The US Court of Appeals for the Second Circuit recently held that the term “willfully” in the AKS requires proof that a defendant acted “with a bad purpose” and “knowledge that his conduct was unlawful,” offering protection to defendants that inadvertently engage in conduct otherwise prohibited under the AKS.1 Applying this standard to the allegations in the case, the Second Circuit affirmed the dismissal of the relator’s federal FCA claims, finding that the relator failed to plead sufficient facts showing the defendant acted willfully. In doing so, the court set a high standard for both the government and relators to establish scienter, making it more difficult to bring FCA cases based on alleged AKS violations.
Background
Relevant here, the AKS prohibits “knowingly and willfully” offering or paying any remuneration, directly or indirectly, to induce another person to “purchase . . . any . . . item for which payment may be made” under a federal health care program, such as Medicare or Medicaid.2
In US ex rel. Hart v. McKesson Corp., a relator brought claims against McKesson Corp. under the federal FCA and related state laws, alleging that McKesson offered its provider customers two valuable “Business Management Tools” to induce them to purchase oncology drugs from McKesson.3 According to the relator, the Tools compared McKesson’s prices for specific drugs or courses of treatment against publicly available Medicare reimbursement rates, allowing providers to determine which drug or course of treatment would provide the highest profit margin and helping providers “maximize their profits and mitigate the risk that the reimbursement rate will fall below the actual cost they paid for drugs.” McKesson allegedly offered the Tools for free only to those providers who agreed to use McKesson as their primary wholesale supplier for drugs. According to the relator, this violated the AKS and similar state anti-kickback laws.
The district court dismissed the relator’s complaint—including both the federal and state law claims—holding that the relator failed to plausibly plead that McKesson acted “willfully” under the AKS.
Second Circuit: Willfulness Requires Knowledge of Unlawful Conduct
The primary issue before the Second Circuit on appeal was the meaning of the term “willfully” under the AKS. Recognizing that this term has “long bedeviled courts,” the Second Circuit ultimately held that to act “willfully” under the AKS, a “defendant must act with a bad purpose,” meaning that the defendant acted “with knowledge that his conduct was unlawful.” This does not mean, the court clarified, that a defendant must know of the AKS specifically or intend to violate that statute. Indeed, a person may be liable under the AKS “without knowing of that statute or having a specific intent to violate it, provided that the person acts with knowledge that her conduct is, in some way, unlawful.”
To support this interpretation, the Second Circuit considered, among other things, the breadth of the statutory text and the “legal landscape that has emerged through HHS’s safe harbors and advisory opinion process.” Under this landscape, the court recognized that the existence of a statutory or regulatory safe harbor may “not resolve whether a particular arrangement is permissible under the AKS,” such that “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.” According to the court, “defining ‘willfully’ to require that a defendant act knowing that her conduct is in some way unlawful avoids sweeping in such innocent conduct.”4
Applying this interpretation to the relator’s complaint, the court considered three categories of allegations relating to McKesson’s scienter, finding that none of these claims, “alone or in combination with each other” plausibly suggests that McKesson acted willfully under the AKS. Specifically:
- The relator alleged that McKesson scrubbed the contents of the relator’s laptop after receiving a Civil Investigative Demand from the federal government and removed from its website (and lost the footage of) a customer testimonial video about one of the Business Management Tools. According to the Second Circuit, these allegations suggested, “at most,” that at some point during the litigation, McKesson may have determined that its use of the Business Management Tools was improper, but they were insufficient to establish wrongful intent at the time of the alleged AKS violation (i.e., at the time McKesson offered the Tools to its customers). In reaching this conclusion, the Second Circuit emphasized sthat “courts that have found concealment probative of wrongful intent typically done so when the concealment happened concurrently with the violation,” whereas, here, there was no allegation that McKesson made any efforts at concealment before the litigation ban. The court also noted that there was no allegation that scrubbing a former employee’s laptop was inconsistent with McKesson’s normal practices.
- The relator also cited to alleged conversations that he had with his supervisor and the creator of one of the Tools, in which he allegedly raised concerns regarding whether McKesson’s use of the Tools was appropriate. The Second Circuit found these allegations to be insufficient to establish “willfulness” for two reasons. First, while these alleged conversations suggested that the relator believed that McKesson’s use of the Tools violated the AKS, they did not demonstrate that the relator’s supervisor or the Tool creator actually shared those beliefs. Second, even assuming the relator’s belief was shared by certain other McKesson employees, the relator had not alleged that those employees’ beliefs could be imputed to the company.
- Finally, the relator alleged that one of McKesson’s senior sales executives sent another McKesson executive an email that stated, “You didn’t get this from me…ok?,” which email included attached three documents totaling 170 pages. Those 170 pages included five references to the Tools, which, according to the court, were “buried in discussions and analyses of numerous other topics.” The Second Circuit concluded that this email was insufficient to support an inference that McKesson acted “willfully” in its offer of the Tools to providers, since, even if the sender “acted surreptitiously in providing the documents to the recipient,” there was “nothing to connect that sentiment to the references to the Business Management Tools, or even to suggest that the reason for secrecy involved revelations of corporate misconduct.”
Notably, the relator also alleged in his complaint that McKesson required its customer-facing employees to undergo annual training relating to fraud, waste, and abuse and had a company Code of Conduct reflecting a clear understanding that the AKS prohibits offering anything of value to influence the decisions of healthcare professionals. The court did not extensively engage with these allegations, however.
Although it dismissed the relator’s federal claims, the Second Circuit did reverse the district court’s dismissal of the relator’s state law claims, finding that the relator’s complaint may be sufficient to state a state law claim, given that some of the state laws have a different scienter requirements.
Key Take-Aways
The Second Circuit’s decision in Hart serves as a useful tool for defendants in the Second Circuit and elsewhere in combatting federal FCA claims based on alleged AKS violations. Interpreting the term “willfully” to require the defendant act with knowledge its conduct is unlawful offers protection for those defendants who acted “innocently and inadvertently engage[d] in prohibited conduct.” Further, the court’s dismissal of the relator’s complaint at the motion to dismiss stage—despite numerous allegations relating to McKesson’s knowledge and a favorable pleading standard—suggests, at least in the Second Circuit, that the government and relators have a significant burden in setting forth sufficient allegations of scienter under this standard. Finally, the court’s discussion of the AKS safe harbors and advisory opinion process in relation to scienter suggests that defendants should argue that good-faith, though imperfect, compliance with HHS-OIG guidance establishes that the defendant did not act with the requisite scienter.
- US ex rel. Hart v. McKesson, 96 F.4th 145 (2d Cir. 2024). ↩︎
- 42 U.S.C. § 1320a-7b. ↩︎
- The government declined to intervene in the case. ↩︎
- The Second Circuit also noted that its interpretation “aligns with the approach to the AKS taken by several of our sister circuits, which have held or implied that to be liable under the AKS, defendants must know that their particular conduct was wrongful.” Hart, 96 F.4th at 154–55 (citing United States v. Montgomery, No. 20-5891, 2022 WL 2284387, at *12 (6th Cir. June 23, 2022); United States v. Nora, 988 F.3d 823, 830 (5th Cir. 2021); United States v. Hill, 745 F. App’x 806, 815–16 (11th Cir. 2018); United States v. Nagelvoort, 856 F.3d 1117, 1126 (7th Cir. 2017); United States v. Goldman, 607 F. App’x 171, 174–75 (3d Cir. 2015); United States v. Yielding, 657 F.3d 688, 708 (8th Cir. 2011)). ↩︎
