Knowledge of Wrongdoing at Heart of Whistleblower’s Long Road

Does a “willful” act under the federal Anti-Kickback Statute require a defendant to know that their conduct violates the law? That’s the question a whistleblower is asking the U.S. Supreme Court to answer, in order to resolve what the petition calls a “circuit split” on a key question of federal fraud prosecutions.

The answer could carry significant implications for future whistleblowers, patients, taxpayers, and the healthcare industry more broadly, even as legal experts are divided.

Adam Hart, a former employee of McKesson Corp., brought the issue to the U.S. Supreme Court in early June, asking the justices to define the “willfulness” element of the Anti-Kickback Statute. The petition comes after the Second Circuit Court of Appeals in March affirmed the dismissal of his Anti-Kickback Statute-based False Claims Act case against a wholesale pharmaceutical distributor.

Hart urged the justices to weigh in on whether one must plead and prove that a defendant intentionally acted wrongfully, as the Second Circuit found, or whether defendants need only be on notice that their conduct was improper.

While Hart and some legal experts say this question is ripe for review by the U.S. Supreme Court, others warn that it may be premature, and that the justices could end up making it harder to hold defendants accountable for government fraud – which is what Hart was trying to do in the first place.

The Whistleblower’s Suit

Hart brought his suit nearly a decade ago, after taking a compliance training in which he says he noticed that McKesson’s sales practices violated the very policies it instructed him to follow. Hart said he shared his concerns with a supervisor, who told him not to worry about the compliance policies and to get back to work.

Afterward, Hart said he discussed with his coworkers how he believed McKesson had acted unlawfully by offering two business management tools worth about $150,000 to medical practices without charge in exchange for commitments to buy McKesson drugs.

Hart’s suit against McKesson, filed in 2015 and unsealed five years later, alleged that the drug distributor engaged in a kickback scheme that encouraged medical practices “to purchase the highest-margin drugs, which led cancer patients to make far higher co-payments and the government and private insurers to pay far higher reimbursement rates.”

In an amended complaint, he claimed that while the U.S. Department of Justice (DOJ) was investigating, McKesson improperly destroyed documents, including files from Hart’s laptop. The federal government chose not to intervene in the case.

A New York federal judge dismissed Hart’s suit in March 2023, finding that while he “plausibly identifies conduct” that could constitute a violation of the law, he had not adequately shown that McKesson willfully violated the federal Anti-Kickback Statute.

A year later, a Second Circuit panel affirmed the bulk of the decision, agreeing that Hart had not established the requisite scienter on McKesson’s part to proceed. However, the panel revived Hart’s claims brought under anti-kickback laws in 27 states and the District of Columbia, on the grounds that some of the state laws had no scienter requirement, or had a lesser requirement than willfulness.

Representatives and counsel for the parties did not respond to Law360’s request for comment.

What’s at Stake

The Anti-Kickback Statute makes it a felony to “knowingly and willfully” offer or pay remuneration to induce a referral for anything reimbursable under a federal healthcare program, albeit with certain safe-harbor exceptions.

Charles M. Honart, an attorney with Stevens & Lee, PC who often represents healthcare systems in compliance matters, told Law360 he thinks the issue is ripe for review, explaining that because the statute doesn’t define “willful,” it’s been left up to the courts to interpret.

The willfulness standard as articulated by the McKesson court, he said, is materially different from the less-stringent standards that the relator argues apply.

“Given that the term is critically important in both the criminal and civil enforcement context, the definition of ‘willfully’ is obviously hugely significant,” Honart said.

But Jacklyn DeMar, an attorney who heads up the Anti-Fraud Coalition, a nonprofit that defends whistleblowers, doesn’t think this question is ready for U.S. Supreme Court review.

The McKesson court “is really the only circuit-level court to apply a potentially more stringent test for scienter” to the Anti-Kickback Statute, she said. When district courts have discussed the willfulness standard, most have held that relators need only allege evidence that defendants were on notice that their conduct was improper under the False Claims Act.

Seeking High Court Review

In early June, Hart filed a petition for a writ of certiorari to the U.S. Supreme Court, arguing that the Second Circuit raised the intent standard too high when it held that, in order to violate the Anti-Kickback Statute, one has to act with a “bad purpose” or with intent to violate a known legal duty.

“In the Fifth and Eighth Circuits, McKesson’s conduct would have violated the Anti-Kickback Statute: it was committed intentionally and was wrongful on its face,” Hart wrote.

The Second Circuit, he said, used a different standard that led it to hold that his allegations did not support an inference that McKesson believed his warnings or otherwise knew that its conduct was unlawful.

Similarly, Hart said the Eleventh Circuit, in the 2015 decision United States v. Sosa, held that “willfulness” under the statute requires a defendant to have acted with knowledge that its conduct was unlawful.

“The contrary rule adopted by the Second and Eleventh Circuits contravenes the text of the statute, departs from Congress’s goals of preventing waste, fraud, and abuse, and shows too much solicitude for a company that deliberately profiteered off cancer patients but (erroneously) contended that it had followed the letter of the statute,” Hart wrote.

He urged the justices to grant review to resolve the circuit courts’ “disagreement about the mental state needed to violate the Anti-Kickback Statute.”

“It should then hold that knowledge of illegality is not required,” Hart wrote.

Tightening the Standard

Sarvenaz Fahimi, a partner at Cotchett Pitre & McCarthy, LLP who has represented healthcare industry whistleblowers, agrees that the Second Circuit’s scienter standard is narrower than other circuits’.

“While typically ‘scienter’ can be more generally pled, McKesson really tightens this requirement by requiring that a defendant had ‘knowledge that his conduct was unlawful,'” Fahimi told Law360. “This is a tougher standard for relators and narrows application of the (Anti-Kickback Statute) out the gate.”

The McKesson court also appears to contradict itself on the scienter standard, she added, as it has held that a defendant need not know about the Anti-Kickback Statute, nor intend to violate it. At the same time, the court held that the defendant must act in a manner it knows is unlawful.

That potential contradiction “should be reviewed for the benefit of the taxpayers,” she said.

If the high court were to hold that a defendant need not know their conduct violates the law in order to run afoul of the Anti-Kickback Statute, Fahimi thinks that could help prevent bad actors from being shielded, “merely because at the pleading stage of a case, it cannot specifically be shown that the defendant knew the conduct was specifically unlawful.”

Anti-Fraud Coalition’s DeMar, however, said such a ruling would merely “maintain the status quo, and what Congress intended when passing and amending” the anti-kickback law.

George B. Breen, an attorney with Epstein Becker Green who regularly defends healthcare providers in False Claims Act matters, argued that if the U.S. Supreme Court were to decide that a defendant can act “willfully” without showing that they knew they were acting unlawfully, it “would have the far-reaching potential to subject well-meaning parties” to exposure to Anti-Kickback Statute liability.

“At a bare minimum, there must be a need to show unlawful intent in order to subject a party to the potential of liability” under the statute, Breen told Law360.

Loosening the Standard

Both Fahimi and DeMar expressed concern about what could happen if the justices were to take up the case and back the Second Circuit’s higher intent standard.

It could lead to “wrongdoers getting off the hook before discovery, even where it appears the wrongdoer ‘willfully’ engaged in conduct that is not permitted under the (Anti-Kickback Statute),” Fahimi said.

DeMar noted that it “would potentially require relators and the government to provide more details about what the defendants understood regarding their improper conduct.”

“To the extent that the court could hold that there is a higher burden to prove violations of the (Anti-Kickback Statute), patients would be at further risk of being prescribed drugs that are, perhaps, not the ideal drugs to treat their condition, or be subject to unnecessary surgeries in order to drive up the sale of certain medical devices,” DeMar said.

“The taxpayers deserve to pay for healthcare that is correct and necessary for patients relying on taxpayer-funded healthcare,” she added. “A higher burden could lead to more fraudulent spending of taxpayer dollars and a drain on government funds.”

Hart is represented by Stephen S. Hasegawa of Phillips & Cohen LLP, Ari Yampolsky of Whistleblower Partners LLP and Andrew C. Shen, James M. Webster, Gregory G. Rapawy, David L. Schwarz, Bradley E. Oppenheimer and Grace W. Knofczynski of Kellogg Hansen Todd Figel & Frederick PLLC.

Read more at: https://www.law360.com/articles/1847236?copied=1