Proving Fraud is and Should Be Hard: Lessons from a Recent Medicare Advantage False Claims Act Decision
The litigator’s adage “it’s easy to plead, it’s hard to prove” once again came true in the long-running False Claims Act (FCA) case targeting Medicare Advantage (“MA”) plans operated by UnitedHealth (United). Eight years after the complaint was filed, a Special Master recommended granting United’s motion for summary judgment. U.S. ex rel. Poehling v. UnitedHealth Group, Inc., 2025 U.S. Dist. LEXIS 40921 (CD CA). Both the litigation and the Special Master’s report contain valuable insights for all FCA defendants, and especially for those matters involving allegations related to diagnosis coding.
The government alleged that United violated the FCA’s “reverse false claim” provision by failing to return overpayments related to the submission of allegedly invalid diagnosis codes in connection with the MA program. The Special Master recommended summary judgment in United’s favor due to the government’s inability to prove both that United was actually overpaid, and that it improperly avoided an obligation to repay the government. In doing so, the ruling highlights the government’s burden to prove that 1) a diagnosis code is false; and 2) that a defendant “deceived” the government in “improperly” withholding an overpayment. It also confirms that materiality is an essential element of a “reverse” FCA violation.
Lesson #1: The Government Must Prove Its Case
The Special Master found that the government did not prove the diagnosis codes were unsupported by medical records because the government did not actually review the medical records. Instead, the government identified nearly 28 million diagnosis codes that it argued were invalid, but “did not compare the diagnosis codes submitted by United’s doctors against the underlying medical records to identify unsupported diagnosis codes.” Rather, “if United’s coders did not identify a diagnosis code during chart review as supported by a medical record, the government assume[d] the diagnosis code was, in fact, not supported.” (Emphasis in original). The Special Master found that assumption woefully insufficient.
The Special Master also found it compelling that CMS’s own RADV audits “found support in medical records for diagnosis codes that the government has alleged were unsupported based solely on such codes not having been coded during United’s chart review. These findings undercut the government’s theory that any diagnosis code submitted by United to CMS but not identified by coders in chart review is presumptively invalid.”
The Special Master further pointed out that “the government has repeatedly attempted to shift the burden to United to disprove the government’s allegations. Rather than review medical records itself, the government served discovery asking United to identify which of the approximately 28 million diagnosis codes, if any, United contends were supported by medical records and to produce the medical records providing such support.” (Emphases in original). United properly objected to this as “‘an improper contention interrogatory that impermissibly seeks to shift the burden of proving an essential element of the government’s False Claims Act case on to UnitedHealth . . .’” but offered to produce the 21 million underlying medical records in order to resolve the discovery dispute. The government rejected that offer, apparently, due to the volume of documents. The Special Master wryly noted that “the government was responsible for placing that volume of records in dispute.” Defendants should push back on government attempts to force them to prove their innocence, and to take on the government’s own investigatory and evidentiary obligations.
Lesson #2: The FCA Is A Fraud Statute
At base, the False Claims Act is a “fraud statute.” See e.g., United States ex rel. Schutte v. SuperValu, Inc., 598 U.S. 739, 750-51 (2023). As such, the Special Master appropriately focused on the government’s position that “mere avoidance of an obligation to repay money to the government is enough to create liability under the FCA, without the need to prove any deceptive conduct” and found that this position obviates the nature of a fraud statute. The Special Master ruled that “the impropriety of a defendant’s retention of an overpayment cannot be grounded in the mere fact of the defendant having received the overpayment, or even of being obligated to return it. Otherwise, the requirement of ‘improper’ conduct would introduce circularity and surplusage into a statute where Congress clearly intended nothing of the kind.” Quite simply, “a reverse FCA claim requires proof that the defendant engaged in conduct that deceived the government about an obligation to repay funds.”
Here, the government did not allege “any sort of deception.” Even if United had retained an overpayment, “[t]he mere retention of overpayments may deprive the government of funds it is owed, but that is not fraud.” While the failure to allege deception was fatal by itself, here there was also evidence that “the government knew of the very chart review practices of which it now claims United prevented it from learning, and thus the government cannot have been duped into relying on any action or inaction by United in determining whether it had been the victim of overpayments.”
The bar for both pleading and proving fraud is high. Fed. R. Civ. Pro. 9(b). Here, the Special Master correctly recognized that “[i]n relying upon only the ‘knowing and improper avoidance’ formulation of reverse FCA liability, the government must establish that United knew it had received overpayments and acted in a way that kept the government from learning of the overpayment.” Defendants should hold the government to those requirements. Quite simply, fraud and breach of contract are radically different, and proving fraud is, and should be, hard.
Lesson #3: Materiality Matters
In the eight years since the publication of Universal Health Services v. United States ex rel. Escobar, 579 U.S. 176 (2016), this blog has written extensively about materiality. More than 1,100 court decisions cite to Escobar. Escobar’s impact is significant and pervasive. Here, the government argued that “materiality is not a required element of establishing liability under the second prong of the reverse false claim provision.” The Special Master disagreed:
Escobar and subsequent Ninth Circuit cases recognize that, like the FCA as a whole, its reverse false claims provision incorporates the elements of common law fraud (although the provision expands the notion of what constitutes a “false claim” under the statute). Accordingly, a materiality element must apply to that provision, regardless of which of its two prongs is the basis for the government’s claim in a given case, because of the inconceivability of fraud absent a materiality element.
(Emphasis added, citations omitted). FCA defendants should continue to hold the government to its burden to prove materiality as well.
Conclusion
While the threat of treble damages, per claim penalties, and a variety of administrative remedies (including, but not limited to, suspension and debarment) are intimidating, FCA defendants should take comfort in this decision, which underscores the value of investing in a good defense and litigation strategy. Courts will hold the government’s feet to the fire and require it to meet its burden to prove fraud which, as here, it often simply cannot do.
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PTO Reverts to Prior Post-Grant Guidelines for Cases Involving Parallel District Court Litigation
On February 28, 2025, the acting director of the US Patent & Trademark Office (PTO) announced that the agency will revert to previous guidelines for discretionary denials of petitions for post-grant proceedings where there is ongoing district court litigation.
This announcement rescinds the PTO’s June 21, 2022, memorandum entitled “Interim Procedure for Discretionary Denials in AIA Post-Grant Proceedings with Parallel District Court Litigation.” The memorandum stated that the Patent Trial & Appeal Board “will not deny institution of an IPR or PGR under Fintiv (i) when a petition presents compelling evidence of unpatentability; (ii) when a request for denial under Fintiv is based on a parallel ITC proceeding; or (iii) where a petitioner stipulates not to pursue in a parallel district court proceeding the same grounds as in the petition or any grounds that could have reasonably been raised in the petition.” The memorandum effectively limited the discretion granted in Fintiv, which outlined six factors for the Board to consider when making decisions on post-grant proceedings involving parallel district court litigation.
Now that the 2022 memorandum has been rescinded, parties to post-grant proceedings should refer to Board precedent, including Fintiv and Sotera Wireless v. Masimo, for guidance when there are parallel district court proceedings. In accordance with prior guidelines, the PTO’s objective is to achieve greater consistency in its decision-making processes, especially in situations where patent validity is contested both in the courts and before the Board. The PTO emphasized that any portions of future Board decisions that rely on the 2022 memorandum will not be binding or persuasive.
Practice Note: Because of this action, the Board will now enjoy greater discretion when ruling on post-grant petitions, which may result in an increase of discretionary denials.
Delaware’s Fight to Remain Preeminent Home for Corporations
Delaware is feeling the pressure of backlash from resident corporations over recent decisions by the Delaware Court of Chancery in stockholder litigation, as well as from significant competition from other states, like Texas and Nevada, which are making material changes to their respective corporate laws to attract corporations looking for a friendlier new home state. As Foley reported previously, Texas is vying hard to become the preferred jurisdiction for legal domestication. Senate Bill No. 29 and companion House Bill 15 were filed in the Texas Legislature on February 27, 2025. Those bills introduce a series of corporate reforms, the most significant of which include the codification of the so-called “business judgment rule” and the permission for Texas corporations to adopt an ownership threshold that must be met for derivative claims.
And that is only the most recent step by Texas. In September 2024, Texas opened a statewide business court judicial district modeled after Delaware’s Court of Chancery to accommodate the booming corporate community in Texas, which only continues to grow due to a number of geographic and economic factors. Texas Governor Greg Abbott also recently announced the creation of the Texas Stock Exchange, which will begin facilitating trades and listings in Dallas in 2026. Nevada also has a leg in this race. Its legislature introduced Assembly Bill 239 on February 17, 2025, which, among other things, introduces new processes for reorganizations and revises processes for which a board of directors approves a plan of merger, conversion, or exchange. Notably, that bill also proposes to amend Nevada’s codification of the business judgment rule to require directors to act on an “informed basis.”
To preserve its position as the premier “home” to American corporations, the Delaware legislature is likewise proposing changes to Delaware corporate law. On February 17, 2025, it introduced Senate Bill 21. Among other things, that bill would establish:
New safe harbor protections for directors, officers, or controlling stockholders or control groups, shielding such individuals or groups of individuals from liability if they have interests rendering them “not independent” regarding transactions or other actions taken, and terms for deeming directors and stockholders independent (see proposed revisions and amendments to § 144 of Title 8 of the Delaware Code);
An amendment to stockholder books and records inspection rights to limit by definition the materials a stockholder may demand to inspect and to impose conditions upon bringing a demand to inspect a corporation’s books and records (see proposed revisions and amendments to § 220 of Title 8 of the Delaware Code); and
That controlling stockholders and control groups cannot be held liable for monetary damages for breach of the duty of care (see proposed revisions and amendments to § 144(c) of Title 8 of the Delaware Code).
Among other things, these proposed changes to Delaware’s corporate law seek to ease the volume of stockholder litigation brought in the state, as well as class attorney fees resulting from any successful stockholder action. However, these proposed changes are facing substantial pushback within the state, only a few weeks after the bill’s introduction. Part of that pushback stems from the source of the bill itself — reportedly, it was quickly developed by a working group convened by Delaware’s recently elected Governor Matt Meyer, who specifically cited concern with corporate rumblings of charters moving to other states, like Texas.
Only in its infancy, Delaware’s Senate Bill 21 has already had practical effects, with a stockholder complaint filed in the Court of Chancery on February 26, 2025, alleging that the defendant corporation has strategically (but improperly) avoided direct demands for inspection of books and records in reliance on Senate Bill 21, anticipating its passage will avoid liability as to the corporation. See Assad v. Altair Engineering Inc., No. 2025-0217 (Del. Ch. Ct.).
As the discord between stockholders or other plaintiff classes affected by corporate law and corporations continues to grow within Delaware and its Chancery Court, in the midst of immense competition from Texas, Nevada, and other states, it is yet to be seen whether Delaware can maintain its position as the preeminent home for America’s corporations and, consequently, where and with what success stockholders can file and maintain actions against the corporations in which they own interests.
Impact of the USPTO’s Rescission of its Discretionary Denial Memorandum
In May 2020, the PTAB panel in Apple Inc. v. Fintiv, Inc. (IPR2020-00019) denied institution of Apple’s petition in view of the advanced state of a parallel district court litigation and set forth six non-exclusive factors to be considered when a patent owner requested that the PTAB deny institution based on this ground. Those six factors would become known as the Fintiv factors and are:
whether the court granted a stay or evidence exists that one may be granted if a proceeding is instituted;
proximity of the court’s trial date to the Board’s projected statutory deadline for a final written decision;
investment in the parallel proceeding by the court and the parties;
overlap between issues raised in the petition and in the parallel proceeding;
whether the petitioner and the defendant in the parallel proceeding are the same party; and
other circumstances that impact the Board’s exercise of discretion, including the merits.
After the Fintiv decision, discretionary denials in view of parallel district court proceedings spiked considerable.
In June 2022, then-USPTO Director Kathi Vidal issued a memorandum titled “Interim Procedure for Discretionary Denials in AIA Post-Grant Proceedings with Parallel District Court Litigation” (the “Interim Guidelines”) in response to this spike in discretionary denials. The Interim Guidelines stated that a petition would not be denied:
based on a parallel U.S. International Trade Commission (ITC) proceeding;
when a petitioner stipulates not to pursue in the parallel litigation the same grounds of invalidity as raised in the petition or any ground that could reasonably have been raised in the petition (referred to as a “Sotera stipulation” based on a PTAB decision by that same name); or
when a petition present “compelling evidence” of unpatentability.
The Interim Guidelines also recognized that a court’s scheduled trial date, a key factor in Fintiv discretionary denials, is not always a good indicator of when trial will actually occur. Accordingly, the Interim Guidelines allowed parties to present evidence of the median time-to-trial statistics for civil actions in the district court where the parallel litigation was pending.
After the Interim Guidelines, the pendulum swung back against discretionary denials with a notable decline in discretionary denials following thereafter.
On February 28, 2025, the USPTO issued an unsigned notice stating that the Interim Guidelines are rescinded and instructed parties and practitioners to again refer to the Fintiv and Sotera decisions when determining whether to deny institution based on a parallel proceeding.
The USPTO’s decision to rescind the Interim Guidelines is expected to increase the number of discretionary denials by removing the safe harbors for petitioners previously available under the Interim Guidelines. But it remains unclear how PTAB panels will address requests for discretionary denials where the parties’ arguments were submitted in view of the Interim Guidelines but were published after their rescission. The first such decisions are now being published and shed some early light on this question.
In Hulu LLC v. Piranha Media Distribution, LLC (IPR2024-01253), published March 4, 2025, the panel cited the USPTO’s Interim Guidelines before declining to deny institution based on the parallel proceeding. This decision was likely authored prior to the USPTO’s February 28, 2025 notice rescinding the Interim Guidelines and was simply published after without revision.
The first PTAB institution decision addressing the USPTO’s rescission of the Interim Guidelines was Savant Technologies LLC v. Feit Electric Company, Inc. (IPR2024-01357), published March 5, 2025. In this case, patent owner requested that the PTAB deny institution based on two related litigations in different districts—the Eastern District of Kentucky and the Northern District of Texas.
In considering the Kentucky litigation, where no trial date had been set, the board considered the parties’ proffered median time-to-trial statistics and found that the trial would likely occur “well after” a final written decision would issue.
Notably, in considering the Texas litigation, which was scheduled for trial on January 20, 2026, the panel noted that “[w]hen the parties filed their papers, the USPTO was following now-rescinded guidance” that allowed parties to present median time-to-trial statistics. Nevertheless, the panel stated that the time-to-trial evidence was not relevant “because we agree with Patent Owner that the time-to-trial statistics are congruent with the scheduled trial date.” In particular, the parallel litigation was schedule for trial on January 20, 2026, while the average time to trial in the Northern District of Texas suggested an earlier trial date in December 2025. After considering the other Fintiv factors, including the merits of Petitioner’s arguments, the panel instituted the IPR.
Another decision published on March 5, 2025, Mobileye Global, Inc. v. Facet Technology Corp. (IPR2024-01110), also addressed patent owner’s request for discretionary denial. In that decision, the panel applied the Fintiv factors without any mention of the Interim Guidelines, which is notable because each party filed two post-preliminary response replies addressing the Interim Guidelines. After considering the Fintiv factors, the panel instituted IPR in this matter.
As can be seen from this small sample of decisions, there is no uptick in discretionary denials since the USPTO rescinded its Interim Guidelines. However, as shown by the Savant Technologies’s decision, the PTAB may continue to consider median time-to-trial statistics in the absence of a trial date but will likely disregard such evidence when a trial date is set. Accordingly, at this time, we suggest that parties continue to cite median time-to-trial statistics in the absence of a trial date but should be prepared for the PTAB to disregard such evidence if or when a trial date is set.
Mass. Chapter 93A Claims Require Specific In-State Conduct
In order to state a viable Chapter 93A, § 11 claim, a plaintiff must make specific, factual allegations about the conduct that occurred primarily and substantially within the Commonwealth of Massachusetts, the U.S. District Court for the District of Massachusetts recently confirmed. In diversity action Crunchtime! Info. Sys., Inc. v. Frisch’s Rests., Inc., a restaurant software developer alleged breach of contract, breach of the implied covenant of good faith, and a Chapter 93A violation against a restaurant chain. Plaintiff, a Delaware corporation with a principal place of business in Massachusetts, provides software services to restaurants across the world. Defendant, an Ohio corporation with a principal place of business in Ohio, operates franchises primarily in the Midwest. Defendant moved to dismiss only the Chapter 93A violation for failure to state a claim.
Relevant here, the parties entered into an agreement where plaintiff agreed to provide software services to defendant’s restaurants in exchange for payment. The only allegations in the amended complaint that connected the conduct to Massachusetts was the existence of a principal place of business in the state and the fact that Massachusetts law governed the underlying contract. In assessing whether conduct occurs “primarily and substantially” within Massachusetts, the court must examine the context of the events that gave rise to the claim, and whether the center of gravity of those events occurred in Massachusetts. Because the amended complaint did not include any allegations elaborating on the specific facts that occurred in or related to Massachusetts, there was no basis to believe the conduct occurred primarily and substantially in the Commonwealth. Therefore, the claim was dismissed.
This case serves a reminder, especially for parties who do not normally practice in Massachusetts, to pay particular attention to the factual allegations related to the conduct giving rise to the claims and whether the center of gravity of that conduct occurred in Massachusetts.
Are You Really Covered as an Additional Insured?
For your next construction project in New York, securing commercial general liability coverage as an additional insured may not be as simple as it would appear. Recent court rulings have interpreted the terms of insurance policies, where additional insured parties are intended to be covered pursuant to a “blanket” endorsement (i.e., the additional insureds are not explicitly named in the body of the endorsement or the underlying insurance policy), to provide coverage only to those persons or entities that the named insured has agreed to add as additional insureds in writing.
As a result of the rulings described below, when drafting construction contracts, it is important to be unambiguously clear as to which parties are intended to be additional insureds under any insurance policies required to be obtained under such contracts. In order to protect against the risks of non-coverage highlighted below, any party entering into a construction contract or subcontract should take the following actions when additional insureds are added to an insurance policy pursuant to a “blanket” endorsement:
(i) require by direct written agreement between the applicable named insured and each proposed additional insured that such named insured must include such proposed additional insureds as additional insureds under its insurance policy, together with a contractual indemnity by the named insured in favor of such proposed additional insureds, or preferably (where feasible) (ii) require that any insurance policy required under such construction contract should expressly name each and every party that is intended to be included as an additional insured thereunder; and
review the underlying insurance policies (i.e., not just the applicable certificates of insurance, which are informational only and do not supersede or modify the actual policy terms) to confirm exactly what persons or entities are covered as additional insureds thereunder and to confirm whether coverage as an additional insured is primary or excess to other coverage available to such additional insured.
In 2018, the New York Court of Appeals upended market norms in affirming a ruling limiting coverage for additional insureds to those in contractual privity. Gilbane Bldg. Co. v. St. Paul Fire & Marine Ins. Co., 31 N.Y.3d 131 (2018). In Gilbane, the court found that a project’s construction manager was not covered as an additional insured by the insurance purchased by the general contractor (GC Policy), because the GC Policy included a “blanket” additional insured endorsement and the construction manager did not have privity of contract with the general contractor, the named insured under the GC Policy. The court specifically and exclusively relied on the language of such “blanket” endorsement, which read “WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract … ” (with emphasis added). The court specified that the language “with whom” clearly required a written agreement between the named insured and any proposed additional insured, in which the named insured agreed to add such person or entity as an additional insured in order to effectuate coverage for the proposed additional insured.
This approach was reinforced in a recent decision in the New York Supreme Court, Appellate Division, Second Department, New York City Hous. Auth. v. Harleysville Worcester Ins. Co., 226 A.D.3d 804 (2024). In that case, an owner contracted with a general contractor who subsequently contracted with a subcontractor for construction work. The subcontractor obtained insurance coverage for the project and was later sued by its own employee in a lawsuit that also named as defendants the owner, general contractor and other parties whom the subcontractor had agreed to include in its insurance policy as additional insureds. The court determined that, apart from the general contractor, none of the other parties were entitled to coverage, relying on the language of the subcontractor’s insurance policy: “Who Is An Insured is amended to include as an insured any person or organization for whom you are performing operations only as specified under a written contract … that requires that such person or organization be added as an additional insured on your policy” (with emphasis added). The court interpreted this language as limiting coverage to those with whom the named insured (the subcontractor) had contracted directly to do work, thereby finding that the general contractor qualified as an additional insured under the terms of the policy, but that no other parties seeking additional insured status were covered.
The court also held that language in the subcontract between the general contractor and the subcontractor, incorporating the terms of the prime contract between the owner and the general contractor that required the general contractor to add the owner as an additional insured under the general contractor’s policy, was “insufficient to confer additional insured status on [the owner] with respect to the subcontractor’s policy.” Finally, after comparing the terms of the respective policies issued to the general contractor and the subcontractor, the court determined that the subcontractor’s policy was excess to the general contractor’s policy, so coverage for the general contractor — the one party the court determined was entitled to coverage under the subcontractor’s policy as an additional insured — would be triggered only if and when the liability limits of the general contractor’s own policy were exhausted. As a result, the general contractor would first have to pursue any applicable claim under its own insurance policy, and only after policy limits under its own policy were exhausted could the general contractor seek coverage as an additional insured under the subcontractor’s policy.
USCIS: Only ‘01/20/2025’ Edition of Updated Forms Acceptable After Grace Period
USCIS issued a grace period on March 8, 2025, for the dozen updated immigration forms it released in February and March 2025 and made effective immediately. These forms include the N-400 for naturalization, I-485 for adjustment of status, and I-131 for travel documents. Applicants may use the previous editions until the specified grace period ends.
USCIS had released the new, “01/20/2025” editions of the forms without notice and made them effective immediately. Consequently, the previous edition(s) of the impacted forms that were received by USCIS after the release dates faced the risk of rejection. Following significant criticism and a lawsuit filed by the American Immigration Lawyers Association challenging the publication of new forms without proper notice or grace period, USCIS announced it would continue to accept the prior versions of the updated forms for a specified period. USCIS provided at least a one-month grace period for all the updated forms issued.
USCIS will accept only the 01/20/2025 editions of the following forms starting:
1) March 24, 2025:
Form I-356, Request for Cancellation of Public Charge Bond
Form I-914, Application for T Nonimmigrant Status
Form I-941, Application for Entrepreneur Parole
2) April 3, 2025:
Form I-485 Supplement J, Confirmation of Valid Job Offer or Request for Job Portability Under INA Section 204(j)
Supplement A to Form I-485, Adjustment of Status Under Section 245(i)
Form I-485, Application to Register Permanent Residence or Adjust Status
Form G-325A, Biographic Information (for Deferred Action)
Form I-192, Application for Advance Permission to Enter as a Nonimmigrant
Form I-134, Declaration of Financial Support
3) April 4, 2025:
Form N-400, Application for Naturalization
Form I-131, Application for Travel Documents, Parole Documents, and Arrival/Departure Records
4) May 5, 2025:
Form I-918, Petition for U Nonimmigrant Status
Applicants should check the USCIS Forms and Forms Updates pages to ensure they are using the correct edition of an immigration form to avoid delays or rejections.
Interesting Delay: Prejudgment Interest Accrues Despite Unreasonable Delay
The US Court of Appeals for the Federal Circuit upheld a decision on enhanced damages and prejudgment interest, concluding that the district court correctly applied the appropriate standard for enhanced damages in accordance with established precedent. Halo Electronics, Inc. v. Pulse Electronics, Inc., Case Nos. 23-1772; -1966 (Fed. Cir. Feb. 28, 2025) (Prost, Bryson, Reyna, JJ.) (nonprecedential).
In 2013, following a jury verdict in favor of Halo, the district court entered a $1.5 million verdict against Pulse for willful infringement but denied Halo enhanced damages. Halo appealed and, in 2016, engendered a new enhanced damages standard from the Supreme Court. In 2015, while the case was pending before the Supreme Court, Halo filed for an award of supplemental damages for direct infringement between 2012 and 2013, and prejudgment and post-judgment interest on the initial $1.5 million judgment and on the supplemental damages. The district court awarded supplemental damages and prejudgment and post-judgment interest.
In 2017, the district court determined that Halo was not entitled to enhanced damages or attorneys’ fees under the Supreme Court’s new standard. Although the parties still disagreed on which method to use for prejudgment interest calculation – and briefed their positions accordingly – the district court mistakenly ordered the clerk to enter a final judgment and close the case. After the Supreme Court decided WesternGeco v. ION Geophysical in 2018, Halo (in 2020) filed a motion seeking prejudgment interest and a new damages trial, arguing that the district court had not made a final ruling on the issue of prejudgment interest and that WesternGeco was intervening case law that permitted it to seek additional damages for Pulse’s activities outside the United States.
Halo argued that because the final order closing the case ignored an outstanding issue (prejudgment interest), the case was merely administratively closed. Although Pulse argued that the resurrected case should remain closed under Federal Rule of Civil Procedure 41(b), the district court awarded limited prejudgment interest in March 2023. The district court rejected Halo’s request for a new trial regarding additional foreign damages under WesternGeco.
Halo appealed, and Pulse counter appealed. Halo raised two main arguments:
Enhanced damages were appropriate because of the jury’s finding of willfulness.
The district court should have allowed a limited trial on the issue of foreign infringement.
Pulse argued that FRCP 41(b) should have barred any prejudgment interest because Halo did not address the court’s oversight until 2020.
The Federal Circuit rejected both of Halo’s arguments. It explained that a jury’s finding of willfulness is “but one factor” in an enhanced damages determination under the Supreme Court’s highly discretionary Halo test. Willful infringement does not require the more egregious intent that gives rise to enhanced damages, nor does it merge with enhanced damages analyses procedurally – willfulness is a jury issue, while enhanced damages is an issue for the court.
Addressing Pulse’s argument, the Federal Circuit found no abuse of discretion in either the district court’s refusal of a new trial or its decision to allow prejudgment interest. It was unreasonable for Halo to bring forward an argument under WesternGeco for a new trial two years after WesternGeco was decided. Waiting three years between the case’s 2017 closing and renewing its arguments about prejudgment interest also constituted unreasonable delay, but other equitable factors nevertheless permitted the award of prejudgment interest.
FedEx Defeats Government’s Loper Bright Gambit
On February 13, 2025, a Tennessee federal district court handed FedEx Corporation its second win in a refund action involving the application of foreign tax credits to what are known as “offset earnings.”[1] Offset earnings are earnings from a taxpayer’s profitable related foreign corporations that are offset by losses from other related foreign corporations. FedEx previously prevailed on the question of whether it was entitled to foreign tax credits related to such earnings.[2] In this most recent ruling, the court rejected the Government’s reliance on a certain regulatory provision called the “Regulatory Haircut Rule”[3] to argue that the amount of FedEx’s claimed refund should be reduced. The case now appears to be set for appeal.
Revisiting the analysis in its first ruling, the court explained the error of the Government’s reliance upon the Regulatory Haircut Rule. In short, the court said that the rule’s application conflicted with the best construction of the governing statutes, primarily Internal Revenue Code (IRC) Sections 960, 965(b)(4), and 965(g). The Government defended its reliance by appealing to Loper Bright’s instruction that courts must respect legitimate delegations of authority to an agency.[4] Citing IRC Section 965(o), which authorized the Secretary of the Treasury to prescribe regulations “as may be necessary or appropriate to carry out the provisions of” Section 965 and to “prevent the avoidance of the purposes” of this section, the Government argued that the Regulatory Haircut Rule furthered the IRC’s broader goal of preventing tax avoidance and that Loper Bright required the court to respect the Secretary’s exercise of his delegated authority.
While acknowledging that legitimate delegations of authority to agencies remain permissible after Loper Bright, the court reminded the Government that an agency does not have the power to regulate in a manner that is inconsistent with the statute, even when a delegation provision grants the agency broad discretionary authority:
Assuming that Congress delegated authority . . . to promulgate regulations implementing section 965 . . . that authority cannot, under Loper Bright, encompass the discretion to promulgate regulations that contravene the “single, best meaning” of section 965, as determined by the courts.[5]
In other words, a statute’s delegation provision should not be interpreted to allow Treasury to eliminate rules that Congress established in other parts of the IRC.
Practice Point: Referencing Loper Bright’s acknowledgment that Congress may “confer discretionary authority on agencies,”[6] the Government has defended (and likely will continue to defend) its regulations on the theory that its exercises of such authority should be respected. But as Loper Bright reminds us, courts have an independent duty to decide the meaning of statutory delegations. Thus, taxpayers should closely examine whether regulations purportedly derived from a statute’s delegation provision comport with the rest of the statute. Those that do not should be challenged.
______________________________________________________________________________
[1] FedEx Corp. & Subs. v. United States, No. 2:20-cv-02794 (W.D. Tenn., Feb. 13, 2025)(electronically available here).
[2] FedEx Corp. & Subs v. United States, No. 2:20-cv-02794 (W.D. Tenn., Mar. 31, 2023)(electronically available here).
[3] See Treas. Reg. § 1.965-5(c)(1)(i) (limiting foreign tax credits by the amount of withholding taxes paid to a foreign jurisdiction). The court also rejected the Government’s reliance upon what it called the “Statutory Haircut Rule” based on IRC section 965(g)(1). This discussion focuses on the regulatory counterpart.
[4] See Loper Bright Enters. v. Raimondo, 144 S.Ct. 2244, 2268 (2024).
[5] FedEx, No. 2:20-cv-02794 (W.D. Tenn., Feb. 13, 2025).
[6] Loper Bright, 144 S.Ct. at 2268.
This Week in 340B: March 4 – 10, 2025
Find this week’s updates on 340B litigation to help you stay in the know on how 340B cases are developing across the country. Each week we comb through the dockets of more than 50 340B cases to provide you with a quick summary of relevant updates from the prior week in this industry-shaping body of litigation.
Issues at Stake: Contract Pharmacy; HRSA Audit Process; Medicare Payment; Rebate Model
In a case appealing a decision on a state contract pharmacy law, two amicus briefs were filed in support of the defendant-appellant state.
In one Health Resources and Services Administration (HRSA) audit process case, the court granted motion to withdraw the plaintiff’s motion for preliminary injunction.
In a case challenging a Medicare Advantage plan’s response to 340B payment cuts, defendants’ motion to compel the production of a damages spreadsheet was granted in part and denied in part.
In six cases against HRSA alleging that HRSA unlawfully refused to approve drug manufacturers’ proposed rebate models:
In five such cases, the court granted intervenor’s motion to intervene and a group of amici filed an amicus brief in support of the defendant.
In one such case, intervenors filed a notice of supplemental authority to which the plaintiff filed a response and a group of amici filed an amicus brief in support of the defendant.
Nadine Tejadilla also contributed to this article.
Compounded GLP-1 Drugs: Texas Judge Denies PI Motion and Request for Stay of FDA’s Declaration that Tirzepatide Shortage is Resolved; Plaintiff OFA Appeals
On March 5, 2025, one U.S. District Court ruled unequivocally in FDA’s favor in the case, Outsourcing Facilities Ass’n, et. al. v. U.S. Food and Drug Admin., et. al., 4:24-cv-0953-P, slip op., 2025 WL 746028, at *15 (N.D. Tex. Mar. 5 2025), denying plaintiffs’ motion for (1) a preliminary injunction (PI) prohibiting the Food & Drug Administration (FDA) from taking action against Outsourcing Facilities Association (OFA) members and FarmaKeio based on their compounding of the drug ingredient tirzepatide pending final judgment in the case and (2) a stay pending conclusion of the review proceedings in response to FDA’s declaration that the shortage of the diabetes and weight-loss tirzepatide products has been resolved.
Background
Based on unprecedented demand and Eli Lilly’s inability to meet this demand, the tirzepatide products at issue, Mounjaro® and Zepbound®, whose marketing applications were approved in 2022 and 2023 respectively, were placed on the drug shortage list in December 2022.
The Food Drug, and Cosmetic Act (FDCA) defines “shortage” as “a period of time when the demand or projected demand for the drug within the United States exceeds the supply of the drug.” 21 U.S.C.§ 356c. When a drug is placed on the FDA’s shortage list, Congress permits 503A compounders, those operating under state board of pharmacy oversight and issuing patient specific prescriptions, to compound copies of the drug and 503B outsourcing facilities which are those compounders who are registered and regulated by FDA and who manufacture large batches of sterile compounded medications for health care entities, to compound from that drug’s active ingredient—which is otherwise prohibited—including by compounding drugs that are “essentially a copy” of an approved drug. See 21 U.S.C.§§ 353b(a)(2)(A)(ii), (a)(5), (d)(2)(A). Thus, compounding copies of a drug is only permitted while a shortage exists.
Current Status for Compounders
Consistent with FDA’s February 11, 2025 update, which remains in effect given the Court’s denial of the PI and stay, FDA’s approach to compounders is as follows:
For a state-licensed pharmacy or physician compounding under section 503A of the FDCA, the period of enforcement discretion described below has ended.
For outsourcing facilities under section 503B, FDA does not intend to take action against compounders for violations of the FDCA arising from conditions that depend on tirzepatide injection products’ inclusion on FDA’s drug shortage list until March 19, 2025.
Future State
On March 10, 2025, OFA filed a notice of interlocutory appeal signaling their intention to appeal the March 5, 2025 decision in FDA’s favor to the United States Court of Appeals for the Fifth Circuit. The appeal notwithstanding, we will watch for developments on certain GLP-1 products that continue to be compounded by 503A pharmacies under the rationale that certain compounded products are required to meet the individual needs of patients. There are a number of different strengths, different dosage forms, and combination of ingredients being compounded or contemplated. While FDA has not yet taken a position with respect to these types of modified compounded products, it will be interesting to see whether FDA agrees that such modifications are determined to be needed to meet the individual needs of patients and are clinically relevant or whether such products are considered to be essentially a copy of a commercially available product. If so and barring judicial intervention, 503A pharmacies must stop compounding tirzepatide, and 503B pharmacies may only continue compounding tirzepatide until March 19, 2025.
Want To Learn More? See our prior blogs.
FDA Targets GLP-1 Providers with Warning Letters
GLP-1 Drugs: FDA Removes Lilly’s Zepbound® and Mounjaro® (semaglutide injection) from its Drug Shortage List
GLP-1 Drugs: Brand Companies Push FDA to Limit Compounding
Federal Circuit Affirms ImmunoGen Patent Obviousness
In a precedential opinion issued on March 6, the Federal Circuit affirmed the US District Court for the Eastern District of Virginia that the claims in ImmunoGen’s US patent application 14/509,809 (“the ’809 application,” published on May 14, 2015, as US 2015/0132323) were obvious.
ImmunoGen, Inc. v COKE MORGAN STEWART, ACTING UNDER SECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY AND ACTING DIRECTOR OF THE UNITED STATES PATENT AND TRADEMARK OFFICE, (2023-1762, Decided: March 6, 2025).
This case highlights the distinctions between the US law where the obviousness inquiry is generally agnostic to the particular motivation of the inventor, versus that in Europe and many other countries that evaluate inventive step/inventiveness based on a “problem–solution” approach not required in the US. The case also serves as a reminder of the risks attendant with the use of so-called boilerplate language, particularly when used in the context of ascribing a level of skill in the art regarding optimization of parameters. And it further underscores the challenges faced by patent applicants, particularly in the pharmaceutical and life sciences sectors, in balancing the scope of its own seminal patents covering new chemical entities, per se, against a reasonable foreseeability of filing of later, second-, and later-generation patent applications on various improvements, such as treatment regimens, dosage formulations, etc. This challenge has been exacerbated by a growing hostility towards building “patent thickets” around new drugs, based on the notion that they are responsible for high drug prices. This decision further adds to the growing arsenal of jurisprudence on which generic drug companies may rely on attacking later-generation Orange Book-listed patents covering drug compositions and uses thereof.
The claims at issue are directed to a dosing regimen for administering IMGN853 (mirvetuximab soravtansine), which is ImmunoGen’s patented and US Food and Drug Administration- (FDA) approved antibody drug conjugate (ADC) used for treating certain ovarian and peritoneal cancers. IMGN853 is a conjugate of an antibody known as “huMov19” linked via a charged sulfopSPDB linker to a toxic maytansinoid payload known as “DM4.” The key limitation in the claims was the recitation that immunoconjugate is administered at a dose of 6 milligrams (mg) per kilogram (kg) of adjusted ideal body weight (AIBW) of the patient.” The Patent Trial and Appeal Board (PTAB) affirmed the Examiner’s obviousness rejection, which was based primarily on ImmunoGen’s own prior patent publication [2012/0282282] directed to IMGN853, per se. Immunogen filed a civil action under 35 U.S.C. § 145. The Eastern District Court of the Eastern District of Virginia affirmed PTAB’s decision.
On appeal, ImmunoGen stressed that at the time the invention was made, the art did not appreciate that IMGN853 caused ocular toxicity in humans. Thus, in its view, the solution to an unknown problem could not have been obvious — such as found in some prior Federal Circuit and the US Court of Customs and Patent Appeals (CCPA) cases. See, e.g., In re Sponnoble, 405 F.2d 578, 585 (C.C.P.A. 1969) (“a patentable invention may lie in the discovery of the source of a problem even though the remedy may be obvious once the source of the problem is identified.”); In re Omeprazole Patent Litigation, 536 F.3d 1361, 1380-81 (Fed. Cir. 2008) (upholding patent where coatings for omeprazole were discovered by the inventors to negatively interact with each other, and solution of providing a barrier therebetween was non-obvious even if providing a barrier would have been obvious if the interaction problem were known); Leo Pharmaceutical Products v. Rea, 726 F.3d 1346, 1353-54 (Fed. Cir. 2013) (“The inventors of the ‘013 patent recognized and solved a problem with the storage stability of certain formulations—a problem that the prior art did not recognize and a problem that was not solved for over a decade.”)
This position is also consistent with jurisdictions, such as Europe, that apply a “problem-solution” approach to the determination of inventive step. Indeed, the European Patent Office granted to ImmunoGen at least one patent with claims similar to those at issue in the United States.
However, the District Court determined that because ocular toxicity was “a well-known adverse event in the administration of immunoconjugates that contain DM4,” and because IMGN853 includes a DM4 payload, a person of ordinary skill in the art would have been motivated to monitor for those side effects when administering the drug to humans, despite not knowing of IMGN853’s ocular toxicity.
The Federal Circuit agreed. It pointed to its prior decisions in reasoning that “[a]s an initial matter, although ImmunoGen is correct that “[w]here a problem was not known in the art, the solution to that problem may not be obvious,” Forest Lab’ys, LLC v. Sigmapharm Lab’ys, LLC, 918 F.3d 928, 935 (Fed. Cir. 2019), it does not follow that a claimed solution to an unknown problem is necessarily non-obvious.” (Emphasis in original). Relying on KSR for the proposition that “[i]n determining whether the subject matter of a patent claim [was] obvious, neither the particular motivation nor the avowed purpose of the patentee controls,” the Federal Circuit found no clear error in the District Court’s reasoning.
ImmunoGen also argued that the district court clearly erred in finding that a person of ordinary skill in the art would have been motivated to try AIBW dosing as a dosing methodology for IMGN853 to eliminate ocular toxicity or arrive at a dose of 6 mg/kg AIBW with a reasonable expectation of success. Regarding the former, AIBW was a known technique but had never been used as a methodology for an ADC. So, in ImmunoGen’s view, the district court “simply plucked AIBW dosing out of [a] multitude of possibilities.” In finding no clear error in the District Court’s reasoning, the Federal Circuit relied on ImmunoGen’s ‘282 publication and, in particular, for its teaching that “[t]he dosing regimen and dosages [of the disclosed ADCs] will depend on the particular cancer being treated, the extent of the disease and other factors familiar to the physician of skill in the art and can be determined by the physician.” (Emphasis in original). This reference to the level of skill in the art, especially at the time of drafting, most certainly came back to haunt ImmunoGen.
Regarding the latter, ImmunoGen was again thwarted by its own prior publication. Indeed, in view of its findings that Immunogen’s ’282 publication discloses dosing IMGN853 at around 6 mg/kg of TBW (total body weight) of the patient, an abstract from the American Society of Clinical Oncology disclosing that IMGN853 had been tested on humans at a dose of 5 mg/kg TBW, AIBW dosing was well known, and that “for patients who weigh exactly their ideal body weight, a dose of 6 mg/kg AIBW is identical to a dose of 6 mg/kg TBW,” the district court viewed ImmunoGen’s ‘809 application as an attempt “to cover a dose that was already disclosed in the prior art.” The Federal Circuit agreed, concluding: “[a] doctor dosing a patient at his or her IBW with IMGN853 at a dose of 6 mg/kg TBW would necessarily be dosing that patient at 6 mg/kg AIBW, as claimed. This would be true regardless of whether a doctor knew of AIBW dosing.” (Emphasis in original).
In sum, this case shows that, even if a problem was unknown at the time an invention was made, it may still be obvious. Moreover, this case demonstrates the difficulties of obtaining a patent to a specific method of treatment and dosage formulations in view of one’s own prior art.