“Willfulness” as “Knowledge of Illegality”: Second Circuit Adopts Prevailing Federal AKS Scienter Interpretation While Reviving State FCA Claims Over Potentially Different State AKS Scienter Standards

On March 12, 2024, the Second Circuit affirmed the dismissal of federal False Claims Act claims against pharmaceutical distributor McKesson Corporation and its related subsidiaries (McKesson), which were premised on federal Anti-Kickback Statute (AKS) violations — but the circuit court also reversed the dismissal of state FCA claims based on state anti-kickback violations. U.S. ex rel. Hart v. McKesson Corp., No. 23-726-CV, 2024 WL 1056936 (2d Cir. Mar. 12, 2024). In 2015, McKesson was sued by its former business development executive, Adam Hart, concerning two McKesson business-management tools that were allegedly offered to oncology practices to increase profit margins for prescription drugs. The United States declined to intervene and the district court ultimately dismissed the case for failure to plead “willful” conduct. Writing for the Second Circuit, Judge Gerald E. Lynch explained that the district court correctly dismissed the federal qui tam claims for failing to plead willfulness under the federal AKS, and applied the general criminal-law definition of “willfully” to require knowledge of illegality generally, even without knowledge of the specific law being violated. However, the Second Circuit also held that the district court erroneously dismissed the relator’s analogous state law qui tam claims because the state anti-kickback provisions did not necessarily impose the federal AKS’s high scienter bar.

The relator’s operative complaint alleged that the defendants induced oncology providers to buy pharmaceutical drugs from McKesson instead of its competitors in supposed violation of the federal FCA, the federal AKS, and various state (and D.C.) FCAs and antikickback laws. The relator also alleged that McKesson gave oncologists free business management tools that helped compare reimbursement rates among comparable drugs, and that McKesson’s staff supposedly marketed these tools’ use in maximizing physicians’ ability to profit when prescribing McKesson’s specialty oncology drugs. The relator claimed that these tools were “value-added services” that constituted impermissible kickbacks and alleged that the tools were only made available to physician groups in exchange for agreements to purchase pharmaceuticals from McKesson.

The district court dismissed the complaint, just as it dismissed an earlier version, because the relator failed to make a plausible showing that McKesson acted “willfully” under the federal AKS. See 2023 WL 2663528 (S.D.N.Y. Mar. 28, 2023); see also 602 F. Supp. 3d 575, 579 (S.D.N.Y. 2022). The court also dismissed the state-law claims, construing the complaint as alleging state FCA violations only “by way of a violation of the federal AKS,” and holding that it did not actually plead state FCA violations premised on state anti-kickback violations. 2023 WL 2663528, *8 (emphasis in original). On the relator’s appeal, the Second Circuit agreed with the dismissal of the federal FCA claims, but held that the complaint actually did plead state FCA violations premised on state anti-kickback laws.

First, the Second Circuit held that the term “willfully” in the federal AKS means that a defendant must act knowing that their conduct is unlawful in some way. In doing so, it looked to Bryan v. United States, 524 U.S. 184 (1998), where the Supreme Court held that when a criminal statute requires “willfulness,” a defendant must have acted at least with a “bad purpose” and the knowledge that his or her conduct was unlawful — although not necessarily that the conduct would violate the specific criminal statute at hand. (Bryan also noted that in criminal cases involving highly technical statutes, such as tax offenses and currency structuring, “willfulness” indeed also requires a defendant’s awareness of the specific law that was allegedly violated.) The Second Circuit embraced Bryan, following other circuit courts and explaining that defendants act willfully under the federal AKS when they act “knowing that [their] conduct is unlawful, even if [they are] not aware that [their] conduct is unlawful under the AKS specifically.” 2024 WL 1056936, *4.

Here, the relator alleged only that McKesson knew of the AKS’s general prohibitions on improper renumeration, and that it had “offered its Business Management Tools to encourage customers to commit to purchasing from McKesson.” See id. at *11. But the relator did not plausibly plead that at the time that McKesson allegedly offered those tools to customers, “it believed that its conduct was unlawful under the AKS or any other law.” Id. The Second Circuit thus agreed with the district court’s analysis of “willfulness” under the federal AKS and upheld the dismissal of federal FCA claims.

However, the Second Circuit disagreed with the district court’s conclusion that the relator’s state law claims necessarily rested on the federal AKS alone. The appeals court explained that, although the relator’s operative complaint focused on the federal AKS, it also cited “similar State laws,” id., and “expressly listed” those state laws that the defendants allegedly violated through the provision of their business management tools, id. at *11 n.15. As a result, the Second Circuit concluded that because the relator argued that many state anti-kickback laws “have no scienter requirement or a lesser requirement than willfulness,” the district court’s federal AKS analysis did not automatically apply to state anti-kickback laws. Id. at *12. However, the panel expressed no opinion about the adequacy of the relator’s claims under those laws. Id. at *12 n.16.

The Second Circuit remanded the case for further review of the state laws cited in the operative complaint. Notably, earlier in the litigation, the district court held that the relator adequately pled that the provision of the business management tools qualified as “remuneration” for AKS purposes. See 602 F. Supp. 3d at 589-590. The Second Circuit’s remand thus leaves open the possibility that even though the relator failed to plead that such tools were “willfully” provided, the allegations of “remuneration” might theoretically plead the violation of a state anti-kickback law with a less demanding scienter requirement.

Importantly, the Second Circuit in McKesson adopts the general criminal-law willfulness standard that the Supreme Court long ago established in Bryan — a standard that has nonetheless confounded courts and counsel alike over the years. The case also serves as a reminder that qui tam relators might not need to plead “willfulness” under the federal AKS to plead claims under certain state FCA and anti-kickback statutes.

We will continue to monitor this case as it develops. For any questions regarding compliance with state and federal antikickback provisions, please contact the authors or any of their colleagues in Arnold & Porter’s White Collar Defense & Investigations practice group and Life Sciences & Healthcare Regulatory team.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.