In a significant ruling, the Second Circuit Court of Appeals recently expanded the scope of the Anti-Kickback Statute (AKS).The Court joined other circuit courts across the country in adopting, for the first time, the “at-least-one-purpose rule,” whereby a defendant violates the AKS when at least one purpose, rather than the sole or primary purpose, of a payment (or “remuneration”) is to induce the purchase of federally reimbursable healthcare products or services. This ruling significantly lowers the bar for proving AKS violations in the Second Circuit.
The Case: Novartis and “Sham” Speaker Programs
The decision stemmed from a non-intervened qui tam lawsuit against Novartis Pharmaceuticals. The relator alleged that Novartis used “sham” speaker programs to funnel illegal kickbacks to doctors, incentivizing them to prescribe the company’s multiple sclerosis drug, Gilenya. These alleged “sham” programs included: (1) lavish speaking events with no legitimate attendees and minimal educational content; (2) excessive payments for canceled speaking engagements; and (3) deliberately selecting high-prescribing physicians as speakers.
After relator’s Third Amended Complaint was dismissed with prejudice in 2022, by Judge Kimba Wood of the U.S. District Court for the Southern District of New York, relator appealed. On December 27, 2024, Judge Myrna Perez of the Second Circuit affirmed the dismissal as to several categories of allegations in relator’s complaint but revived the qui tam lawsuit by vacating the dismissal as to these three categories of allegations.
Accepting relator’s allegations as true for the purposes of a motion to dismiss, the Second Circuit ruled that all three categories of activities were pled with the requisite particularity and suggest that Novartis operated its speaker program at least in part to remunerate physicians to prescribe Gilenya, in violation of the AKS.
The Court thereby rejected Novartis’s argument that relator must prove that the only purpose of the speaker program was to induce prescriptions, and for the first time adopted the at-least-one-purpose rule. As the Court noted, the at-least-one-purpose rule was first adopted by the Third Circuit in 1985 (United States v. Greber, 760 F.2d 68, 69, 72 (3d Cir. 1985)), and has since been adopted by the First, Fourth, Fifth, Seventh, Ninth, and Tenth Circuits. Importantly, the Court also held that an allegation of an AKS violation does not require proof of any quid pro quo, or establishing a cause-and-effect relationship between payments and prescription volumes. Taken together, these two holdings provide a powerful tool for whistleblowers and government enforcement to prosecute all manner of payments to healthcare providers made by pharmaceutical companies, medical device companies, and other companies selling healthcare products and services.
Key Takeaways
The key takeaways from the opinion are:
- At Least One Purpose is Enough: The court rejected the argument that remuneration to physicians is unlawful under the AKS only if the “sole purpose” or “primary purpose” of the payment is to induce healthcare purchases. Rather, it is enough under the AKS to show that at least one purpose of the payment is to induce future purchases.
- No Quid Pro Quo Required: The court emphasized that proving a direct cause-and-effect relationship between payment and prescriptions is not necessary.
- Particularity is Paramount: While the “at least one purpose” standard broadens liability, courts will still scrutinize the level of detail in the allegations, in accordance with the heightened pleading requirements of Fed. R. Civ. P. 9(b).
Pleading with Particularity: Facts Matter
The Court’s analysis greatly turned on the degree of particularity with which relator pled the allegations. For the categories of allegations that the Second Circuit affirmed dismissal, the Court ruled that they were not pled with the “specific detail” necessary to satisfy the at-least-one-purpose rule. In contrast, for the three categories of allegations that the Court vacated dismissal, it cited to specific allegations that met the heightened pleading requirement of Fed. R. Civ. P. 9(b) and gave rise to a strong inference of fraudulent intent. With respect to relator’s allegations that (1) Novartis paid physicians via lavish speaking events with no legitimate attendees and minimal educational content, the Court cited particularly illustrative examples of these “sham” events, such as a $1,000 three-person steak dinner where all three attendees were Novartis-speaker physicians from the same practice. Notably, the District Court looked at the same complaint and found that “relator still has not provided a basis on which to infer that these events were fraudulent,” and “without more detail as to the composition of the audience at these events, and the content covered, Relator’s claim that they are ‘shams’ is merely a ‘conclusory allegation.’”
Regarding relator’s allegations that (2) Novartis provided excessive payments for canceled speaking engagements, the Second Circuit cited to relator’s identification by name and location physicians whom Novartis paid, including for each the amount paid for canceled speaker events (approximately $20,000 per physician over a two-year period) and the volume and dollar value of Medicare claims for Gilenya prescriptions (from $1 to $1.7 million each over the same period). Again, the District Court was unsatisfied by the same complaint, dismissing it because the Relator did not identify “the circumstances or timing of the cancellation for any of these events.”
For relator’s allegations that (3) Novartis deliberately selected high-prescribing physicians as speakers, the Second Circuit cited to specific details showing that Novartis selected the physician speakers based on driving volume of Gilenya prescriptions, for example witness statements that Novartis representatives knew that a particular physician “would not prescribe Gilenya without speaking engagements.” The District Court did not find this satisfactory, dismissing because “Relator’s allegations do not link” Novartis’s analysis to the actual prescribing habits.
So, what one Court sees as pleading with particularity, another may not.
Impact
This ruling has major implications for the healthcare industry:
- Increased Scrutiny of Marketing Practices: Pharmaceutical companies and other healthcare providers must carefully review their interactions with physicians to ensure compliance with the AKS.
- Heightened Risk of Enforcement: The broader scope of liability increases the risk of government investigations and whistleblower lawsuits based on AKS violations.
This decision sends a clear message: even if a payment has legitimate purposes, it can still violate the AKS if inducing prescriptions (or other healthcare purchases) is one of them.
When your client is under investigation by the Federal Government, a time-honored practice that is often pursued by white collar practitioners is an early sit down with the lead AUSA to discuss the legal and factual components of the case, including the possibility of a declination, immunity, or a cooperation agreement. These meetings are always beneficial to both sides of the “v” – an opportunity for the Defense to seek a declination or leniency, and for the Government to assess the strengths and weaknesses of its case as well as the potential value of Defendant cooperation.
United States of America v. Robert Menendez, et al.
Full and frank communication at these meetings are vital to their process and they must be based on mutual trust and respect. Which is why many in the defense bar were taken aback when, this past March, it was revealed that the grand jury investigating former New Jersey Senator Robert Menendez handed down a superseding indictment. The new indictment included two additional counts charging Menendez and his wife with obstruction of justice, alleging, in pertinent part, that Menendez and his wife had caused their “then-counsel to make false and misleading statements” to SDNY prosecutors during a Pre-Indictment Meeting. Causing additional angst amongst the defense bar was the fact that during trial in May, the Government sought, and was successful in, introducing a PowerPoint presentation created by Menendez’s then lawyer Abbe Lowell that was shared with prosecutors’ pre-indictment. The utilization of a PowerPoint presentation is a routine practice during these types of pre-indictment meetings with the Government.
Attorney Lowell’s PowerPoint, part of Lowell’s failed attempt to convince the Government not to indict, outlined his theory of defense. Lowell maintained that payments made to Menendez’s wife (then girlfriend), alleged by the Government to have been bribes, were not known to Menendez prior to the Government’s investigation, and that the payments were in fact loans that were paid back as soon as the couple learned of the investigation.
Menendez’s trial counsel subsequently opposed the introduction of the PowerPoint as overly prejudicial under F.R.E. 403. The Government countered that the presentation, as authorized by the client, Menendez, was part of a larger scheme to obstruct justice by classifying bribe payments as loans. The Government was successful and the PowerPoint was allowed into evidence. Menendez was ultimately convicted on all counts. Menendez’s post-trial motions, which include attacks on his obstruction of justice conviction, are currently pending before the trial court. Menendez is scheduled for sentencing on January 29, 2025.
The Government’s aggressive use of an attorney’s statement against his client received a lot of press at the time because of the high-profile nature of the Defendant as well as the rarity that this tactic is used. However, it is not the first-time that attorneys from our firm, and others, have seen the Government pursue this tactic.
Is This a Trend?
Recently, similar troubling situations have played out for the authors of this article. On one occasion, an attorney with our firm represented one of the alleged payors of a bribe in a political corruption trial. During jury selection, counsel for a codefendant was approached by the Government with a thinly veiled threat. Depending on the arguments asserted by counsel in his opening statement, it was the Government’s intention to introduce statements made by counsel during a pre-indictment meeting with the prosecutors and the lead FBI agent.
After opening statements, the Government made good on its threat and it sought to introduce evidence of statements made by defense counsel at a pre-indictment hearing which occurred very early in the Government’s investigation. Counsel for the codefendant pushed back arguing, as Menendez’s counsel had, that evidence of what was said at the meeting was of limited evidentiary value and that the admission of counsel’s statement would be unduly prejudicial. Additionally, because the Government’s version of what was said at the meeting differed greatly from defense counsel’s version (and defense counsel’s contemporaneous notes), it was contemplated that defense counsel would have to take the stand to rebut the Government’s testimony, thus preventing counsel from participating in the trial and essentially denying codefendant her right to her chosen counsel.
In the end, the trial court allowed the testimony with certain conditions. The lead FBI agent was allowed to testify that the meeting took place but could not testify as to what was said. While that may seem like a win for the defense, the Government made every attempt it could to suggest that they had been misled by counsel at this meeting. In addressing whether the Government’s use of attorney statements against their clients at trial may make defendants reluctant to cooperate, the Government stated the following in their brief:
The government does not want defense lawyers to make false exculpatory statements to investigators and prosecutors. If [counsel] and other defense lawyers are deterred from requesting meetings with the government in order to make statements on behalf of their clients that they have not independently vetted, that would be a welcome incidental result…
While the Government may have won the battle, they certainly lost the war – the trial ended with codefendant’s acquittal. However, the chilling effect of what the Government had attempted to do was felt throughout the local white-collar defense bar long after the case was over.
This dynamic can come to a head well before trial, and our firm has experienced exactly that. In a completely unrelated case in another federal district, attorneys from our firm sought to meet with the government to present an “attorney proffer.” White-collar practitioners are accustomed to these off-the-record meetings in which defense counsel present what they believe their client might say – or what the evidence might show – before an indictment is returned in an effort to dissuade the government from charging.
In this particular instance, our attorneys wrote to the prosecutors a few days before the scheduled meeting to confirm that our meeting would be off-the-record and that what counsel says at the meeting would not be considered an admission by our client. The prosecutor responded quickly and rejected our proposal. The prosecutor specifically referenced the Menendez case and wrote that a meeting with us would not be productive unless our client had “skin in the game.” We held firm in our position and decided not to meet with the government.
Any Guardrails?
Unfortunately, there are not many protections for pre-trial discussions with prosecutors. There is a case out of the Second Circuit, United States v. Valencia, 826 F.2d 169 (2d Cir. 1987), upholding a trial court’s refusal to allow the Government to introduce statements from the defendant’s attorney made during a conversation with prosecutors regarding the lowering of his client’s bail. The Second Circuit cogently recognized that “[o]ur concern arose because the routine use of attorney statements against a criminal defendant risks impairment of the privilege against self-incrimination, the right to counsel of one’s choice, and the right to the effective assistance of counsel.” Id at 172. However, subsequent decisions have limited the Valencia protections to simply “informal” discussions between defense attorneys and prosecutors.
Defense counsel have also looked to F.R.E 410 (Pleas, Plea Discussions, and Related Statements) and F.R.E. 408 (Compromise Offers and Negotiations) to protect their pre-indictment statements from becoming evidence at trial. However, Courts are reluctant to consider pre-indictment discussions protected under Rule 410, unless the terms of a specific plea deal are discussed. Additionally, Rule 408 contains a sizeable obstruction exception, “The court may admit this evidence for another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.”
Going Forward
So, what can be done to ensure your pre-indictment presentation does not become evidence at trial and avoid the unthinkable – the possibility of being called as a witness at your client’s trial? First, ask yourself if a presentation is a good idea in the first place. Are there verified facts you could present that may sway a prosecutor or is the presentation being made to appease a difficult client? Second, don’t attribute the facts contained in your presentation to your client. Credit your facts to a robust investigation and clarify that your current understanding of the facts is as follows. Third, do not utilize written materials, such as a PowerPoint presentation, that could one day become a trial exhibit. If a written presentation is necessary, make sure copies are not provided to the Government. Finally, make sure an associate or a paralegal accompanies you to the presentation for the sole purpose of taking contemporaneous notes; just in case the substance of the discussion becomes disputed down the line. Or, in the alternative, come to an agreement with the Government, that no notes will be taken at the presentation by anyone.
Fundamental to the practice of representing criminal defendants in federal court, as opposed to the state court system, has always been the ability to walk-in to a United States Attorney’s Office and have open and honest discussions with people that you trust and who in turn trust you. These discussions often center around complex legal arguments that are beyond the understanding of even a sophisticated client and should never be seen as authorized by or attributable to a defendant. However, in light of what occurred in the Menendez case, the defense bar is struggling with serious reservations about meeting with prosecutors at all. With the threat of an attorney statement being used against their client now hanging over their head, the safest bet may be to stay away from the Government entirely. While the Government may be dismissive of the resultant chilling effect of their actions, such a dismissal is extremely short sighted.
