Second Circuit Reinforces Anti-Kickback Statute's Demanding Willfulness Standard

The threat of AKS liability looms large in the health care industry, particularly because of how it can be leveraged by qui tam plaintiffs seeking treble damages and massive penalties under the FCA. A party that "knowingly and willfully offers or pays any remuneration … to any person to induce such person … to purchase … any good, facility, service, or item" reimbursable under a federal health care program violates the AKS—with any "resulting" claims for government payment being false claims under the FCA. But many of these statutory terms were not defined by Congress, leaving the scope of AKS liability often unclear.

In Hart, the Second Circuit issued an important ruling on the AKS's willfulness requirement—and showed how the statute's ambiguity can provide a strong defense to defendants accused of both AKS violations and FCA violations that are predicated on the AKS. In an opinion by Judge Lynch affirming the dismissal of FCA claims, the Hart court held that a defendant "willfully" violates the AKS only when the defendant knows that its conduct was "in some way" unlawful. A defendant need not know that it is violating the AKS in particular, but nonetheless must act with a "bad purpose" to be found to have acted "willfully" under the AKS. By the same token, a defendant that believes its conduct is lawful—or is even unaware whether its conduct is prohibited by law—has not acted willfully and thus does not have scienter under the AKS. This is the same willfulness standard used elsewhere in federal criminal law, underscoring that background principles of criminal law apply to the AKS.

The court reasoned that this interpretation is consistent with the "general goal of criminal law to punish those who act with a 'vicious will'"—and reflects that the reach of the AKS is "far from settled." Indeed, the HHS Office of Inspector General has codified many safe harbors under the AKS, which it continues to refine and expand. Mindful of this complex landscape, the court noted that a lesser scienter standard could risk expanding the statute to reach "even a well-counseled defendant who has taken every effort to comply with the AKS"—such as "rely[ing] on a published advisory opinion to conclude that her conduct is lawful"—but turns out to be incorrect. Willfulness requires much more.

Importantly, Hart illustrates that this standard not only protects defendants but has force on the pleadings. The Hart relator alleged that the defendant (his former employer) offered free access to certain business management tools in order to induce health care providers to purchase drugs from the defendant—which, in the relator's view, violated the AKS as well as analogous state laws. The relator alleged that the defendant knew these tools were valuable and offered them only to providers who agreed to make the defendant their primary wholesale supplier. And, to support his accusation of "willful" misconduct, the relator alleged that the defendant deleted certain files after receiving a Civil Investigative Demand; that the relator expressed concerns internally about the propriety of the defendant's practices; and that an executive once emailed documents about these practices while stating "you didn't get this from me."

None of this, according to the Second Circuit, rose to the level of plausibly alleging that the defendant acted "willfully"—i.e., that the defendant believed its conduct was unlawful at the time it offered its tools to customers. The defendant's alleged deletion of files suggested "at most … that at some point during this litigation," the defendant determined that its actions "may have been improper"—not that the defendant believed this "concurrently with the violation." The fact that the relator expressed internal concerns did not mean that the defendant shared those concerns. Similarly, the fact that an email may have been sent "surreptitiously" did not itself suggest willful misconduct relating to the alleged AKS issues.

The Second Circuit accordingly affirmed the district court's dismissal of the AKS-based FCA claims. The court did, however, vacate the dismissal of the state-law claims, which rested in part on state anti-kickback laws not addressed by the district court.

The core holding of Hart should be part of a defendant's arsenal in AKS-based FCA cases—particularly because it illustrates that the AKS's willfulness requirement has teeth even on a motion to dismiss. In addition, the Second Circuit explained how its interpretation was consistent with the law in other circuits, which will help defendants litigating this issue elsewhere.