege that McKesson took any efforts to conceal its alleged wrongdoing before the litigation began.”[21] The court similarly found insufficient Hart’s allegation that McKesson removed a video from its website and claimed to have lost or destroyed the source footage, given that “there is nothing to suggest that McKesson attempted to conceal the . . . video other than the fact that McKesson currently does not possess that video or the footage used to make it.”[22]
Second, Hart alleged that he discussed his concerns about McKesson’s use of the Business Management Tools while he was an employee at McKesson. However, the court found that Hart failed to allege that others shared his concerns.[23] Third, Hart pointed to an allegation that a senior sales executive sent another executive via email materials in part concerning the Business Management Tools and wrote, “You didn’t get this from me….ok?”
The court rejected this argument as well, noting that the references to the Business Management Tools were buried amid 170 pages of documents, and there was nothing connecting the surreptitious nature of the email to the Business Management Tools.[24] Ultimately, in a somewhat uncommon move (a federal appellate court examining the sufficiency of an FCA relator’s scienter allegations), the Second Circuit affirmed the district court’s holding that Hart failed to state a claim.
Though the Second Circuit affirmed the district court’s dismissal of Hart’s FCA claim, it reversed the district court’s dismissal of his state law claims. The court disagreed with the district court that Hart brought his state law claims under those states’ FCA analogues only “by way of a violation of the federal AKS.”[25] The court found persuasive Hart’s argument that “many of the state anti-kickback laws have no scienter requirement or a lesser requirement than willfulness,” such that “even though his complaint is insufficient to state a federal FCA claim based on the federal AKS, it may be sufficient to state a state-law claim under one or more of the state anti-kickback laws cited in his complaint.”[26]
McKesson will surely be cited frequently by FCA and AKS defense counsel in the Second Circuit and elsewhere, as it firmly establishes the AKS’s standard for “willfulness” in a manner favorable to defendants and contrasts the approach with less stringent standards. The court’s discussion of statutory and regulatory safe harbors, and HHS-OIG publications, encourages defendants to present arguments that good faith compliance—even if imperfect—with such safe harbors and publications, defeats scienter under the AKS and in turn any resulting FCA claims.
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[1] No. 23-726-CV, 2024 WL 1056936 (2d Cir. Mar. 12, 2024).
[2] 2024 WL 1056936, at *2.
[3] Id.
[4] Id. at *3.
[5] 42 U.S.C. § 1320a-7b(b)(2)(B).
[6] 2024 WL 1056936, at *3.
[7] Id. at *6 (quoting Bryan v. United States, 524 U.S. 184, 191 (1998), and United States v. Kukushkin, 61 F.4th 327, 332 (2d Cir. 2023)).
[8] Id.
[9] Id.
[10] Id. at *4.
[11] Id. at *4–6.
[12] Id. at *5.
[13] Id. at *7.
[14] Id. (alteration in original).
[15] Id. at *7–8.
[16] Id. at *7 (citations omitted).
[17] Id. at *8.
[18] Id.
[19] Id. at *5 n.6.
[20] Id. at *9 n.9.
[21] Id. at *9.
[22] Id. at *10.
[23] Id.
[24] Id.
[25] Id. at *11 (quoting United States ex rel. Hart v. McKesson Corp., No. 15-CV-0903 (RA), 2023 WL 2663528, at *8 (S.D.N.Y. Mar. 28, 2023)).
[26] Id. at *12.