On May 3, 2023, the US Court of Appeals for the Seventh Circuit sided with the policyholder, resolving a large insurance coverage dispute relating to a $100 million settlement involving claims under the federal Anti-Kickback Statute and the federal False Claims Act. Astellas US Holding, Inc. v. Fed. Ins. Co., No. 21-3075, 2023 WL 3221737 (7th Cir. May 3, 2023). In so doing, the court held that Illinois public policy does not forbid a liability insurer from covering its insured’s payments to resolve compensatory damages it may owe even if characterized by the government and insured as “restitutionary,” while reiterating that Illinois public policy prohibits insurance for “genuine restitution it owes the victims of its intentional wrongdoing.”[1] Determining the amount of a False Claims Act (“FCA”) settlement that is compensatory in nature was made easier by a change in the tax code implemented by The Tax Cuts and Jobs Act of 2017 requiring all False Claims Act settlements to detail the percentage of the settlement amount that is compensatory in nature (and, therefore, is tax deductible), providing an important marker for policyholders seeking insurance coverage for at least a portion of the settlements they reach to resolve FCA investigations.
Background
Healthcare companies and government contractors are increasingly facing scrutiny from government regulators and whistleblowers under the FCA, the government’s preeminent fraud enforcement tool that allows whistleblowers to bring claims on behalf of the government and provides for treble damages and civil penalties. Given the risk of outsized damages, particularly in (1) healthcare cases where per invoice penalties can be exponentially larger than the government’s actual damages and (2) kickback cases where the taint principal of damages can lead to massive cascading damages,[2] defendants are often eager to settle FCA claims.
In 2012, plaintiff Astellas US Holding (“Astellas”) launched Xtandi, a so-called “androgen receptor inhibitor” used to treat metastatic prostate cancer that has not responded to surgery.[3] Xtandi was initially priced at $7,800 per month, and under Medicare’s patient share structure, beneficiaries were responsible for paying about $1,800 per month of that amount.[4] After Astellas released Xtandi, it started contributing money to two patient assistance plans (also referred to as co-pay assistance funds) to, among other things, help defray the beneficiaries’ out -of-pocket costs for this new drug.[5] The United States Department of Justice began investigating Astellas’ contributions to these patient assistance plans for potential healthcare-related fraud offenses and issued a detailed Civil Investigation Demand to Astellas in September 2017.[6]
In 2018, Astellas agreed to pay the federal government $100 million to settle potential claims for violations of the federal Anti-kickback Statute and the federal FCA arising from the contributions to the co-pay funds, $50 million of which was labeled as “restitution to the United States” in the settlement agreement (in accordance with the requirement in The Tax Cuts and Jobs Act of 2017).[7] Coverage for the other $50 million part of the settlement was not an issue before the court
Thereafter, Astellas sought coverage from its insurers, including Federal Insurance Company (“Federal”), for the $100 million settlement.[8] Astellas’ directors and officers (“D&O”) excess liability insurance policy with Federal had a policy limit of $10 million.[9] Federal and the other insurers denied coverage and Astellas then filed a complaint against its insurers for breach of insurance contract.[10]
After settling with its other insurers, Federal remained the sole defendant in the case.[11] Following extensive briefing, the United States District Court for the Northern District of Illinois granted Astellas’ motion for summary judgment on the breach of contract claim, concluding Federal owed Astellas $10 million under the D&O policy since Illinois public policy did not forbid coverage of the settlement.[12] Federal appealed.
The Seventh Circuit’s Decision
The Seventh Circuit affirmed the District Court’s ruling and agreed with policyholder Astellas that the compensatory portion of the $100 million settlement with the government was a covered loss under the D&O policy. The key issue on appeal was whether Illinois public policy forbids the liability insurer from covering its insured’s payment to settle the federal government’s potential claims under the federal Anti-Kickback Statute and the federal FCA.
Illinois is one of only a handful of states where public policy may, depending on the facts and policy language at issue, prohibit coverage for a settlement payment that is “restitution” to a victim / plaintiff. On the other hand, settlement payments that are “compensatory” in nature are insurable under Illinois law.[13] The Astellas Court recognized that drawing the line between what is “compensatory” versus what is “restitutionary” can be challenging, but tried to shed some light on this issue stating—“Where a payment compensates a victim or plaintiff for a loss, the payment takes on the character of compensatory damages,” and, conversely, “where a payment restores to a victim or plaintiff what has been taken from it or forces the perpetrator or defendant to disgorge fraudulently obtained profits, the payment is deemed restitutionary.”[14]
The Seventh Circuit held that Federal had the burden of showing that the portion of the settlement payment for which Astellas sought coverage was uninsurable restitution.[15] The Court, however, held that Federal failed to do so, noting that “labels” in the settlement agreement identifying portions of payment as “restitution to the United States” could not be taken at face value, and “was applied for tax purposes.”[16] The Court further held that the FCA does not provide for restitutionary damages—instead, the focus in FCA litigation is on compensating the government for its actual damages: “As best we can tell, no court has ever interpreted the False Claims Act as allowing restitutionary remedies. We are not persuaded that we should be the first to treat ‘damages’ under the False Claims Act as restitutionary rather than compensatory, particularly in the context of a dispute over insurance coverage for claims that were never even formally asserted.”[17] In other words, the Astellas court held that the portion of the settlement agreement labeled as “restitution to the United States” for tax purposes, is considered compensation to the United States and, therefore, for insurance coverage purposes covered under the D&O policies at issue.
Key Takeaways
Astellas is an important and helpful precedent for subjects of FCA investigations seeking insurance coverage under D&O and other insurance policies. Crucially, this case demonstrates that even though a payment may be described as “restitution” in a settlement agreement and the law governing the policy is from one of only a handful of states holding that restitutionary damages / losses are uninsurable, courts will look beyond the mere “description” of the loss amount to determine if it is covered or not. The Astellas court did exactly that and based on the language and intent of the FCA statute, which does not allow for restitutionary remedies, correctly found that even though the government and the policyholder referred to a portion of the amount being paid as part of the settlement agreement as “restitution” to the government, that amount was in fact “compensatory,” not in violation of Illinois law, and thus covered under the Federal D&O policy at issue.
Policyholders who are the subjects of FCA investigations should take a careful look at their insurance policies, applicable state law, and should not accept an insurer’s declination of coverage based on the insurer’s argument that “restitutionary” type damages are not covered under the insurance policy. McGuireWoods’ False Claims Act Team and Insurance Recovery Practice work closely together on False Claims Act investigations and actions to (1) ensure a vigorous defense of any fraud claims and (2) to seek all appropriate coverage of defense and settlement costs from clients’ D&O and other insurers.
Please contact the authors if you have any questions about the Astellas case, a fraud enforcement matter, or insurance policy placement / coverage issues.
[1] Astellas US Holding, Inc., 2023 WL 3221737 at *1.
[2] See, e.g., Distributor of Ophthalmic Surgical Products Found Guilty of Paying Kickbacks and Violating the False Claims Act: May Be Liable For Up To $848 Million in Civil Damages and Penalties | The FCA Insider
[3] Astellas US Holding, Inc., 2023 WL 3221737 at *1.
[4] Id.
[5] Id. at *2.
[6] The government considers certain payments directed to beneficiaries to offset pharmaceutical co-pay costs as improper remuneration under the Anti-Kickback Statute that is designed to induce the use of the drug while undermining Medicare’s patient-share structure.
[7] Astellas US Holding, Inc., 2023 WL 3221737 at *2.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id. at *5.
[14] Id.
[15] Id. at *3, 13.
[16] Id. at *7.
[17] Id. at *15.