The Alchemy of Wrongs

Kickbacks are not fraud. Both shady, perhaps. Both illegal, maybe. But they are two different species of wrong, as distinct as a jaguar from an ocelot.

Fraud is about deception--misleading someone about something important to get their money. Kickbacks and bribes are about quid-pro-quo: you give me something you're not supposed to, and then I send you something else as payment.

Health insurers don't like paying health care providers for treating patients who the providers obtained by paying kickbacks to referral sources. Sometimes, they seek to sue providers for doing this. But the laws prohibiting kickbacks usually don't let the insurers sue directly; instead, they leave enforcement to the government.

So insurers have sometimes alleged that paying kickbacks for patient referrals violates the federal mail and wire fraud statutes (18 U.S.C. §§ 1341 and 1343), and then have sued under the  Racketeer Influenced and Public Corruption statute (RICO), which allows lawsuits by victims of those crimes.

In recent years, however, the Supreme Court has restricted the scope of the mail and wire fraud statutes. This has made it harder for DOJ to prosecute fraud schemes, but will also make it harder for private parties to bring RICO lawsuits based on allegations of mail and wire fraud. Health insurers looking to sue over kickback arrangements may run directly into this roadblock.

A dubious hypothetical, and a better one.

Imagine I am a doctor, and you run an imaging center that provides MRI scans. We agree that I will send my patients to you for the MRIs, you will bill an insurer for them, and then you will pay me a certain amount for each patient I send. That is very possibly illegal under federal or state anti-kickback laws. We could both go to jail for doing it, even if the patients really do need the MRIs and you really do provide them.

But is it fraud? What if we tell the insurer what we are doing? What if you send a note along with each bill: "Hi Insurer. I paid a referral fee for this patient. Hope you don't mind." And the insurer pays the bill anyways. Fraud? Harder to make that case.

What if we don't say anything about it either way? You send the bills, and we stay silent about the referral arrangement. This is the more realistic, common, and trickier scenario. Is it fraud? Can the insurer sue?

Using RICO to attack kickbacks.

A very short description of RICO is that it allows a plaintiff whose "business or property" have been harmed through certain types of criminal conduct to sue the perpetrators for three times the amount of the harm. One of the types of criminal conduct is federal mail or wire fraud under Sections 1341 or 1343.

Insurers have thus alleged that health care providers who pay kickbacks for referral of patients, treat the patients, and then bill the insurers are guilty of mail or wire fraud, and thus that the insurers can sue the providers for treble damages under RICO.

For example, GEICO filed a RICO claim in New York federal court against an acupuncture provider who allegedly paid for patient referrals. The court granted GEICO's motion for summary judgment, agreeing that the provider "was not entitled to reimbursement due to its payment for patient referrals," and thus that the defendant had violated the mail fraud statute in submitting its claims.

In other cases, insurers have recently used RICO to sue Regeneron, a biotech company, for using a charity organization to help patients cover copays for an expensive Regeneron drug that treats macular degeneration. In part, the theory is that the financial assistance is a form of kickback to the patients, and the scheme defrauds the insurers in violation of the mail and wire fraud statutes. The cases have been stayed pending a separate DOJ lawsuit over the same conduct.

As mail and wire fraud narrow, so do RICO claims predicated on them.

The Supreme Court has been on a bit of a tear recently in reining in DOJ's use of the mail and wire fraud statutes. In Kelly v. United States, the Court held that a scheme would not violate those statutes unless its "object" was to obtain money or property.

In last year's Ciminelli v. United States, the Court rejected the "right to control" theory of mail/wire fraud, under which a defendant could be guilty if he “deprives a victim of potentially valuable economic information necessary to make discretionary economic decisions” or of “intangible interests such as the right to control the use of one’s assets.” According to the Court, the fraud scheme had to aim at depriving the victim of more traditional property rights, rather than such intangible interests.

Lower courts have begun to respond to this directive. Several months ago, in United States v. Constantinescu, a Texas federal court dismissed an indictment against defendants accused of a pump-and-dump scheme in which they used social media posts to induce their followers to buy certain securities, then sold their own shares when the price went up. The court said that because the defendants had not sold inflated stock directly to their followers--but rather to the general market--their scheme did not involve depriving the victims of traditional property rights.

In some circuits, courts have also held that even if a defendant misleads someone else into parting with their money or property, that defendant does not commit mail or wire fraud where the alleged victims "received exactly what they paid for" and "there was no discrepancy between benefits reasonably anticipated and actual benefits received." See United States v. Starr. Thus, where a misrepresentation does not go to "the nature of the bargain" between defendant and victim, it does not amount to federal mail or wire fraud. United States v. Milheiser.

The Supreme Court may be on the verge of adopting this theory, too. In the October 2024 term, it will consider Kousisis v. United States, in which the first issue is "whether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme." The Court's decision may extend the "nature of the bargain" theory nationwide.

What will this mean for insurers seeking to file RICO claims against health care providers they suspect of paying kickbacks? Likely that they cannot use mail or wire fraud as the basis of their racketeering allegations. Where a patient has a legitimate medical need for a certain treatment, and a provider has provided that treatment properly, then arguably both patient and insurer have received what they bargained for, precluding liability under Starr, Milheiser, and perhaps Kousisis--regardless of how the patient ended up with the provider. It could not be said that the insurer had been deprived of money it would otherwise have kept; if the treatment was medically necessary, then presumably the insurer would have had to pay someone for the treatment. While the insurer may claim it was denied its intangible right to be informed of and reject claims somehow "tainted" by kickbacks, that right would likely be deemed insufficient under Ciminelli.

Don't cry for me (yet), UnitedHealthcare.

Insurers may still have other options. RICO claims can also be grounded in laws criminalizing bribery, rather than fraud. In Health Net v. Dual Diagnosis Treatment Centers, an insurer successfully sued a provider under RICO, invoking Section 750 of California's Insurance Code, which prohibits using "runners, cappers, or steerers" to obtain insured patients.*

Even more creatively, in In re EpiPen Direct Purchaser Litigation, drug wholesalers sued Mylan, the maker of EpiPens, under RICO. The plaintiffs claimed that Mylan had paid rebates to pharmacy benefit managers in order to induce more orders of the devices. This, they claimed, violated the federal Anti-Kickback Statute, which amounted to "bribery" in violation of the federal Travel Act, which was a type of "racketeering" offense covered by RICO. A Minnesota district court accepted the theory and allowed the case to proceed.

Other plaintiffs have invoked the "honest services fraud" statute, 18 U.S.C. § 1346, which extends the mail and wire fraud statutes (and thus RICO) to cover accepting kickbacks in return for shirking one's fiduciary duty to another. Some courts have held that a doctor owes the equivalent of a fiduciary duty to her patients, and thus that accepting kickbacks for patient referrals violates § 1346.

Two major challenges to these strategies are standing and causation, which are required for a valid RICO claim. That is, a RICO plaintiff must show that the defendants' illegal conduct caused "concrete financial harm" to the defendant's "business or property." As mentioned above, if the treatment provided in a kickback scheme was medically necessary, then presumably the insurer would have had to pay for it one way or another, regardless of who ended up providing it.

In some contexts--like the copay assistance case in Regeneron--the insurer might retort that the kickbacks steered the patient to a more expensive provider, treatment, or drug than a cheaper alternative the patient would have chosen if forced to cover the full copay amount. This might satisfy RICO's harm causation requirements.

Takeaway

One of the broad themes I expect to cover in this blog is how developments in criminal law also affect related civil laws and litigation, and maybe vice-versa. Because so many civil RICO claims are grounded in violations of the mail and wire fraud statutes, court decisions on the scope of those laws may limit the viability of many RICO cases. One of the results may be to push insurers and other plaintiffs to focus on different types of RICO theories, such as under specific bribery statutes, and to underscore the importance of other threshold RICO elements.

Just Queryin'

Last week, the Supreme Court decided Snyder v. United States. Contrary to some editorial headlines, it did not "legalize bribery." It said that while bribing state and local officials is illegal under 18 U.S.C. § 666, giving them gratuities--gifts that are not part of any quid-pro-quo arrangement--are not covered by that statute. But some critics raised the point that Justice Thomas, who has been criticized for accepting gifts from rich people with interests in some of the cases before him, was part of the majority on the case.

Which got me thinking.

Paying gratuities to federal officials is covered by 18 U.S.C. § 201(c), which makes it illegal for a "public official" to "receive" or "accept" "anything of value . . . for or because of any official act performed . . . by such official."

So Justice Thomas accepted luxury vacations and other gifts from billionaires. I'm not aware of any evidence that the gifts were actually provided "because of" his votes or opinions in any specific cases, or that he was aware of any such motivation. But if they were and he was, query whether his actions would implicate § 201(c). Or whether, for a judge, the "official act" has to be a specific vote or opinion, rather than a pattern of them, which the payer wants to reward.

Also, Canon 3(b)(2)(C) of the Supreme Court's Code of Conduct provides that a justice should disqualify himself from a case when his "impartiality might reasonably be questioned," as when he has "an interest that could be affected substantially by the outcome of the proceeding." Would it be reasonable to question whether the above conduct falls close enough to § 201(c) that Justice Thomas has an interest in the outcome of any case under that statute, or other laws relating to unlawful gratuities, such as 18 U.S.C. § 666?

Our Telepathic Future?

Much of my career has involved proving or disproving whether someone knew, believed, or intended something. Nearly all crimes require a certain mens rea, or "guilty mind." The same is true for civil claims, like RICO, that are based on allegations of crime. So too for many other civil cases, from whistleblower retaliation (requiring retaliatory intent), to certain kinds of defamation (requiring "actual malice"), to patents (requiring "willful" infringement for enhanced damages). Fraud cases, both civil and criminal, almost always turn on intent.

So when the Supreme Court blesses a new way to show a jury what someone was thinking, I pay attention. In the case of Thursday's decision in Diaz v. United States, I read every word of every separate opinion. And for my world of competitive psychoanalysis, it qualifies as a doozy.

What the Court Said

In Diaz, the titular defendant was stopped entering the U.S. from Mexico with 54 pounds of methamphetamine hidden in her car's door panels and the trunk. Her defense was that her boyfriend had asked her to drive the car, and she didn't know the dope was there. As part of its case, the government called an expert witness on Mexican cartels, who testified that "in most circumstances" involving such car-based smuggling, "the driver knows they are hired . . . to take the drugs from Point A to Point B." The woman was convicted and sentenced to seven years in prison.

Federal Rule of Evidence 704(b) states that "[i]n a criminal case, an expert witness must not state an opinion about whether the defendant did or did not have a mental state or condition that constitutes an element of the crime charged or of a defense." The idea is that it is up to the jury to decide what the defendant's state of mind was, and a witness should not be able to serve up a pre-packaged conclusion with the imprimatur of a court-approved expert. Diaz argued that this meant the government's expert should not have been allowed to give the above testimony, as it essentially equaled an opinion about whether she knew the drugs were in the car.

The Supreme Court, or at least most of it, disagreed with her. The majority took a narrow view of Rule 704(b), and said that it only barred an expert from explicitly opining on what the specific defendant knew, or on what all defendants in those circumstances would know. As long as the expert only testified that most people in the defendant's situation had the required knowledge, there was no problem. The jury could still decide whether the defendant was in the supposed minority of persons who were ignorant and innocent.

The dissent, penned by Justice Gorsuch, was incredulous. How, he wondered, could the government be allowed to circumvent the rule and introduce testimony that people in the defendant's situation would have guilty knowledge, simply by inserting the word "most"? Of course, he said, the opinion was "about" whether the defendant had the required state of mind (and thus violated the plain language of 704(b)); otherwise, why would it be relevant?

But in her concurrence, Justice Jackson--a former public defender--was almost gleeful. As she pointed out, what goes around, comes around: defendants, just as easily as the government, could introduce experts to opine that most people in the defendant's situation did not have the required knowledge, or intent, or willfulness. While Justice Gorsuch worried that the government now had a "powerful new tool" to prove mens rea, Justice Jackson recognized that the same tool could be equally powerful in creating reasonable doubt.

Back to the Good(?) Old Days

As the justices on both sides recalled, Rule 704(b) had been enacted after the trial of John Hinckley, Jr., who was charged with shooting President Reagan in 1981. At trial, multiple psychiatrists testified for the prosecution and the defense about whether Hinckley's mental disorders made it impossible for him appreciate the wrongfulness of his conduct. The jury found him not guilty by reason of insanity. In the ensuing public outcry, Rule 704(b) was introduced to prevent such battles of the experts in the future.

From personal experience, I can attest that prosecutors are not keen to let cases turn on expert battles. Not only does it take much of the probative power away from the prosecutors and law enforcement agents, but the complex and technical nature of the testimony often leads to jury confusion, which is an invitation to reasonable doubt.

But if Justices Jackson and Gorsuch are right, we may be looking at a return to the Hinckley days, with competing experts allowed to explain what "most" people in certain scenarios think. Insider trading case? An experienced stock trader or finance professor could say that most traders in the defendant's position would not intend to use the material nonpublic information they held for improper trading, but rather would trade based on legitimate factors. Health care fraud? A doctor could say that "most" of their peers would think that a certain billing arrangement was permissible. And so on.

For the expert witness industry, good times may be on the way.

Unless

Or maybe not so fast? Rule 704(b) is only one obstacle to expert testimony. Another important one is Rule 702, which allows only qualified experts to opine, and only if their specialized knowledge will help the jury; the testimony is based on sufficient facts or data; and the testimony derives from reliable principles and methods, and their reliable application in the case.

My first reaction to reading the facts of Diaz was: how did this testimony make it past Rule 702? How could the government's expert, a law enforcement officer but presumably never a drug mule or cartel member, have any basis to say what such people typically "know"? There was no indication that the expert had conducted any broad-based survey of drug smugglers, nor that he would have any idea how to do so. As Justice Gorsuch put it, the basis of the testimony appeared to be the agent's "convenient ability to read minds," even though "perhaps no 'science' is more junky than mental telepathy." 

He went on, perhaps reading my own mind:

"I struggle to see how a witness claiming to offer an opinion about another person’s (or class of persons’) thoughts at a particular moment in the past can meet any of those standards.  No one, at least outside the fortuneteller’s den, can yet claim the power to conjure reliably another’s past thoughts.  . . . [In] assessing whether a defendant's story about her state of mind is credible . . . [j]urors are more than up to performing that task, and they hardly need the help of some clairvoyant."

I once prosecuted a tax fraud case in which the defendant planned to call an expert to testify about cognitive bias--the idea that people tend to believe what they want to believe; in that case, that a particular tax refund theory was legitimate. I opposed, citing Rule 702, and may or may not have cited such legal luminaries as Paul Simon,* Francis Bacon, Upton Sinclair, and Voltaire to underscore that the jury did not need help with this particular scientific concept. The witness was excluded.

As it turns out, in Diaz, the defendant did not object under Rule 702, at least not in her motions in limine. (Yes, I looked them up.) Not a criticism of defense counsel--there were objections under other rules, and perhaps there were good reasons to skip 702. In any case, it did not come up at any stage of the trial or appellate processes.

My Own Crystal Ball

I suspect that Rule 702, and the related Daubert doctrine, will play a role in keeping out some amount of expert opinion on mental state, at least when it comes to testimony as facile as that at issue in Diaz. (Seriously: how can a law enforcement agent have a reliable scientific method for determining what most suspects know?)

Then again, the six-justice Diaz majority seemed entirely untroubled by the notion of widespread expert testimony regarding knowledge and other mental states. It did not mention Rule 702 even once. Justice Jackson, meanwhile, all but sent engraved invitations to defense counsel to make use of the practice. Perhaps 702 will not hold the line after all.

If not, the impact goes well beyond the criminal world. Rule 704(b) explicitly applies only to criminal cases; there is no such restriction in civil cases. And some may find it hard to see how expert testimony on mental states can be a fine basis for sending someone to prison, but unacceptably unreliable in business litigation and other disputes where life and liberty are not at stake. Hinckley-esque expert battles could perhaps find their way into a wide range of civil disputes as well.

Upshot: Kids, if you're having second thoughts about law school, you may want to stick with that psychology major a bit longer. There could be a few openings on the way.

* "… a man hears what he wants to hear, and disregards the rest."