UNITED STATES OF AMERICA, ET AL., EX REL. ADAM HART, Plaintiffs-Appellants, — v. — MCKESSON CORPORATION, MCKESSON SPECIALTY DISTRIBUTION LLC, MCKESSON SPECIALTY CARE DISTRIBUTION CORPORATION, Defendants-Appellees.
Docket No. 23-726-cv
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
Decided: March 12, 2024
August Term, 2023 (Argued: November 28, 2023)
LYNCH and PARK, Circuit Judges, and WILLIAMS, District Judge.**
Adam Hart brought a qui tam action under the federal False Claims Act (the “FCA“) and the FCA analogues of several states and the District of Columbia against a pharmaceutical distributor, McKesson. Hart alleged that McKesson provided two business management tools to its customers without charge, in exchange for those customers’ commitments to purchase drugs from McKesson, conduct that he argues violated the federal anti-kickback statute (the “AKS“) and several analogous state anti-kickback statutes. The district court (Abrams, J.) dismissed Hart‘s FCA claim because it concluded that Hart failed to allege sufficient facts to suggest that McKesson acted “willfully,” as required under the AKS. It dismissed the remaining claims under the state FCA analogues on the ground that those claims were premised solely on a violation of the federal AKS.
We hold that the district court correctly concluded that to act “willfully” under the federal AKS, a defendant must act knowing that its conduct is in some way unlawful, and that Hart failed to plead sufficient facts to meet that standard. We also hold, however, that the district court erred in concluding that Hart‘s remaining claims were premised solely on a violation of the federal AKS. Accordingly, we AFFIRM the district court‘s dismissal of Hart‘s federal FCA claim, VACATE the dismissal of the remaining claims, and REMAND for further proceedings.
ANDREW C. SHEN, Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C. Washington, DC (James M. Webster, David L. Schwarz, Bradley E. Oppenheimer, Grace W. Knofczynski, Kellogg, Hansen, Todd,
** Judge Omar A. Williams of the United States District Court for the District of Connecticut, sitting by designation.
MARK MOSIER, Covington & Burling LLP, Washington, DC (Krysten L. Rosen Moller, Ethan M. Posner, Nicholas Pastan, Covington & Burling LLP, Washington, DC; S. Conrad Scott, Covington & Burling, New York, NY, on the brief), for Defendants-Appellees.
GERARD E. LYNCH, Circuit Judge:
In this qui tam action, Adam Hart sued McKesson Corporation, McKesson Specialty Distribution LLC, and McKesson Specialty Care Distribution Corporation (together, “McKesson“) under the federal False Claims Act (the “FCA“),
As explained below, we agree with the district court that to violate the federal AKS, a defendant must act knowing that its conduct is, in some way, unlawful, and that Hart failed to allege facts sufficient to satisfy that standard. We disagree, however, with the district court‘s conclusion that Hart‘s claims under the FCA analogues of several states and the District of Columbia were premised solely on a violation of the federal AKS. Accordingly, we AFFIRM the district court‘s dismissal of Hart‘s federal claim, VACATE the dismissal of Hart‘s remaining claims, and REMAND for further proceedings consistent with this opinion.
I. Factual Background1
McKesson is a large wholesale pharmaceutical distributor that sells products across the United States. It provides drugs and other medical supplies to various health care providers, including oncology providers. McKesson includes two divisions that serve oncology customers – the U.S. Oncology Network (“USON“), which offers tools and services to member health care practices in exchange for management fees, and the Open Market Division, which operates as a traditional drug wholesaler that purchases drugs from manufacturers and sells them at a markup to health care practices.
Oncology practices often obtain specialty drugs from wholesalers like McKesson. When an oncology practice buys a specialty drug from a wholesaler, it bills its patient‘s insurer for the cost of the drug. Medicare and Medicaid are federally funded health insurance programs that are major payors for oncology drugs procured in that fashion. Those programs reimburse health care providers
McKesson offers two tools (the “Business Management Tools“) to help providers maximize their profits and mitigate the risk that the reimbursement rate will fall below the actual cost they paid for drugs. The first tool, the Margin Analyzer, evaluates sets of “therapeutically interchangeable” drugs by comparing McKesson‘s price for each drug to publicly available Medicare reimbursement rates for that drug. App‘x 277–78, ¶¶ 63, 65. Using the Margin Analyzer, a medical provider can thus compare drugs that McKesson categorizes as interchangeable to determine which treatment option provides the highest profit margin based on how each drug‘s reimbursement rate measures up to McKesson‘s prices. The Margin Analyzer does not evaluate the comparative medical benefits of the drugs that it analyzes, nor does it evaluate which drug would provide the least expensive option for a given patient. Instead, according to Hart, the tool‘s “sole function is to identify which among several purportedly
But according to Hart, while the Business Management Tools led to increased costs for insurers, they were hugely valuable tools for McKesson and for health care providers, and McKesson understood as much. Hart alleges, for example, that multiple internal and external analyses determined that the Margin Analyzer and Regimen Profiler possessed significant value. Further, the Business Management Tools formed a central component of McKesson‘s national marketing and sales strategy, and McKesson often won new business by touting the benefits of the tools to health care providers.
Hart‘s objection to the Business Management Tools is that McKesson‘s Open Market Division offered them for free to induce providers to buy drugs
Hart further contends that McKesson acted willfully. He points out that sales executives and other customer-facing employees at McKesson received regular training on the AKS and that those training sessions emphasized that
II. Procedural History
Hart filed his complaint on February 6, 2015. Because Hart asserted a qui tam action under the FCA,3 the United States was given an opportunity to intervene in the case. See
In its opinion on the motion to dismiss the SAC, the district court concluded that to act “willfully,” as required for liability under the AKS, a defendant must act knowing that its conduct was unlawful. Id. at *7. The court then concluded that Hart‘s allegations, including the new allegations that he added to the SAC, did not plausibly plead that McKesson acted willfully under that standard. Id. at *8–12. The district court also dismissed Hart‘s claims under the FCA analogues of several states and the District of Columbia, reasoning that those claims were premised only on “a violation of the federal AKS,” which Hart had not plausibly alleged. Id. at *8 (emphasis in original). The court again granted Hart leave to amend his complaint because it was “conceivable” that Hart could state a claim under the anti-kickback laws of one or more states, which may have a lower scienter requirement than the federal AKS. Id. at *13.4
DISCUSSION
Hart argues on appeal that the district court erred in dismissing his federal FCA claim because he alleged sufficient facts to show that McKesson acted with the requisite scienter under the federal AKS. He also argues that the district court erred in dismissing his remaining claims because, contrary to the district court‘s conclusion, they were not premised solely on a violation of the federal AKS. As explained below, we agree with the district court‘s dismissal of Hart‘s federal FCA claim but disagree with its dismissal of the remaining claims.
I. Standard of Review
We review de novo a district court‘s grant of a motion to dismiss. Meyer v. Seidel, 89 F.4th 117, 128 (2d Cir. 2023). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.‘” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
II. The Federal AKS Claim
A. Willfulness
The primary issue on appeal is whether the SAC plausibly alleges that McKesson acted with the mens rea applicable under the federal AKS. That statute provides, in pertinent part, that
[w]hoever 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 . . . .
When interpreting a statute, “[w]e begin with the text.” Facebook, Inc. v. Duguid, 592 U.S. 395, 402 (2021). The statute here requires, inter alia, that a defendant act “willfully” to be liable, but it does not define that term.
Interpreting the term “willfully” has long “bedeviled” courts, United States v. George, 386 F.3d 383, 389 (2d Cir. 2004), because it is “‘a word of many meanings’ whose construction is often dependent on the context,” Bryan v. United States, 524 U.S. 184, 191 (1998), quoting Spies v. United States, 317 U.S. 492, 497 (1943). “Most obviously it differentiates between deliberate and unwitting conduct, but in the criminal law it also typically refers to a culpable state of mind.” Bryan, 524 U.S. at 191. Thus, “[a]s a general matter, when used in the criminal context, a willful act is one undertaken with a bad purpose.” United States v. Kosinski, 976 F.3d 135, 154 (2d Cir. 2020) (alterations in original) (internal quotation marks omitted), quoting Bryan, 524 U.S. at 191. “In other words, in order to establish a willful violation of a [criminal] statute, the Government must prove that the defendant acted with knowledge that his conduct was unlawful.”
At the same time, it is well settled that “ignorance of the law or a mistake of law is no defense to criminal prosecution.” Cheek v. United States, 498 U.S. 192, 199 (1991). Accordingly, with few exceptions, “a person who acts willfully need not be aware of the specific law that his conduct may be violating.” United States v. Henry, 888 F.3d 589, 599 (2d Cir. 2018) (emphasis added). “Rather, ‘knowledge that the conduct is unlawful is all that is required.‘” Id., quoting Bryan, 524 U.S. at 196.5
Drawing on that background understanding of willfulness, our only opinion to address the AKS‘s mens rea requirement suggested that to violate the AKS, a defendant must act knowing that his conduct is unlawful, even if the defendant is not aware that his conduct is unlawful under the AKS specifically.
Although Pfizer addressed a slightly different issue than the one we now face, its discussion of the term “willfully” in the AKS is evidence that we have understood that term as it is typically interpreted in federal criminal law. Moreover, the interpretation suggested in Pfizer 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. See, e.g., 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);
Pfizer‘s interpretation also makes sense given the text and structure of the statute. The AKS forbids “offer[ing] or pay[ing] any remuneration . . . directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person” to make certain purchases.
All of that suggests that Congress understood that the precise contours of the AKS would evolve over time. Thus, interpreting “willfully” to require that a defendant act understanding that his conduct is unlawful (if not necessarily under the AKS) accords with the general goal of criminal law to punish only those who act with a “vicious will.” Ruan v. United States, 597 U.S. 450, 457 (2022) (internal quotation marks omitted), quoting Morissette v. United States, 342 U.S. 246, 251 (1952). A more expansive interpretation would risk creating a trap for the unwary and deter socially beneficial conduct. See id. at 459; United States v. Pineda, 847 F.2d 64, 65 (2d Cir. 1988) (rejecting challenge to sentencing enhancement “because the statute requires proof that a defendant knowingly and intentionally possessed a controlled substance“).
The legal landscape that has emerged through HHS‘s safe harbors and advisory opinions only strengthens that conclusion. HHS has codified over 35 safe harbor provisions and continues to add new safe harbors and modify existing ones. See
Several years later, the Ninth Circuit held that “knowingly and willfully” required not only that a defendant act knowing that her conduct was unlawful in general, but also that she act with specific knowledge of the AKS. Hanlester Network v. Shalala, 51 F.3d 1390, 1400 (9th Cir. 1995). Other circuits rejected that interpretation, concluding that “ignorance of the law is no excuse” and that “knowledge that conduct is unlawful is all that is required.” E.g., United States v.
endeavor. A defendant could innocently conclude in light of a safe harbor provision or advisory opinion that its conduct is lawful under the AKS and all other applicable laws. The possibility that such a defendant would draw that conclusion and turn out to be incorrect supports interpreting willfulness to require knowledge of wrongdoing.
In 2010, Congress resolved the conflict. It amended the statute to provide that, to violate the AKS, “a person need not have actual knowledge of [the AKS] or specific intent to commit a violation of [the AKS].” Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 6402(f)(2), 124 Stat. 119, 759 (2010) (codified at
Finally, a comparison between the criminal provision at issue in this case and its civil counterpart lends further support to our interpretation. The AKS is abutted by a provision that imposes civil liability against, inter alia, those who “knowingly” make false representations in certain health care contexts. See, e.g.,
Accordingly, we hold that the term “willfully” in the AKS means what it typically means in federal criminal law. To act willfully under the AKS, a defendant must act with a “bad purpose,” Bryan, 524 U.S. at 191. In other words, the defendant must act “with knowledge that his conduct was unlawful.” Kukushkin, 61 F.4th at 332 (internal quotation mark omitted), quoting Bryan, 526 U.S. at 191-92.
None of this is to say, however, that a defendant must know of the AKS specifically or intend to violate that statute. Such a requirement would conflict with the plain language of the 2010 amendment. A person may be criminally 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. Our interpretation of the AKS‘s willfulness requirement thus protects those (and only those) who innocently and inadvertently engage in prohibited conduct.
We disagree. At the outset, Hart‘s proposal is based on a misreading of our opinion in Pfizer. Although that opinion explained that a “bad purpose” is “accurately understood as ‘a voluntary, intentional violation of a known legal duty,‘” Pfizer, 42 F.4th at 77, quoting Bishop, 412 U.S. at 360, it also made clear that “a person can ‘willfully’ violate a statute as long as he knows that his conduct is illegal, even if he is not aware of the exact statutory provision that his conduct violates,” id. at 77 n.8 (emphasis added). The full context of the opinion thus indicates that the relevant knowledge that a defendant must possess is knowledge that “his conduct” is illegal; according to Pfizer, a defendant‘s
Second, Hart‘s two-factor definition would criminalize too much innocent conduct. 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,” Ruan, 597 U.S. at 457 (internal quotation marks omitted), quoting Morissette, 342 U.S. at 251. But under Hart‘s proposed definition, the company could suffer criminal penalties anyway if the hotline was deemed prohibited remuneration.
Third, although Hart cites a handful of out-of-circuit opinions to support his two-factor test, those opinions do not help him. In the first, United States v. Sosa, 777 F.3d 1279 (11th Cir. 2015), the defendant engaged in conduct that was plainly illegal -- writing checks to a “recruiter” who, in exchange, paid patients in
Hart‘s other primary authorities are likewise inapplicable. As with Sosa, those cases all involved kickback schemes that were plainly illegal. See United States v. Goodwin, 974 F.3d 872, 873 (8th Cir. 2020) (defendant shared profits of medical testing company in exchange for referring patients to the company); United States v. Moshiri, 858 F.3d 1077, 1082 (7th Cir. 2017) (defendant was aware that his teaching contract with a hospital was a sham designed to disguise kickbacks for patient referrals); United States v. Nowlin, 640 F. App‘x 337, 340, 344 (5th Cir. 2016) (defendant received commissions from medical equipment company in exchange for referring clients to the company). And, as with Sosa, those cases all come from circuits that have elsewhere held or implied that willfulness under the AKS requires knowledge that the defendant‘s specific
Hart‘s second proposed definition derives from an outlier opinion from the Fifth Circuit, United States v. St. Junius, 739 F.3d 193 (5th Cir. 2013). We reject that definition, too. In St. Junius, the court stated that to show a criminal violation of the AKS, the government “must prove that the defendant willfully committed an act that violated” that statute. Id. at 210. It rejected the argument that the government must prove that the defendant acted knowing that her conduct was unlawful. Id. at 210 n.19. In other words, the Fifth Circuit ruled 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. In so ruling, the court relied exclusively on the portion of the AKS that provides that to violate the AKS, “a person need not have actual knowledge of [the AKS] or specific intent to commit a violation of [the AKS],”
St. Junius‘s reasoning is unpersuasive. As we have established above, there is a distinction between knowledge of unlawfulness in general and knowledge of
Accordingly, neither of Hart‘s proposed definitions has merit. Instead, to act “willfully” under the AKS‘s criminal provisions, a defendant must act knowing that his conduct is unlawful, even if he is not aware of the AKS
B. Sufficiency of Hart‘s Allegations
Having established the proper definition of willfulness, we now turn to whether Hart has alleged sufficient facts pertinent to that definition to survive a motion to dismiss. Hart points to three categories of allegations that he contends give rise to a plausible inference of willfulness as we have defined it -- allegations that McKesson destroyed certain documents after receiving notice that its conduct may be unlawful, that Hart himself suggested to certain McKesson employees that McKesson‘s use of the Business Management Tools violated the company‘s compliance policies or was otherwise inappropriate, and that one McKesson executive sent an email to another executive that attached a document that included a reference to the Business Management Tools and stated, “You didn‘t get this from me . . . . ok?“. We hold that none of those allegations alone or together gives rise to a plausible inference that McKesson acted willfully.9
Under the circumstances, we disagree. At most, the allegation suggests that at some point during this litigation, McKesson determined that its use of the Business Management Tools may have been improper. But courts that have found concealment probative of wrongful intent have typically done so when the concealment happened concurrently with the violation. See, e.g., Vernon, 723 F.3d
Hart also alleges that McKesson removed a customer testimonial video about the Margin Analyzer from its website and claims to have lost or destroyed the video and the footage used to make that video. But there is nothing to suggest that McKesson attempted to conceal the testimonial video other than the fact that McKesson currently does not possess that video or the footage used to make it. Hart does not allege that McKesson had an obligation to preserve those materials
Second, Hart relies on a handful of allegations that, while he was still employed at McKesson, he discussed his concerns about the propriety of McKesson‘s use of the Business Management Tools. He relies, for example, on a message that he sent to his supervisor while both of them attended a training session on McKesson‘s compliance policies that included a presentation on the AKS. During the session, Hart told his supervisor that he felt that McKesson‘s current sales practices violated the policies discussed at the session. Even interpreting that allegation in the light most favorable to Hart, it suggests only that Hart believed that McKesson‘s use of the Business Management Tools violated the AKS.11 Hart does not allege that his supervisor agreed with him or
Hart similarly alleges that he had “frequent conversations” with the creator of the Margin Analyzer, during which the two employees “discussed concerns that McKesson was inappropriately exploiting the value-added business tool . . . by giving the tool for free to open market customers.” App‘x 320, ¶ 166. Again, Hart does not allege that the tool‘s creator shared Hart‘s concerns. Even assuming that he did, however, Hart does not allege that the belief was shared by others on McKesson‘s sales team or that the views of the tool‘s creator can be imputed to McKesson as a whole.
Finally, Hart points to his allegation that one of McKesson‘s senior sales executives sent another McKesson executive an email that stated, “You didn‘t get this from me . . . . ok?” and attached three documents. The attached documents total 170 pages and cover a host of topics, including valuations of over 150
The district court noted that the SAC lacked allegations similar to those that other courts have found support an inference of willfulness. For example,
Accordingly, none of Hart‘s allegations, alone or in combination with each other, plausibly suggests that when McKesson offered its Business Management Tools to encourage customers to commit to purchasing from McKesson, it believed that its conduct was unlawful under the AKS or any other law. As a result, the district court did not err in dismissing Hart‘s federal FCA claim for failure to state a claim.13
Finally, we turn to Hart‘s remaining claims under the laws of 27 states and the District of Columbia (the “State-Law Claims“).14 The district court dismissed those claims on the ground that Hart brought his claims under the state FCA analogues only “by way of a violation of the federal AKS.” Hart, 2023 WL 2663528, at *8 (emphasis in original). That conclusion was erroneous.
To be sure, the focus of the SAC is Hart‘s contention that McKesson‘s conduct violated the federal AKS. But he alleges that “[t]he States also have enacted statutes prohibiting kickbacks in connection with State Medicaid services,” App‘x 265, ¶ 37, and that “McKesson‘s conduct violates the federal AKS and similar State laws,” id. at 270, ¶ 53 (emphasis added). Indeed, Hart even listed the various state anti-kickback statutes that he contends McKesson
Importantly, Hart argues that many of the state anti-kickback laws have no scienter requirement or a lesser requirement than willfulness. Thus, 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.16 Accordingly, we vacate the district
CONCLUSION
For the reasons stated above, we hold that to act willfully under the AKS, a defendant must act knowing that its conduct is unlawful under either the AKS or other law. Because Hart‘s allegations do not plausibly suggest that McKesson acted with such knowledge of illegality, his federal FCA claim based on the federal AKS must be dismissed. But since he also brought state-law claims under other false claims and anti-kickback statutes that may not have the same mens rea requirements, the district court should not have dismissed those claims on the ground that they were premised only on the federal AKS. Accordingly, we AFFIRM the district court‘s dismissal of Hart‘s federal FCA claim, VACATE the dismissal of the State-Law Claims, and REMAND for further proceedings consistent with this opinion.