"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

• Published date: 02 April 2024
• Subject Matter: Litigation, Mediation & Arbitration, Food, Drugs, Healthcare, Life Sciences, Trials & Appeals & Compensation, Food and Drugs Law
• Law Firm: Arnold & Porter
• Author: Mr Murad Hussain, Michael C. Wood and Annie K. Blackman

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...