PIH Health Settles HIPAA Violations for $600,000
PIH Health, a health care entity located in California, suffered a data breach in June 2019 when 45 employee email accounts were compromised in a targeted phishing campaign. The accounts contained the protected health information (PHI) of 189,763 individuals, including their names, social security numbers, driver’s license numbers, diagnoses, lab tests, medications, treatment, claims, and financial information.
PIH notified the individuals and the Office for Civil Rights (OCR) of the incident in January 2020. OCR launched an investigation and found alleged violations of HIPPA’s privacy, security and breach notification rules.
In addition to the $600,000 settlement payment, PIH entered into a resolution agreement with OCR that required it to:
Conduct an accurate and thorough risk analysis of the potential risks and vulnerabilities to the confidentiality, integrity, and availability of its ePHI.
Develop and implement a risk management plan to address and mitigate security risks and vulnerabilities identified in its risk analysis.
Develop, maintain, and revise, as necessary, its written policies and procedures to comply with HIPAA rules.
Train its workforce members who have access to PHI on HIPAA policies and procedures.
These requirements are essential to a HIPAA compliance program, and this settlement is a reminder for covered entities to update and maintain security risk assessments, analyses, and risk management plans to address risks and vulnerabilities on an ongoing basis.
Senior NIH Researcher and Leading Expert on Ultra-processed Foods Accuses Administration of Interference and Resigns
Kevin Hall, Ph.D, a senior NIH researcher involved in food and metabolism research, including the effects of ultra-processed foods (UPF), resigned earlier this month, alleging that he had experienced censorship regarding his recent research which he said “did not appear to fully support preconceived narratives of my agency’s leadership about ultra-processed food addiction.” He stated that while he had hoped to expand his research on the connection between food and chronic disease, recent events had made him “question whether NIH continues to be a place where I can freely conduct unbiased science.”
In 2019 Dr. Hall had authored a paper which linked consumption of UPF to greater energy consumption and weight gain. However, a paper he recently published suggested that UPF are not addictive, at least not in the way that many drugs are addictive (the study found that dopamine response to a UPF milkshake was not significant, highly variable, and not related to adiposity).
He also alleged to CBS News that the administration had prevented him from discussing his research, had edited written answers to the media, and had threatened to remove him as an author to the paper if he did not comply with their demands. The administration has denied these accusations.
Attorney General Issues Guidance to U.S. Department of Justice Regarding Transgender Healthcare for Children
On April 22, 2025, U.S. Attorney General Pam Bondi issued a memorandum entitled “Preventing the Mutilation of American Children” (“the AG Memorandum”).
Directed to all Justice Department employees, the AG Memorandum sets forth steps that the Department will take to counteract gender affirming care to treat gender dysphoria. This is the most recent step in a series of actions that the Administration has taken targeting care for transgender children and represents a significant escalation in the Administration’s enforcement efforts.
Background
On January 20, 2025, as one of his first official acts, the president signed Executive Order 14168 entitled “Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government” (the “Gender Ideology EO”). Eight days later, the president issued Executive Order 14187, entitled “Protecting Children from Chemical and Surgical Mutilation” (the “Surgical Mutilation EO”) Broadly, the two Executive Orders (EOs) target laws and practices related to the role of transgender individuals in American society. The Surgical Mutilation EO specially addresses medication and surgical treatment for gender dysphoria and states, “[I]t is the policy of the United States that it will not fund, sponsor, promote, assist, or support the so-called ‘transition’ of a child from one sex to another, and it will rigorously enforce all laws that prohibit or limit these destructive and life-altering procedures.”
Notably, the Surgical Mutilation EO defines “child” as “an individual…under 19 years of age.” This is unusual because in all but two states, eighteen years is the age of adulthood.
Section 8 of the Surgical Mutilation EO includes a set of directives to the Department of Justice that are carried forward in the AG Memorandum. In addition, both Executive Orders include directives to all federal agencies.
Section 8(a) of the Surgical Mutilation EO calls on the attorney general to review enforcement of 18 U.S. Code § 116, an existing federal criminal law intended to prevent “female genital mutilation” on someone who has not attained the age of 18 years, defined in part as “any procedure performed for non-medical reasons that involves partial or total removal of, or other injury to, the external female genitalia.” When enacted, this statute was intended to prevent certain cultural practices and specifically exempts surgeries “necessary to the health of the person;” however, the administration is utilizing this law to bolster its efforts to prohibit or limit gender affirming care.
Preliminary Injunctions
Both the Gender Ideology EO and Surgical Mutilation EO were the subject of almost immediate litigation in federal district courts in Maryland and the state of Washington. Following entry of temporary restraining orders, both courts issued preliminary injunctions after a round of briefing. The District of Maryland court issued a nationwide injunction. The District of Washington’s preliminary injunction was limited to the states of Washington, Oregon, California, and Colorado.
Both courts enjoined various provisions of the two Executive Orders, but did not enjoin them in their entirety. And both courts then stayed the cases when the government filed notices of appeal to the Fourth Circuit Court of Appeals and Ninth Circuit Court of Appeals. The stay orders left the injunctions in place during the appeals, which are expected to take months, and allowed for further trial court proceedings if the injunctions were violated.
There were two notable developments relevant to this article in the Washington federal court case before the stay was entered. First, the government persuaded the court not to include Section 8(a) of Surgical Mutilation EO within the scope of its injunction, arguing that there was no evidence of a credible threat of prosecution under 18 U.S. Code § 116. However, the stay order specifically held that it would not apply if there was a credible threat.
Second, a contempt motion was filed alleging that the government was moving to implement provisions of the executive orders under the guise of following new policies: grant funding had been cut off for a research project in Washington state. The court denied the contempt motion but allowed expedited discovery to take place—after which the grant funding was restored. In its stay order, the court noted that the government had “seriously misrepresented” facts in its briefing and had adopted a “manifestly unreasonable” interpretation of the preliminary injunction. The court expressed concern that the government might “attempt to skirt” the injunction.
The AG’s Memorandum
Citing the Surgical Mutilation EO, the AG’s Memorandum has five directives:
Enforcement of 18 U.S. Code § 116. The AG Memorandum puts “medical practitioners, hospitals, and clinics on notice” that female genital mutilation is a felony, instructs the FBI to investigate potential criminal acts, and directs U.S. Attorneys to prosecute such acts.
Investigation of Food, Drug, and Cosmetic Act (“FDCA”) and False Claims Act (“FCA”) violations. The Consumer Protection Branch of DOJ is tasked with investigating violations of the FDCA by manufacturers and distributors for alleged misbranding of “puberty blockers, sex hormones, or any other drug” used for a child’s “gender transition.” The Civil Division’s Fraud Section is instructed to conduct FCA investigations of “false claims submitted to health care programs for any non-covered services related to radical gender experimentation,” and cites an example of a prescription for puberty blockers for gender dysphoria being billed as prescribed for early onset puberty. Further, qui tam whistleblowers are notified that DOJ is “eager to work with” them.
“Ending Reliance on Junk Science.” World Professional Association for Transgender Health (WPATH) Guidelines are eradicated from use by the DOJ at multiple levels.
Federal and State Coalition. The AG Memorandum offers a partnership with states to “identify leads, share intelligence, and build cases against hospitals and practitioners violating federal or state laws banning female genital mutilation and other, related practices.”
Promoting new legislation. The AG Memorandum describes an initiative to draft legislation creating a federal private right of action for children and parents of children who have received gender affirming care and later wish to impose liability on providers of such care.
Takeaways
Litigation over the AG Memorandum is inevitable and may start quickly. On Friday, April 25, the government filed a notice with the federal court in Washington advising it of the AG Memorandum, apparently having learned from being chastised in other cases for appearing to clandestinely attempt to circumvent court orders. The government can no longer take the position that there is no evidence of a “credible threat of prosecution under 18 U.S. Code § 116” now that the attorney general herself has given instructions to utilize it against providers of certain gender affirming care. We would expect to see an effort by plaintiffs to expand the preliminary injunction to include Section 8(a) of Surgical Mutilation EO.
There may be other ways in which the AG Memorandum could be viewed as violating the two preliminary injunctions, resulting in additional proceedings in the two courts. And, to the extent the AG Memorandum introduces new initiatives, separate legal action against those provisions may be filed.
The AG Memorandum brings increased risk to health care providers who provide certain types of gender affirming care. Clinicians and hospitals should consult with their legal, compliance, quality, and risk departments about the implications of the new DOJ policies and initiatives on provider services. We would expect to see access to this type of care become more limited.
In addition, the threat of FCA prosecution should encourage close review and communications of billing practices surrounding gender affirming care. It is unlikely that a court will, or even could, pre-emptively enjoin all prosecution by the DOJ at an individual case level, so providers should be especially vigilant that their billing practices are appropriate and defensible.
Finally, providers are challenged to manage the conflict between the AG Memorandum (and related actions by HHS and other federal agencies) and laws in some states intended to protect access to gender affirming care and prohibit discrimination based on gender identity. This federal-state conflict is the mirror image of the issue faced in restrictive states during the prior administration, when federal law was positioned to protect or even mandate the gender affirming care that laws in those states specifically restricted or prevented. The courts did not definitively resolve those conflicts over the prior four years, and some of the practical resolution was that patients travelled to states without those restrictions. Actions taken by the Department of Justice in response to the AG Memorandum may result in the more urgent need for courts to act to resolve this conflict between state and federal law.
Will Supreme Court Punt on Circuit Split Over Article III Standing in Class Actions?
On April 29, 2025, the Supreme Court heard argument on an issue that has divided the circuits: “Whether a federal court may certify a class action pursuant to Federal Rule of Civil Procedure 23(b)(3) when some members of the proposed class lack any Article III injury?” The case is Laboratory Corporation of America Holdings, dba Labcorp v. Luke Davis, et al., Case No. 22-55873, and the court’s decision could have a significant impact on class action litigation across the country. But the justices’ questions at oral argument highlighted a procedural wrinkle that could prevent the court from resolving this hotly contested issue.
The named plaintiffs in LabCorp are legally blind individuals who allege that they are unable to use the self-service check-in kiosks installed at LabCorp’s patient service centers. Based on these allegations, the plaintiffs assert claims for damages under the Americans with Disabilities Act and California’s Unruh Act.
In May 2022, the district court certified a damages class under Rule 23(b)(3) comprising all legally blind individuals in California who visited a LabCorp patient service center and “were denied full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations due to LabCorp’s failure to make its e-check-in kiosks accessible to legally blind individuals.” In August 2022, following a motion by plaintiffs to modify the class definition to eliminate any “fail safe” language (generally, a class defined in a way that depends on determination on the merits), the district court issued an order redefining the damages class as all legally blind individuals who visited a LabCorp patient service center “but were unable to use the LabCorp Express Self-Service kiosk.”
LabCorp filed an interlocutory appeal from the district court’s May 2022 order, challenging certification on the ground that the class included members who lacked Article III standing. LabCorp argued that some legally blind individuals who visited a LabCorp patient service center preferred not to use a self-service kiosk. According to LabCorp, those individuals did not suffer any injury but would nonetheless be included in the class.
The Ninth Circuit affirmed the district court’s order. Citing its decision Olean Wholesale Grocery Cooperative, Inc. v. Bumble Bee Foods LLC, 31 F.4th 651 (9th Cir. 2022), the Ninth Circuit explained that “LabCorp’s allegation that some potential class members may not have been injured does not defeat commonality at this time.” Davis v. Lab’y Corp. of Am. Holdings, No. 22-55873, slip op. at 5 n.1 (9th Cir. Feb. 8, 2024).
In its briefing in the Supreme Court, LabCorp framed the issue principally in terms of whether Article III of the Constitution forbids certification of a class that includes uninjured members. Alternatively, it argued that individualized issues will necessarily predominate over any common issues when a class contains an appreciable number of uninjured members, making certification improper under Rule 23(b)(3).
But at oral argument, the justices expressed concern about the fact that LabCorp only filed an appeal from the district court’s May 2022 certification order — not its subsequent August 2022 order that redefined the class to remove any “fail safe” language. That procedural quirk creates two potential problems for LabCorp and for the Supreme Court as it attempts to resolve this case. First, as plaintiffs’ counsel emphasized during oral argument, LabCorp’s arguments regarding uninjured class members appear to be directed primarily at the revised class definition in the August 2022 order, not the original class definition in the May 2022 order that was the subject of LabCorp’s appeal. Second, to the extent LabCorp is challenging the May 2022 order, that order has arguably been rendered a nullity by the district court’s subsequent August 2022 order.
A decision on the merits from the Supreme Court would bring much needed clarity to questions about Article III or predominance under Rule 23(b)(3). Following oral argument, it remains to be seen whether the court will actually reach the merits in this particular case. However, given the fact that the petition for a writ of certiorari was granted in LabCorp, the court clearly has expressed an interest in addressing the underlying issues at some point.
We will provide additional updates here once the Supreme Court acts. In the meantime, parties should pay careful attention to the governing law in their respective circuit, while keeping in mind that the law in this area could soon be clarified.
Missouri Paid Sick Time Law Still Stands After State Supreme Court Ruling
On April 29, 2025, the Supreme Court of Missouri upheld Proposition A, the voter-approved initiative that mandates paid sick time and raised the minimum wage.
Quick Hits
The Supreme Court of Missouri recently upheld Proposition A that raised Missouri’s minimum wage on January 1, 2025, and requires employers provide paid sick time to most Missouri employees, starting May 1, 2025.
The court found that the summary statement and fiscal note in the 2024 ballot measure were not misleading and did not result in election irregularities.
The court dismissed arguments that the initiative violated the Missouri constitution’s “single subject” and “clear title” requirements because the court lacked jurisdiction to address those claims.
After Proposition A passed on November 5, 2024, several voters challenged the ballot measure, claiming the summary statement and fiscal note were misleading and the measure violated the Missouri constitutional requirements of “single subject” and “clear title.” They argued that the summary statement did not provide sufficient information about the sick time provisions, and the fiscal note summary was insufficient and unfair because it did not accurately identify the costs to private businesses and local governments. The contestants also claimed the ballot initiative violated the Missouri constitution’s “single subject” and “clear title” requirements.
The court rejected the voters’ arguments that the summary statement and fiscal note were misleading and cast doubt on the fairness of the election. The court held that, for a summary statement to be sufficient and fair, it must be “adequate and state the consequences of the initiative without bias, prejudice, deception, or favoritism.” A summary statement does not need to describe all the details of a proposal. The court also concluded the ballot measure was not misleading, and the plaintiffs did not demonstrate that there was an irregularity of sufficient magnitude to cast doubt on the election’s validity and fairness. The court also concluded that it lacked jurisdiction to address the constitutional challenges to the validity of Proposition A because the challenge did not relate to the election process. The court dismissed the constitutional challenges without prejudice.
Background on Proposition A
Proposition A raised the minimum wage to $13.75 per hour, effective January 1, 2025, and requires employers to provide workers one hour of paid sick time for every thirty hours worked. Employees will begin earning paid sick time on May 1, 2025.
The paid sick time mandates apply to most Missouri employers except federal government entities, state government entities, and public schools. Private retail and service businesses whose annual gross volume sales is less than $500,000 are also exempt from the paid sick time requirement.
Employees can use the paid sick time when:
they or a family member have a physical or mental illness, injury, or health condition;
they or a family member require medical care, a medical diagnosis, treatment, or preventive healthcare services;
their place of employment has been ordered closed by a public official due to a public health emergency;
they need to care for a child whose school district has been ordered closed by a public official due to a public health emergency; or
they need to attend to matters relating to domestic violence, sexual assault, or stalking.
The statute does not limit an employee’s annual accrual of paid sick time, but the law allows employers with fifteen or more employees to limit the use of paid sick time to fifty-six hours per year, and limit carryover of unused hours to no more than eighty hours. (Employers with fewer than fifteen employees can limit annual paid sick time to no more than forty hours, and carryover to no more than eighty hours.) An employer does not have to provide additional paid sick time if it already has a paid time off (PTO) policy that meets the accrual requirements in the state law and allows the use of PTO under the same conditions provided by the statute. The law prohibits employers from retaliating against a worker for using paid sick time as outlined by the law, which may include discipline or points for attendance violations associated with the use of paid sick time.
Next Steps
Private employers in Missouri must comply with the state’s new paid sick time requirement by May 1, 2025. Employers that have a compliant paid time off policy can continue to allow employees to use time under their policy for all reasons covered by the law.
Employers that do not currently offer paid time off that meets the requirements of the statute may wish to consider whether to implement a paid sick time policy on a long-term basis or a short-term, temporary basis, which may provide more flexibility for compliance until some of the uncertainties surrounding paid sick time in Missouri have been resolved.
Finally, Missouri employers may want to watch pending legislation that could affect the paid sick time law. The Missouri legislature is considering multiple bills that would amend or repeal Proposition A, including the paid sick time mandate. In particular, HB 567 passed the House of Representatives and is stalled in the Senate as legislators from both parties try to reach a compromise on the final terms of the bill. If enacted, HB 567 could substantively affect the paid sick time statute, including key provisions, such as the effective date; rate of accrual; reasons for use; exemptions; and limits on accrual, use, and carryover.
The state legislative session will end on May 16, 2025, so legislators have just over two weeks to present a substitute bill for a vote.
Missouri Supreme Court Upholds Proposition A: Paid Sick Leave Takes Effect May 1, 20
On April 29, 2025, the Missouri Supreme Court ruled 4-3 to uphold Proposition A, the voter-approved initiative that increases the state’s minimum wage and requires employers to provide earned paid sick leave. The law will take effect as planned on Thursday, May 1.
What is Proposition A?
Proposition A raises minimum wage and introduces mandatory earned paid sick leave for most workers. Some of the key provisions of Proposition A include:
Raising the minimum wage to $13.75 per hour in 2025 and $15 by 2026 and providing for annual inflation-based increases thereafter.
Requiring employers to provide paid sick leave, with workers earning one hour of leave for every 30 hours worked.
The Legal Challenge
Business associations and other opponents of the measure challenged the law in Case No. SC100876, Raymond McCarty, et al. v. Missouri Secretary of State, et al. Plaintiffs argued that the summary statement and fiscal note summary were so misleading that they cast doubt on the fairness of the election and validity of its results. Further, Plaintiffs argued that Proposition A was invalid because it violated the “single subject” and “clear title” requirements of Art. III, Section 50 of the Missouri Constitution.
Majority Opinion
The Missouri Supreme Court’s majority held the results of the election adopting Proposition A are valid and dismissed, without prejudice, the claim contending Proposition A violated the single subject and clear title requirements for lack of jurisdiction.
Key points from the majority opinion:
Ballot Summary: The Court determined that the summary language was not materially inaccurate or seriously misleading to demonstrate an irregularity. Instead, the Court stated that Plaintiffs made conclusory allegations that the summary statement language misled voters but did not offer evidence to support those conclusions. Thus, a new election was not warranted.
Single-Subject Rule: The justices declined to rule on whether Proposition A violated the single subject rule—the Court dismissed the claim without prejudice for lack of jurisdiction, stating that the claim had not been properly raised in a lower court before coming to the Supreme Court.
Separate Opinion
Justice Ransom issued a separate opinion from the majority, stating that he disagreed that the Supreme Court possesses original jurisdiction over election contests. However, Justice Ransom agreed with the majority’s decision if, for argument’s sake, the Court had jurisdiction to hear the challenges.
What Happens Next?
With the ruling in place:
Proposition A will take effect on May 1, 2025.
Employers must comply with new minimum wage rates and paid sick leave requirements, including taking immediate steps to implement paid sick leave by May 1.
Lawmakers or business groups could still seek legislative revisions or bring new legal challenges.
Inferential Leaps and Conclusory Kickback Allegations Remain Verboten in False Claims Act Complaints
Earlier this month, the Eleventh Circuit (the “Court”) issued a decision in a False Claims Act (“FCA”) case against a medical supplier that offers welcome clarity for companies facing whistleblower allegations. In Vargas ex rel. Alvarez v. Lincare, Inc., 2025 U.S. App. LEXIS 9084 (11th Cir.), the Court emphasized high pleading requirements FCA plaintiffs must satisfy to survive a motion to dismiss. Specifically, the court held that it is not enough to allege a general scheme; the FCA plaintiff must also plead, with detail, how the scheme caused the actual submission of false claims to the government. The decision is especially significant in the healthcare context with respect to Anti-Kickback Statute (“AKS”) based FCA cases. The court made clear that the plaintiff must do more than include conclusory allegations that one purpose of the payment was to induce referrals—it must include details as to the defendant’s intent.
In Vargas ex rel. Alvarez v. Lincare, Inc., the relators, former employees of medical supplier Lincare, Inc. and its subsidiary Optigen, Inc., alleged that defendants violated the FCA by: (1) improperly billing CPAP accessories under codes for ventilator accessories, or “upcoding”; (2) improperly waiving co-payments through inclusion of a waiver form with every CPAP set-up shipment; (3) automatically shipping CPAP replacement supplies without the required patient or provider request; and (4) making payments to set-up technicians called “CFTs” who were also employees of prescribers and whose payments were tied to referrals of patients, in violation of the AKS. The relators alleged that these schemes resulted in false claims for payment being submitted to TRICARE, the U.S.’s healthcare program for service members.
The District Court for the Middle District of Florida previously dismissed relators’ complaint under all four theories, holding that it failed to meet Federal Rule of Civil Procedure 9(b)’s standard for pleading fraud with particularity. The Eleventh Circuit reversed the District Court as to only the upcoding theory, finding that relators’ examples of specific patients whose supplies were allegedly upcoded, their claim numbers, and the amount TRICARE reimbursed for the supplies satisfied Rule 9(b). The Eleventh Circuit affirmed the District Court’s holding for the remaining three theories.
For these remaining three theories, the Eleventh Circuit found that relators had generally alleged fraudulent schemes, but without enough detail or particular examples—specifically, examples of how the alleged fraud resulted in false claims being submitted to the government. The Court declared that “[w]ithout a clear link between the alleged scheme and actual claims, the complaint failed. … In the end, an FCA claim must do more than sketch out a theory. It must allege facts showing that a false claim was actually submitted to the government.”
In regard to the copay waiver scheme, for example, the relators alleged that a waiver form was provided with each CPAP set up, but did not identify any specific claims or patients whose copays were improperly waived and who subsequently had their devices billed to TRICARE. The Court refused to make the “inferential leap” that the alleged conduct must have resulted in false claims. In dismissing this theory, the Court also noted that the relators did not allege any direct knowledge of the defendants’ billing activity or claims data.
The Court also included firm language in upholding the District Court’s dismissal of the AKS claim. Relators alleged that the defendant paid Contract Field Technicians (“CFTs”), who installed the CPAP devices and often had influence over which supplier’s device was installed, “setup fees” of $50 per setup but would pay the more prolific CFT referrers $225 per installation. Beyond setup fees, Optigen allegedly courted referring providers with meals, gifts, and other incentives. The Court held that this claim was properly dismissed because the relators again failed to plead causation: relators failed “to tie the CFTs’ payments to any actual referrals. They identify no patient referred by a CFT, no instance in which a CFT influenced a prescribing decision, and no facts showing that CFTs played any role in the referral process (whatever that may be). They point to CFTs who purportedly received high fees and made many referrals, but they offer no detail—no conversations, no meetings, no influence over any prescriber’s decision.” As a result:
what the complaint does show is that Optigen paid CFTs to do a legitimate job: set up CPAP equipment in patients’ homes. That work likely included travel, equipment setup, training, and follow-up support. Merely paying people for doing that work—even if the rates vary—does not violate the law.
The upshot is that the relators never pleaded how CFTs induced referrals or why the compensation—paid for services rendered—should be viewed as anything other than payment for work done. And without facts bridging payment and referral, the complaint fails to sufficiently plead a kickback scheme.
The Court noted that a “barebones” and conclusory allegation “that the payments were made—‘in part’—to induce referrals” also fails to meet the Rule 9(b) standard.
This decision serves as a reminder that the False Claims Act targets false claims—not regulatory violations, not internal misconduct, and not abstract theories of fraud. A complaint cannot simply allege a fraudulent scheme and assume the scheme resulted in the submission of false claims for payment by the government. The complaint must, instead, spell out the alleged fraud in detail—including when, where and how it occurred—and specifically allege how the actions alleged actually caused the submission of false claims. The Eleventh Circuit found that speculative and unsupported allegations, including those related to causation, are insufficient, and District Courts should dismiss complaints containing such allegations.
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Trump Administration Issues Drug Pricing Executive Order
On April 15, 2025, President Trump issued an Executive Order instructing federal agencies to implement a variety of drug pricing reforms. The Executive Order addresses drug pricing from several different angles, including pharmacy benefit manager (PBM) competition and transparency, Medicare and Medicaid drug pricing, international importation, and drug manufacturer competition (Executive Order).
The Executive Order, which is the first significant action taken by the current administration to address drug prices, echoes initiatives and policy statements announced during the first Trump administration. However, most of the drug pricing reforms announced during the first administration were never fully implemented. It is unclear how many of the proposals in this Executive Order will ultimately be implemented, but it does provide the clearest outline yet of the Trump administration’s policy priorities regarding drug prices.
Targeting the Inflation Reduction Act “Pill Penalty” and High-Cost Medicare Drugs
Improving upon the Inflation Reduction Act. The Executive Order directs the Secretary of Health and Human Services (HHS) to propose and seek comment on guidance for the Medicare Drug Price Negotiation Program (Negotiation Program). The stated purpose of the guidance is to “improve the transparency of the Negotiation Program, prioritize the selection of prescription drugs with high costs to the Medicare program, and minimize any negative impacts of the maximum fair price (MFP) on pharmaceutical innovation within the United States.” Prior predictions that a second Trump administration would seek to repeal the Inflation Reduction Act (IRA) and replace the Negotiation Program now seem off the table. Instead, the inclusion of this section suggests that this second Trump administration will, at least initially, seek opportunities to improve the existing Negotiation Program.
One such area for possible improvement is the IRA’s so-called “pill penalty.” Under the IRA, small molecule drugs (which are typically pills) are eligible for price negotiation nine years following approval by the Food and Drug Administration (FDA), whereas biological products become eligible after 13 years. The “pill penalty” has been the subject of ire for many manufacturers who have argued that it stifles innovation. The Executive Order directs HHS to work with Congress to modify the Negotiation Program to align the treatment of small molecule prescription drugs with that of biological products.
The Executive Order also directs officials to establish recommendations to President Trump on “how best to stabilize and reduce Medicare Part D premiums.” In 2022, the IRA redesigned the Medicare Part D benefit, which among other things capped Part D beneficiaries’ out-of-pocket expenses at $2,000. After a Part D beneficiary meets this $2,000 threshold, Medicare then covers 100% of such beneficiary’s remaining costs for the year. The IRA also provides a premium stabilization mechanism to limit the average premium increases for people enrolled in Part D to about $2 per month on average. In July 2024, the Centers for Medicare & Medicaid Services (CMS) announced a premium stabilization demonstration to test whether additional stabilization was needed. President Trump’s inclusion of this directive in the Executive Order suggests that this administration may seek to continue this model.
Demonstration Model on High-Cost Medicare Drugs. The Executive Order instructs HHS to develop and implement a Center for Medicare and Medicaid Innovation (CMMI) payment demonstration to improve the ability of the Medicare program to obtain better value for high-cost prescription drugs and biological products, including those not subject to the Negotiation Program. CMMI was created by the Affordable Care Act (ACA) in 2010 to test payment models (i.e., demonstrations) in Medicare, Medicaid, and the Children’s Health Insurance Program. In March, we wrote about CMMI’s premature termination of four payment and delivery demonstrations and the broader questions it raised about the future of CMMI. At the time, we noted that there was no indication that the Trump administration was planning to more broadly limit CMMI’s authority or terminate other models. The inclusion of the payment demonstration in the Executive Order lends further support to this and indicates that the administration intends to use CMMI to further its goals related to Medicare drug cost.
Focus on Pharmacy Benefit Manager Transparency
Reevaluating the Role of Middlemen. The Executive Order directs officials to develop recommendations to President Trump on how “best to promote a more competitive, efficient, transparent, and resilient pharmaceutical value chain that delivers lower drug prices for Americans.” As we outlined in the Winter 2025 edition of our PBM Update, President Trump has long been a critic of PBMs and the high costs of prescription drugs that Americans pay in comparison to other countries’ citizens. While the Executive Order does not explicitly delineate any methods or data sets that officials should consider in making their recommendations, the inclusion of this directive suggests that the role of PBMs may still be at the forefront of President Trump’s mind.
Consolidated Appropriations Act PBM Fee Disclosures. The Executive Order instructs the Secretary of Labor to propose regulations implementing Section 408(b)(2)(B) of the Employee Retirement Income Security Act of 1974 (ERISA) to improve employer health plan fiduciary transparency into the compensation paid to PBMs. Pursuant to the Consolidated Appropriations Act of 2021 (the CAA), Congress amended Section 408(b)(2)(B) to require service providers to group health plans organizations to disclose information to a responsible plan fiduciary about any direct and indirect compensation the service provider expects to receive in connection with providing “brokerage services” or “consulting” to a plan. Service providers must make such disclosures for any affiliates and subcontractors as well.
There has been some ambiguity about whether PBMs, under certain arrangements, are service providers subject to the disclosure requirements as a result of ambiguous statutory drafting and the Department of Labor’s (DOL) refusal to issue implementing regulations. Some PBMs have taken the position that they are not service providers, and there has been little public indication that the DOL has been closely monitoring compliance.
In March 2023, the DOL issued a field assistance bulletin outlining a temporary enforcement policy for the CAA disclosure requirements and requiring service providers to comply in good faith with the requirements, although the 2023 guidance does not provide any additional clarity on the applicability of the disclosure requirements to PBMs or otherwise outline a recommended format for the disclosures. Notably, the DOL stated that it was not required to issue comprehensive implementing regulations and indicated that it had no plans do so, instead referencing regulations it had issued about a decade prior for analogous disclosure requirements for investment plan advisors.
By instructing the DOL to issue regulations, and calling PBMs out specifically, the Executive Order indicates that the DOL will address confusion about the applicability of the disclosure requirements to PBMs. If and once DOL issues and finalizes these regulations, DOL scrutiny over these requirements will likely increase.
Sharing 340B Program Savings with Hospital and Patients
Appropriately Accounting for Acquisition Costs of Drugs in Medicare. The Executive Order instructs HHS to publish in the Federal Register a plan to conduct a survey to determine hospital outpatient departments’ acquisition costs for covered outpatient drugs and to propose adjustments that would align Medicare payment with the cost of acquisition. In 2018 and 2019, HHS established separate reimbursement rates for 340B-participating hospitals and other hospitals. In its decision in American Hospital Ass’n v. Becerra, 596 U.S. 724 (2022), the Supreme Court of the United States held that HHS’s actions were unlawful because HHS failed to conduct a survey of the hospitals’ acquisition costs prior to setting reimbursement rates that differed by hospital group. The inclusion of this section in the Executive Order suggests that President Trump wishes to ensure HHS will follow the proper procedure prior to once again setting separate reimbursement rates for hospitals participating in the 340B drug pricing program.
Access to Affordable Life-Saving Medications. The Executive Order seeks to revive a controversial proposal from the first Trump administration that would require community health centers to “make insulin and injectable epinephrine available [to their patients] at or below” the 340B price paid by the health center. The Executive Order instructs HHS to take action that would condition federal grants to community health centers providing 340B-priced insulin and epinephrine (commonly sold as Epi-Pens) to patients who “(a) have a high cost-sharing requirement for either insulin or injectable epinephrine; (b) have a high unmet deductible; or (c) have no healthcare insurance.” The Executive Order’s associated Fact Sheet states that insulin prices “will be” as low as “$0.03, plus a small administrative fee” and injectable epinephrine “will be” as low as “$15, plus a small administrative fee.”
This proposal was initially put forth by the first Trump administration in December 2020. However, the Biden administration immediately froze implementation of the proposed rule upon taking office and instead opened a five-day comment window in March 2021 resulting in around two hundred comments from interested parties, the vast majority in opposition. Later that year, the Biden administration rescinded the proposed rule citing “the excessive administrative costs and burdens that implementation would have imposed on health centers.” At the time, the Biden administration noted the COVID-19 pandemic as a key cost contributor. Although the U.S. has since emerged from the pandemic, it is unlikely that health center sentiments towards the proposal have improved. It remains to be seen how, if at all, the second Trump administration will incorporate health center feedback in the proposal moving forward.
Continued Interest in International Importation
International Importation. The Executive Order instructs HHS to take steps to streamline the FDA process for importing prescription drugs under the Section 804 of the Food, Drugs, and Cosmetic Act (FDCA). Broadly, Section 804(b) permits the Secretary of HHS to promulgate regulations to establish a state- or Indian tribe-sponsored drug importation program (SIPs) allowing pharmacists and wholesalers to import unapproved prescription drugs from Canada, so long as HHS can certify to Congress that such imports will “pose no additional risk to the public’s health and safety” and will “result in a significant reduction in the cost of covered products to the American consumer.” 21 U.S. Code § 384(b), (l) HHS issued a final rule to implement Section 804(b) in 2020 under the first Trump administration, and in January 2024, the FDA approved the first SIP in Florida. However, at least six other states (Colorado, Maine, New Hampshire, New Mexico, Vermont, and Texas) have enacted laws and/or submitted proposals to the FDA.
As currently constituted, SIPs are heavily regulated and time-limited. For example, Florida’s SIP is only authorized for two years. Further, wholesalers and distributors cannot unilaterally submit proposals for a SIP—they can only “co-sponsor” a SIP with an eligible State or Indian Tribe (SIP Sponsors), who must submit pre-import requests to the agency and take other actions to assure the quality and safety of drugs entering the U.S. Certain drugs are also ineligible for importation, including: controlled substances; biologicals; infused, intravenous, inhaled, injected, intrathecally or intraocularly injected drugs; and any drug that is subject to a risk evaluation and mitigation strategy under Section 505-1 of the FDCA.
Managing and Reforming Medicaid Drug Payments
Promoting Innovation, Value, and Enhanced Oversight in Medicaid Drug Payment. The Executive Order directs HHS, in consultation with other policymakers, to provide the President with recommendations on “how best to ensure that manufacturers pay accurate Medicaid drug rebates consistent with [law], promote innovation in Medicaid drug payment methodologies, link payments for drugs to the value obtained, and support States in managing drug spending.” Under the current version of the Medicaid Drug Rebate Program, as many as 780 drug manufacturers pay a statutory rebate to state Medicaid programs in exchange for Medicaid coverage of the manufacturer’s product. The rebates allow the state Medicaid programs to offset the costs of providing prescription drug coverage to its residents.
The text of the Executive Order opens the door for the Trump administration to consider a wide range of proposals such as increased data and reporting obligations to accurately capture pricing data and product information, value-based care initiatives, the continued use of state supplemental rebates, and the proposal of legislative remedies to address underlying concerns with the statutory Medicaid drug rebate calculation. A Fact Sheet released by the administration specifies that the Executive Order could help reduce state drug costs by “[b]uilding off programs to help states get much better deals on expensive sickle-cell medications in Medicaid than the statutorily required 23.1% discount.” Of note, changes to the Medicaid drug rebate calculation would also affect a manufacturer’s 340B ceiling price, further increasing the discount available to 340B Covered Entities and lowering the price paid to manufacturers for the product.
Increasing Access to Affordable Medicines
Competition for High-Cost Prescription Drugs. The Executive Order directs the FDA Commissioner to issue a report providing administrative and legislative recommendations to: (i) accelerate approval of generics, biosimilars, combination products, and second-in-class brand name medications; and (ii) improve the process through which prescription drugs can be re-classified as over-the-counter (OTC) medications, including identifying prescription drugs that can be provided OTC. The Executive Order references the first Trump administration’s efforts to “to harness competitive forces and increase access to affordable medicines” by encouraging the development of generic and biosimilar alternatives to higher cost brand name prescription drugs.
President Trump’s request for a report examining pathways for generics and biosimilar is timely given ongoing bipartisan concerns over rising prescription drug costs (which Mintz wrote about here). It is unclear what the Executive Order means by “combination products,” which arguably includes a range of innovative and follow-on drugs. The Executive Order also raises questions about how HHS will accomplish accelerated approval with less resources—especially given reports that manufacturers are already seeing adverse impacts on drug development following administration-directed layoffs earlier this year.
Reducing Costly Care for Seniors. The Executive Order directs HHS to evaluate and propose regulations to ensure that payment within the Medicare program does not encourage a shift in drug administration volume away from less costly physician office settings to more expensive hospital outpatient departments. The potential for Medicare to pay the same rate for a service, regardless of where the service is provided is referred to as site-neutral payment. Site-neutral payment policies and efforts have been made for years, dating back to the second Obama administration and throughout the prior Trump administration.
Combatting Anti-Competitive Behavior by Prescription Drug Manufacturers. Finally, the Executive Order seeks to further increase competition in drug manufacturing by instructing HHS to “conduct joint public listening sessions with the Department of Justice, Department of Commerce, and the Federal Trade Commission and issue a report with recommendations to reduce anti-competitive behavior from pharmaceutical manufacturers.” Overall, the Executive Order’s broad target list demonstrates the Administration’s desire to evaluate several drivers of consumer health care costs across the pharmaceutical supply chain.
Looking ahead, stakeholders should watch how the Trump administration seeks to implement its goal of lowering prescription drug costs by targeting various entities and, utilizing multiple regulatory schemes, across the wide-ranging pharmaceutical supply chain.
Have Employees in Wyoming? Start Preparing for the Non-Compete Ban
Effective July 1, 2025, Wyoming will restrict the enforceability of non-compete agreements. In enacting Senate Bill 107, Wyoming joins a growing list of states that have significantly restricted, or completely banned, non-compete agreements.
Specifically, the law provides that, as of July 1, 2025, “[a]ny covenant not to compete that restricts the right of any person to receive compensation for performance of skilled or unskilled labor” is void. However, the law will not apply retroactively, and it contains several exceptions, including the following:
Sale of Business: Any covenant not to compete contained in a contract for the purchase and sale of a business or the assets of a business.
Protection of Trade Secrets: Any covenant not to compete to the extent the covenant provides for the protection of trade secrets as defined by Wyoming Statute §6‑3‑501(a)(xi). The statute defines “trade secret” as “the whole or a portion or phase of a formula, pattern, device, combination of devices or compilation of information which is for use, or is used in the operation of a business and which provides the business an advantage or an opportunity to obtain an advantage over those who do not know or use it.”
Recovery of Training Expenses: Any contractual provision providing for the recovery of all or a portion of the expense of relocating, educating, and training an employee as follows: (i) recovery of not more than 100% of the expense for an employee who has served an employer for a period of less than two years; (ii) recovery of not more than 66% of the expense for an employee who has served an employer for more than two, but less than three years; and (iii) recovery of not more than 33% of the expense for an employee who has served an employer for more than three, but less than four years.
Executive and Management Personnel: Any covenant not to compete with executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. The law does not define who is deemed “executive” or “managerial.”
Additionally, the Wyoming law contains specific provisions pertaining to non-compete covenants with physicians. Any covenant not to compete provision in an employment, partnership or corporate agreement with physicians that restricts the right of a physician to practice medicine, as defined by Wyoming law, upon termination of the physician’s employment, partnership or corporate affiliation is void. Further, a physician may disclose their continuing practice of medicine and new professional contact information to any patient with a rare disorder (as defined by the National Organization for Rare Disorders), or to certain successor organizations.
To ensure compliance with Wyoming’s new law come July 1, 2025, Wyoming employers should carefully revise their employment agreements and consider alternative means for protecting their business interests moving forward, such as robust confidentiality and non-disclosure clauses and non-solicitation covenants, unless one of the exceptions set forth above applies.
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As State Legislatures Debate Strengthening the Corporate Practice of Medicine Limitations, a Drug Manufacturer’s Lawsuits Shine a Light on the Relationship Between Telehealth Companies and Affiliated Medical Groups
Drug manufacturer Eli Lilly has filed suit against four companies involved in making, prescribing, and/or selling compounded versions of its weight loss and diabetes drugs ZEPBOUND® and MOUNJARO®.
Lilly’s drugs, injected under the skin, are the only FDA-approved medicines containing tirzepatide in the United States.
Two complaints, filed April 23 in the U.S. District Court for the Northern District of California, contend that the founders and chief executive officers of Mochi Health Corp. (“Mochi Health”) and Fella Health exerted control over multiple affiliated entities, including medical groups, in violation of California law prohibiting unlicensed individuals and corporations from practicing medicine (generally known as the “Corporate Practice of Medicine” or “CPOM” laws). The plaintiffs allege unfair competition and false advertising under state law and the Lanham Act; and assert state CPOM claims through supplemental and/or diversity jurisdiction.
This latest development on the drug compounding front comes at a time when states are keeping a sharp eye on private investment in the health care space—increasingly proposing legislation to strengthen CPOM laws and also increase oversight on corporate transactions involving health care entities. The majority of U.S. states have some form of CPOM restriction, and some, including Oregon, Texas, and Washington, are considering taking steps advocates say will strengthen theirs—with proposals, for example, to prevent private equity groups or hedge funds from interfering with health care decisions and limiting or eliminating common forms of affiliation with professional medical practices.
Though it was eventually vetoed by the governor, California’s AB 3129 would have explicitly prohibited activity that would likely already violate the state’s CPOM laws (see a previous EBG blog post on the subject) and current California AB 1415 has resuscitated many of those provisions for the current legislative session. Oregon’s proposed HB 4130, which did not pass the state Senate, would have strengthened requirements for professional corporations organized to practice medicine (see another previous blog post). Earlier in 2025, we explored the current landscape of proposed U.S. state legislation with respect to health care corporate structures, some with CPOM provisions. Here, we discuss the CPOM aspects of the Eli Lilly lawsuits, below.
Mochi Health
Mochi Health prescribes and sells compounded tirzepatide to patients. Neither of Mochi Health’s two owners—who are husband and wife—are licensed physicians. Yet the latter, who serves as CEO of Mochi Health, has allegedly represented that she has experience as a doctor and that her business was developed by doctors. The Mochi suit includes in its state law unfair competition claim 1) unlawful corporate control of practice of medicine and prescription practices; 2) the issuance of prescriptions without a medical indication; and 3) unlawfully holding the CEO out as a licensed physician.
As the lawsuit states, California law restricts unlicensed individuals and corporations from engaging in the practice of medicine. The complaint alleges violations of California Business and Professions Code § 2052 prohibiting the unlicensed practice of medicine and covering those who advertise or hold themselves out “as practicing, any system or mode of treating the sick or afflicted…or who diagnoses, treats, operates for, or prescribes” for any physical or mental condition.
The complaint also alleges violations of § 2054, prohibiting individuals from holding themselves out as a physician if lacking a valid license. Unlicensed persons, whether individuals or corporations, cannot employ physicians or engage in the practice of medicine under §§ 2400 et seq.; a corporation cannot hold a medical license. The California Medical Board has also determined that certain decisions—including the need for diagnostic tests, the need for referrals, control of medical records, hiring/firing of medical staff, and alterations to prescriptions—may only be made by a physician.
The complaint alleges that defendants are “entangled in and exercise control over multiple entities” involved in tirzepatide prescribing, compounding, and distribution activities. These include 1) Mochi Medical, an affiliated medical services provider to which Mochi Health refers patients (the wife is allegedly the CEO of both Mochi Health and Mochi Medical, and the appointed director of the latter is reportedly the wife’s father); 2) a pharmacy that supplied Mochi Health’s patients with compounded tirzepatide (the pharmacy is allegedly owned indirectly by the husband); and 3) a distributor that imports weight loss drugs to the pharmacy from China (the wife reportedly serves as governor of the distributor).
The complaint alleges this corporate arrangement violates California law, noting that “Mochi Health and its unlicensed owners exercise undue influence and control over, among other things, the prescribing decisions of physicians at Mochi Medical and, as a result, engage in, and aid and abet, the unlawful corporate practice of medicine,” the plaintiffs contend.
The plaintiffs further claim that Mochi Health—without patient specific or medical reasons—switched dosages and prescriptions for patients, which involved ordering changes to the additives mixed in with the compounded tirzepatide drugs and changing dosages “to non-standard doses that have never been studied.” The complaint alleges that these changes were made en masse and were performed to improved the “business’s bottom line and [in] the mistaken belief that [such] alterations would all [the business] to continue selling—and making money from—knockoff tirzepatide.”
Fella Health
Fella Health prescribes and sells compounded tirzepatide to patients. The lawsuit against Fella Health claims that company is “engaged in the unlicensed practice of medicine on multiple fronts,” with non-physicians offering unlicensed medical advice to patients and also modifying prescriptions without a patient consultation or a prior determination by a physician that the modification is medically necessary.
Fella Health allegedly directs its customers to Fella Medical Group, P.A., a Florida professional association and Fella Medical Group, P.C., a California professional corporation, which Fella Health advertises as “independent medical groups.” The nonphysician founder and CEO of Fella Health is also the CEO of Fella Medical Group P.A. and the lawsuit alleges that he exercises control over both “independent medical groups.”
The complaint further alleges that this nonphysician CEO, and other nonphysician employees communicate directly with patients through social media, text, and phone calls. The communications reportedly included giving medical advice, increasing dosages of patient medications, changing prescriptions without good faith examination by a licensed professional or medical indication; and accelerating titration schedules for financial gain.
“Under California state law, unlicensed persons cannot own and control medical practices, Bus. & Prof. Code §§ 2400 et seq., § 2052, or exercise undue control or influence over clinical decisions and doing so constitutes unfair competition,” the complaint states, asserting later: “Beyond [the] control over Fella Medical Group, Fella also engages in the corporate practice of medicine by allowing non-physicians to offer medical advice to customers and by modifying patient prescriptions for business reasons, not medical ones.”
The claims against Fella include unlawful corporate control of practice of medicine and prescription practices in violation of the California Unfair Competition Law, false advertising in violation of the same law; false or misleading advertising promotion in violation of the Lanham Act; and civil conspiracy claims.
Takeaways
Entities operating in the health care space, especially those using a “friendly PC” or “captive PC” affiliation model, need to exercise caution to prevent non-physicians from exercising unlawful control over physician decision-making. This lawsuit demonstrates that all companies need to evaluate whether their business model complies with state CPOM restrictions – and provides a theory by which competitors may allege claims for financial damages related to a company’s actual or alleged non-compliance. Non-physician entities—whether telemedicine companies, private equity groups, medical spas, etc.—affiliated with medical groups need to evaluate whether they have appropriate controls in place to separate the administrative functions of the platform and the business operations from the clinical decision making at the medical practice. As alleged in this suit, compliance is a question of “on the ground” operational fact as much as it is one of appropriate legal structure and documentation.
Christopher R. Smith, Erin Sutton, William Walters, and Ann W. Parks contributed to this article
Spring Things for Employers to Consider
Trees are beginning to bloom, and bees are buzzing in flower fields as spring is officially underway. As summertime approaches and temperatures continue to rise, employers should be prepared for “Spring Things,” such as navigating employee summer vacation schedules, hosting summer outings and retreats, implementing casual Fridays, and even welcoming interns. Below are a few “Spring Things” that manufacturers should consider as interns join the workplace, employees take off for summer vacations, and summer outings and other warm-weather activities get underway.
Use of Paid Time Off and Vacation
Employer-paid time off (PTO) and vacation policies are essential ways to increase employee morale, productivity, and retention. However, during the summer months, when employees may spend more time at the beach and engaging in recreational activities, employers should ensure that their PTO and vacation policies are applied consistently and that employees comply with all policy requirements to meet business needs.
Employers should review their PTO policies to ensure clarity related to eligibility, notice, accrual, approval, and use. If employers identify issues, they may need to revise the policy. For example, if employees are taking vacation in 2- or 3-week increments and disrupt business operations, the policy may need to be revised so that employees may only take vacation in 1-week increments. Similarly, if exempt employees are taking half-days and not inputting their PTO use or vacation in the HRIS program, the policy may need to be updated to clarify that any time out of the office must result in the use of PTO or vacation—this issue may require monitoring. On the other hand, if employees are not using their vacation, it may be time for managers to communicate with certain team members to encourage them to use their PTO.
Casual Fridays, Pizza Mondays, and Summer Outings
With the return of summertime comes employer-hosted events and teambuilding-focused activities, increasing engagement and improving employee morale. While the goal of these activities is to have fun in an inclusive and safe environment, employers should consider ways to minimize the legal risks associated with these summertime workplace activities and initiatives.
Employers may implement “casual days” in the summer to bring some of the summer fun into the workplace and ensure employees stay comfortable as the summer heat gets turned up. However, manufacturers should be mindful of employee safety and consider whether certain types of footwear or other clothing could pose a safety risk (e.g., employees working on a specific machine). Further, human resources may need to remind employees, generally and individually, of the dress code policy, which contains minimum standards of professionalism in the workplace (e.g., prohibiting offensive clothing).
Manufacturers planning to hold summer outings, retreats, and other events should consider several issues before sending out the invitations. One such issue is whether employees are required to participate in a particular activity, in which case any injuries or illness could result in workers’ compensation coverage with regard to the injury/illness. Employers should also consider what events/activities will be inclusive to all employees rather than presenting a barrier to access or entry; whether alcohol will be served and, if so, how it will be managed; and what measures are needed to ensure professionalism during such events/activities.
Interns in the Workplace
Manufacturers may be welcoming interns into their businesses in the summer. It goes without saying that internship programs can play a key role in a company’s ability to develop and retain talent, generate new ideas and perspectives, and provide valuable mentorship and opportunity to individuals entering the field, resulting in goodwill in the professional community and the enrichment of the workplace. With these benefits come certain legal compliance challenges related to intern compensation and how internship programs are structured. Manufacturers should take the time to carefully review the administration of their internship programs now to ensure compliance throughout the summer and beyond.
One key issue is whether interns are considered “employees” under applicable law and must be paid. The question is, who is the “primary beneficiary” of the relationship – is it the intern or the employer? It can be very difficult for employers to meet the “primary beneficiary” standard. For example, if an intern is enrolled in an academic study program, is receiving academic credit, is not replacing paid employees, and is essentially working a schedule around their academic calendar, it may be possible for the intern to be “unpaid.”
Specifically, in determining who is the primary beneficiary of the relationship, courts apply a number of factors to determine whether the intern or the employer is the primary beneficiary, including the extent to which:
The intern and employer clearly understand there is no expectation of compensation;
The internship provides training similar to that which would be given in an educational environment;
The internship is tied to the intern’s formal education program by integrated course work or receipt of academic credit;
The internship accommodates the intern’s academic commitment by corresponding to the academic calendar;
The internship’s duration is limited to the period in which it provides the intern with beneficiary learning;
The intern’s work complements (rather than displaces) the work of paid employees while providing significant educational benefits to the intern; and
The intern and employer understand there is no entitlement to a paid job at the internship’s conclusion.
These factors are difficult for employers to meet, and in most instances, interns who are working for the summer must be paid in a manner consistent with applicable law (i.e., minimum wage and overtime).
SCOTUS Considers Article III Questions with Significant Implications on Class Action Certification
The Supreme Court of the United States (SCOTUS) heard oral argument this week in Labcorp v. Davis (No. 24-304) to determine “[w]hether a federal court may certify a class action pursuant to Federal Rule of Civil Procedure 23(b)(3) when some members of the proposed class lack any Article III injury.” If the Court’s answer is “no” or some form of “no”, that would support defense counsel’s mechanisms for challenging class certification on the front end of litigation.
There is currently a split among the federal circuit courts on the question. When faced with the issue of how many uninjured persons can be certified within a class without tripping over Article III, courts have taken three general viewpoints. Some circuits hold that Article III bars certification when the class would include any persons who lack standing. Other circuits, viewing the question through Rule 23(b)(3), permit certification if no more than a de minimis portion of the class includes uninjured parties. The third group of circuit courts all but defers the question to post-certification stages of a case, unless it is evident that a “great many” or “large portion” of unnamed class members lack standing.
The Labcorp case comes to SCOTUS out of the Ninth Circuit, one of the handful of circuits that do not impose a material Article III hurdle at the class certification stage. The plaintiffs in the case successfully obtained class certification from the district court for disability discrimination claims, even though there did not seem to be much dispute that the class definition captured an appreciable number of uninjured persons. After the Ninth Circuit affirmed the certification order, Labcorp petitioned and obtained certiorari from SCOTUS, leading to Tuesday’s argument before the Court.
At oral argument, Labcorp principally argued that district courts must address jurisdictional questions of standing (injury) before reaching the merits of a class action—i.e., before certifying a class. Otherwise, defendants are faced with the prospect of defending a large number of claims by parties who independently lack standing, increasing the scope of potential litigation risk in the case and creating monumental settlement pressure. Courts also would be in a position of entering dispositive orders that are binding on unnamed class members who suffered no injury and therefore had no standing to be included in the first place, in violation of Article III. Alternatively, Petitioner addressed that a class certification encompassing uninjured parties would plague litigation with individualized inquiries as to who was actually injured, contrary to Rule 23(b)(3). Labcorp argued that the first issue (Article III standing) can typically be addressed by requiring courts to define the class to only include those individuals who have been injured. But even assuming a class can be redefined to exclude individuals who lack injury, Labcorp argued that a class cannot be certified under Rule 23 unless there is an administrable way to separate non-injured individuals without conducting minitrials as to each. To do so would present clear ‘predominance’ and ‘commonality’ issues under Rule 23(b)(3).
In contrast, Respondents’ counsel argued that courts need not take up all Article III questions at the class certification stage and specifically that absent class members should not be required to demonstrate their standing until the court acts on them as individuals, typically at the relief phase of the case. Respondents’ counsel placed particular emphasis in their briefing on existing precedent, in which the Court suggested that “class certification issues” in some cases are “logically antecedent to Article III concerns” and “should be treated first.”
The Solicitor General of the United States also participated in the argument and focused primarily on Rule 23’s certification requirements. Specifically, the government argued that the Rule 23(b) certification analysis encompasses elements of ‘predominance,’ ‘commonality,’ and the like, that cannot be satisfied when the class includes injured members. The government firmly pressed that Rule 23 requires class members to share a common injury or else the class action mechanism breaks down. Therefore, an individual who has not first suffered an injury should not be part of the class. See U.S. Amicus Brief, Mar. 12, 2025 (“Courts should not certify a class under Rule 23(b)(3)—which permits class actions seeking money damages—when some members of the proposed class lack any Article III injury.”).
Many of the Justices, especially from the more liberal side of the Court, confronted the Petitioner’s Article III positions head on. These included challenges regarding the logistical difficulties district courts would face in sorting out broad Article III inquiries at the class certification stage, as compared to current measures that allow standing to be addressed after all class members come before the court at the relief stage. Some Justices also raised procedural concerns as to whether they could even consider Petitioner’s arguments given the procedural posture from which the case was presented from the Ninth Circuit below. These discussions signaled that the Court may defer or limit its ruling on the Article III and Rule 23(b)(3) questions at issue.
The Court’s ultimate resolution of the case is difficult to predict. For now, the key takeaways are that many Justices appear unprepared to impose a strict Article III requirement applicable to unnamed class members at the certification stage, and the Court may even punt some or all of the meatier constitutional issues for a later day. Given that the Court’s prior class action standing opinions—e.g., Spokeo (2016) and TransUnion (2021)—were rendered as split decisions, it would not be surprising to see a similar outcome here.