340b Management, LLC v. RX Blue Star Solutions, LLC , 176 A.3d 1001 ( 2017 )

J-A24036-17
2017 Pa. Super. 401
340B MANAGEMENT, LLC, : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
v. :
:
RX BLUE STAR SOLUTIONS, LLC; :
SACKS MEDICAL CORPORATION; SMC :
DIRECT LLC; PHARMBLUE LLC; :
PHARMBLUE HOLDINGS, LLC; MEIR :
SACKS a/k/a SHIM SACKS, AND :
YAAKOV SACKS a/k/a JAKE SACKS : No. 331 WDA 2017
Appeal from the Judgment entered February 15, 2017
in the Court of Common Pleas of Allegheny County,
Civil Division, No(s): GD 12-012001
BEFORE: MOULTON, SOLANO and MUSMANNO, JJ.
OPINION BY MUSMANNO, J.: FILED DECEMBER 19, 2017
340B Management, LLC, appeals from the Judgment entered against it
and in favor of RX Blue Star Solutions, LLC (“Blue Star”), Sacks Medical
Corporation, SMC Direct LLC, Pharmblue LLC, Pharmblue Holdings, LLC, Meir
Sacks a/k/a Shim Sacks (“Shim”), and Yaakov Sacks a/k/a Jake Sacks
(“Jake”) (collectively, “Defendants”). We affirm.
The trial court aptly described the facts underlying the instant appeal
as follows:
Brothers Shim [] and Jake [] owned the Evans City, Butler
County[,] mail order pharmacy[,] [] Blue Star [], and
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they believed the 340B Drug Pricing Program[1] presented a new
potential revenue source. In April of 2009, after meeting with
Ira Landsman [(“Ira”)], Shim and Jake engaged Ira [] to solicit
health centers eligible for the 340B Drug Pricing Program to
name [] Blue Star as their contract pharmacy. Ira had been
successful as a certified public accountant, securities trader and
a real estate developer, but he had no experience in pharmacy
matters. However, he immersed himself in 340B Drug Pricing
Program literature and became very knowledgeable on the
subject. With Shim and Jake agreeing [that] Ira would receive
fifty percent of [] Blue Star’s net profits from the 340B Program,
in June of 2009[,] Ira obtained [] Blue Star’s first contract with a
340B heath center. Shim and Jake then gave Ira the title of
Chief Operating Officer of [] Blue Star. Ira and [] Blue Star also
put their net profit[-]sharing agreement into writing [(“the
Agreement”)], with Ira first forming 340B Management, LLC[,]
to receive his fifty percent as [] Blue Star’s independent
contractor.
Ira worked diligently and obtained additional health
centers to sign 340B contracts with [] Blue Star, and gross
revenue to [] Blue Star from the 340B Program grew
dramatically to approximately $1.7 million in 2011 and $17.7
million in 2012. Ira’s duties involved much more than soliciting
health centers eligible for the 340B Drug Pricing Program. He
assisted the health centers in preparing extensive paperwork
required from the health centers by the federal government, he
prepared monthly reports on prescriptions filled for each
customer health center[,] and he managed the relationships with
all of the customer health centers.
In approximately November of 2011[,] Shim asked a
healthcare merger and acquisition advisor to search for
assistance selling [] Blue Star for an asking price of $4.5 million.
A potential purchaser then emerged, but the net profit sharing
agreement with Ira seemed to be a deal breaker. Jake and Shim
then began to perpetrate an elaborate scheme on their
unsuspecting friend and business associate, Ira. Shim
1 The 340B Drug Pricing Program is a federal program that provides
significant savings on outpatient drugs to qualified participants. The name is
a reference to its enabling law, section 340B of the Public Health Service Act,
42 U.S.C.A. § 256b.
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bombarded Ira with a series of lies about civil proceedings and
potential criminal charges against [] Blue Star that Shim said
could ensnare Ira, its Chief Operating Officer. Around March 29,
2012, after Shim told Ira he could avoid this impending legal
crisis if he resigned, Ira[,] in fact[,] submitted his resignation as
Chief Operating Officer of [] Blue Star. In April of 2012,
Pharmblue purchased [] Blue Star and Pharmblue subsequently
refused to honor the agreement between [] Blue Star and Ira’s
340B Management.
340B Management then initiated a lawsuit against [] Blue
Star, Pharmblue, Shim [] and Jake [] for, among other things,
fraud and breach of contract. Ira had regularly requested an
accounting of [] Blue Star’s net profits to determine his fifty
percent, but Jake and Shim never provided him [with] this
information. Instead, [] Blue Star paid Ira’s 340B Management
$18,000 in 2010, $10,000 in 2011[] and $65,000 in 2012[,] for
a total of $243,000. The breach of contract claim was based on
the $243,000 that [] Blue Star paid being far less than fifty
percent of the net profits from the 340B Drug Pricing Program.
Trial Court Opinion, 4/24/17, at 1-3 (footnote added).
After discovery, Defendants filed a Motion for summary judgment as to
Ira’s breach of contract claim. The trial court granted the Motion, concluding
that the contract for payment (based upon 50% of net profits) violated the
federal Anti-Kickback Statute (“the AKS”), 42 U.S.C.A. § 1320a-7b(b)(1)(B).
Consequently, the trial court dismissed Ira’s breach of contract claim. A jury
subsequently determined that Shim had defrauded 340B Management. The
jury awarded 340B Management $35,000 in compensatory damages, and
$400,000 in punitive damages. 340B Management filed a Motion for post-
trial relief, which the trial court granted in part and denied in part. The trial
court entered Judgment on the jury’s award of $35,000 in compensatory
damages, and $400,000 in punitive damages to 340B Management. 340B
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Management filed the instant timely appeal of the trial court’s Judgment,
followed by a Pa.R.A.P. 1925(b) Concise Statement of matters complained of
on appeal.
340B Management presents the following claims for our review:
I. Whether … a new trial is required as to [340B
Management’s] breach of contract claim because the [t]rial
[c]ourt erred in granting partial summary judgment to
[Defendants] with respect to [340B Management’s] breach
of contract claim based on the June 1, 2009 Agreement, as
amended by the March 19, 2010 Amendment, by finding
that said Agreement was unenforceable based on its
violation of federal law, namely, [the AKS?]
II. Whether a new trial is required as to [340B Management’s]
breach of contract claim because the [t]rial [c]ourt erred in
denying [340B Management’s] Motion for Post-Trial Relief
Pursuant to Pa.R.Civ.P. 227.1 with respect to [340B
Management’s] request for a new trial as to [its] breach of
contract claim[?]
Brief for Appellant at 5.
340B Management challenges the entry of summary judgment against
it, and in favor of Defendants.
Our scope of review of an order granting summary judgment is
plenary. We apply the same standard as the trial court,
reviewing all the evidence of record to determine whether there
exists a genuine issue of material fact. We view the record in
the light most favorable to the non-moving party, and all doubts
as to the existence of a genuine issue of material fact must be
resolved against the moving party. Only where there is no
genuine issue as to any material fact and it is clear that the
moving party is entitled to a judgment as a matter of law will
summary judgment be entered.
Motions for summary judgment necessarily and directly implicate
the plaintiff’s proof of the elements of his cause of action. Thus,
a record that supports summary judgment will either (1) show
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the material facts are undisputed or (2) contain insufficient
evidence of facts to make out a prima facie cause of action or
defense and, therefore, there is no issue to be submitted to the
fact-finder. Upon appellate review, we are not bound by the trial
court’s conclusions of law, but may reach our own conclusions.
The appellate court may disturb the trial court’s order only upon
an error of law or an abuse of discretion.
DeArmitt v. N.Y. Life Ins. Co., 73 A.3d 578, 585-86 (Pa. Super. 2013)
(internal citations and quotation marks omitted; some punctuation
modified).
340B Management first challenges the grant of summary judgment as
to its breach of contract claim against Defendants. Brief for Appellant at 25.
Specifically, 340B Management disputes the trial court’s conclusion that the
Agreement violated the AKS as a matter of law, and was therefore
unenforceable. Id. 340B Management asserts that the trial court
improperly failed to consider the totality and operation of the Agreement,
and the purpose of the AKS. Id. According to 340B Management, under the
Agreement, 340B Management did not receive remuneration for “‘arranging
for or recommending purchasing or ordering any good, facility, service, or
item’ to patients or physicians.” Id. at 27. 340B Management asserts that
it was at least two steps removed from arranging for or recommending that
patients select Blue Star as their contract pharmacy. Id.
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The question before us is whether the Agreement violates the AKS, 42
U.S.C.A. § 1320a-7b(b)(1)(B).2 As enacted in 1972, Congress made it a
misdemeanor to solicit, offer, or receive “any kickback or bribe in connection
with” furnishing covered goods or services or referring a patient to a
provider of those services. See Social Security Amendments Act, Pub. L.
No. 92-603, §§ 242(b) and 242(c), 86 Stat. 1419 (1972). In 1977,
Congress expanded the statutes’ language to prohibit the solicitation or
receipt of “any remuneration (including any kickback, bribe, or rebate)” in
return for referrals, prohibit the offer or payment of such remuneration to
induce referrals, and to make violations of the AKS statutes a felony. See
Medicare-Medicaid Antifraud and Abuse Amendments, Pub. L. No. 95-142,
91 Stat. 1175, 1181, 1182 (1977). In 1980, a “knowing and willful”
requirement was added. See Omnibus Reconciliation Act of 1980, Pub. L.
No. 96-499, 94 Stat. 2599, 2625 (1981).
In 1987, the Medicare and Medicaid statutes were combined into one
statute (42 U.S.C.A. § 1320a-7b), and the Office of the Inspector General
was authorized to exclude individuals and entities that violated the statutes
from the Medicare and Medicaid programs. See Medicare and Medicaid
Patient and Program Protection Act of 1987, Pub. L. No. 100-93, 101 Stat.
2 “[A] contract which violates a statute is illegal and will not be enforced.”
Robinson Coal Co. v. Goodall, 72 A.3d 685, 690 (Pa. Super. 2013).
(quoting Rittenhouse v. Barclay White Inc., 625 A.2d 1208, 1211 (Pa.
Super. 1993)).
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680, 681-82 (1989). Subsequent amendments to the AKS are not relevant
in this case.
The current AKS provides, in relevant part, as follows:
(1) Whoever knowingly and willfully solicits or receives any
remuneration (including any kickback, bribe, or rebate) directly
or indirectly, overtly or covertly, in cash or in kind--
…
(B) in return for purchasing, leasing, ordering, or arranging
for or recommending purchasing, leasing, or ordering any
good, facility, service, or item for which payment may be
made in whole or in part under a Federal health care
program, shall be guilty of a felony and upon conviction
thereof, shall be fined not more than $ 25,000 or imprisoned
for not more than five years, or both.
42 U.S.C.A. § 1320a-7b(b)(1)(B). The United States Office of the Inspector
General (“OIG”) has explained that this provision of the AKS
is extremely broad. … [P]rohibited conduct includes not only
remuneration intended to induce referrals of patients, but
remuneration also intended to induce the purchasing, leasing,
ordering, or arranging for any good, facility, service, or item
paid for by Medicare or State health care programs.
General Comments, Office of Inspector General, Notice of Final Rule, Anti-
Kickback Provisions of Medicare and State Health Care Programs, 55 Fed.
Reg. 35,952 (1991) (emphasis added). The AKS does not define the term
“arranging.” However, “[w]here Congress provides no definition for a term
in a statute, the court looks to the word’s ordinary meaning.” Schindler
Elevator Corp. v. U.S. ex rel. Kirk, 563 U.S. 401, 407 (2011). The
ordinary meaning of “arrange” is “to make preparations for: plan[;] … to
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bring about an agreement or understanding concerning.” MERRIAM-WEBSTER’S
COLLEGIATE DICTIONARY 64.
“Compliance with the AKS is clearly a condition of payment under
Parts C and D of Medicare[.]” U.S. ex rel. Wilkins v. United Health Grp.,
Inc., 659 F.3d 295, 313 (3d Cir. 2011). Given the extremely broad scope of
§ 1320a-7b(b)(1), Congress authorized the OIG to issue advisory opinions
and promulgate regulatory “safe harbors” under the AKS. 42 U.S.C.A.
§ 1320a-7d. Subsequently, six “safe harbor” regulations were promulgated
to determine if an agreement falls outside of the class of agreements
prohibited by section 1320a-7b(b)(1). In particular, we observe the fifth
factor, which provides as follows:
As used in [42 U.S.C.A. § 1320a-7b(b)(1)], “remuneration” does
not include any payment made by a principal to an agent as
compensation for the services of the agent, as long as the
following six standards are met:
***
(5) The aggregate compensation paid to the agent over the term
of the agreement is set in advance, is consistent with fair market
value in arms-length transactions and is not determined in a
manner that takes into account the volume of value or any
referrals or business otherwise generated between the
parties for which payment may be made in whole or in
part under Medicare ….
42 C.F.R. § 1001.952(d)(5) (emphasis added). In an Advisory Opinion, the
OIG found that compensation arrangements based on a percentage of sales
“appear to be associated with an increased potential for program abuse.”
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OIG Advisory Opinion No. 99-3, 1999 HHS OIG Adv. Op. LEXIS 37 (Mar. 23,
1999).
While there is no Pennsylvania case law regarding the interpretation of
section 1320a-7b(b)(1)(B), several federal courts have interpreted the AKS,
and are consistent with the result reached in this case. Under the marketing
agreement in Nursing Home Consultants, Inc. v. Quantum Health
Servs., Inc., 926 F. Supp. 835 (E.D. Ark. 1996), aff’d, 112 F.3d 513 (8th
Cir. 1997), Quantum Health Services, Inc. (“Quantum”), and Nursing Home
Consultants, Inc. (“NHC”), entered into a contract (“the agreement”)
whereby NHC would identify Medicare recipients who needed medical
supplies that Quantum could supply. Id. at 839. Under the agreement, all
orders for medical supplies were to be made directly with Quantum, and
NHC was prohibited from providing assistance to nursing home residents in
connection with the placement of an order. Id. NHC’s annual compensation
under the agreement was to be determined based upon the number of units
Quantum sold to those nursing home residents identified by NHC. Id. “In
other words, the more residents [the plaintiff] referred to [the defendant],
the more money [the plaintiff] made under the [] [a]greement.” Id. at 857-
58. The federal district court found that the agreement violated 42 U.S.C.
1320a-7b(b)(1):
NHC was paid for referring persons who needed Medicare-
covered supplies to Quantum, who in turn sold them those
supplies (via their nursing homes), and this type of relationship
falls squarely within the transactions prohibited by subparagraph
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A. Alternatively, NHC could be viewed as having been paid for
recommending to Medicare recipients that they purchase their
Medicare-reimbursable supplies from Quantum, and as such
their relationship with Quantum would violate subparagraph B.
No matter how you slice it, the [] [a]greement violates § 1320a-
7b(b)(1), and accordingly the subject matter of that agreement
(a referral scheme for the provision of Medicare-covered
supplies) is prohibited by that statute, as is the performance of
that agreement.
Nursing Home Consultants, Inc., 926 F. Supp. at 843.
In MedPricer.com, Inc. v. Becton, Dickinson & Co., 240 F. Supp.
3d 263 (D. Conn. 2017).3 MedPricer.com, Inc. (“MedPricer”), operated a
website that provided an online auction platform allowing buyers and sellers
to conduct online negotiations (“Sourcing Events”), which included online
requests for quotes (“RFQs”), i.e., the means to enter bids to supply services
or products to health care organizations. Id. at 265. Medpricer did not
directly participate in the Sourcing Events, but, rather, facilitated
negotiations between buyers and sellers through its website. Id. Hospitals
and healthcare service providers entered into agreements (“Service
Agreements”) with MedPricer, as the exclusive provider of e-sourcing
services. Id. Under the Service Agreements, the hospitals and healthcare
service providers, not MedPricer, determined which suppliers to invite to the
Sourcing Events. MedPricer then sent invitations to those suppliers. Id.
3 Reconsideration was granted in part, denied in part, and summary
judgment entered at MedPricer.com, Inc. v. Becton, Dixon & Co., 2017
U.S. Dist. LEXIS 50226 (D. Conn., filed on March 6, 2017). The federal
district court did not change its legal analysis interpreting the AKS.
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MedPricer provided the online forum, and offered to answer questions about
the bidding process. Id. Under MedPricer’s Service Agreements, “a fee of
1.5% of the value of the transaction shall be paid by a supplier who
participates in a Sourcing Event through MedPricer and is awarded business
related to a Sourcing Event.” Id. at 266.
Analyzing the Service Agreements under section 1320a-7b(b)(1)(B),
the federal district court in Connecticut explained that,
“arranging” a purchase or sale is broader than “making” a
purchase or sale, and MedPricer can intend to bring about a sale
even if it is not a party to the sale. In fact, MedPricer’s business
model is premised on making preparations for and bringing
about agreements to purchase and sell between suppliers and
buyers. MedPricer itself states that it is a “provider of
comprehensive e-sourcing services to the healthcare sector that
helps facilitate the negotiation of contracts between the
healthcare sector and suppliers,” and MedPricer conceded at oral
argument that this means, in effect, that it “facilitates sales.” It
also acknowledges in its brief that its website provides “a forum
where ‘an agreement or understanding’ may be reached between
the health care facility and supplier for the possible sale of
products.” In addition, MedPricer makes money only if a sale
occurs; the entire business model would be unsustainable if
MedPricer did not intend for sales to occur….
Id. at 270. Consequently, the federal district court found that MedPricer
“arranged” for the sale of the supplies and equipment. Id. “The fact that
MedPricer does not choose which particular suppliers participate in the sales
and which products are sold does not mean that it does not intend that a
sale take place.” Id.
The federal district court further observed that
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[t]he Contract’s percentage-based fee likewise points to
coverage by the AKS. The OIG has found that
compensation arrangements based on a percentage of sales
“appear to be associated with an increased potential for program
abuse.” OIG Advisory Opinion No. 99-3, 1999 HHS OIG Adv. Op.
LEXIS 37, 1999 WL 34984727, at *6 (Mar. 23, 1999). These
types of arrangements are subject to greater scrutiny, because
their inclusion suggests that
the parties’ actions under the Agreement could be
motivated by their desire and ability to increase sales of …
products that might be paid for by federal or state health
care programs. Regardless of which party was to be
responsible for the marketing of the Zimmer products, the
end result would be the same: the more products sold, the
more money the parties would make.
Id. at 271 (quoting Zimmer, Inc. v. Nu Tech Med., Inc., 54 F. Supp. 2d
850, 862-63 (N.D. Ind. 1999)).
In the instant case, the Agreement between 340B Management and
Blue Star provided, in relevant part, as follows:
3. It shall be the obligation of [340B Management] to devote his
[sic] best time and energies to the business of [Sacks Medical
Corporation/Blue Star] in obtaining Centers that qualify for
the 340B Program and have contracts executed with
[Sacks Medical Corporation/Blue Star].
4. Once having obtained a qualified Center that is contracted
with [Sacks Medical Corporation/Blue Star], it shall be [340B
Management’s] responsibility to review periodically its accounts
and maintain the ongoing relationship with the center. [Blue
Star’s] responsibility is to service the center with all of the
normal daily operations of a mail order pharmacy and any
additional pharmacy services needed under the 340B program.
…
6. In consideration of the services to be rendered by [340B
Management] and particularly in obtaining Centers for the 340B
Program, it is agreed that the profits of that operation
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derived from the Center or Centers shall be distributed
fifty (50%) percent to [Blue Star] and fifty (50%) percent
to [340B Management] on a quarterly basis payable within
fifteen (15) days after the conclusion of each quarter.
…
8. [340B Management] shall have the continued responsibility
for servicing each Center which he [sic] has developed for
[Sacks Medical Corporation/Blue Star] and for so long as the
relationship between [Sacks Medical Corporation/Blue Star]
continues with the Center or Centers. [340B Management] shall
continue to receive the consideration previously set forth.
9. In the event a Center terminates for any reason their
relationship with Sacks/Blue Star, then [340 Management] shall
no longer receive any distribution of profits from that facility and
will receive an accounting up to the date of termination.
However, any patients from terminated center that continues to
use Blue Star after center terminates contract with Blue Star,
[340 Management] will receive 50% of net profits.
Agreement, ¶¶ 3, 4, 6, 8, 9 (emphasis added).
Under the Agreement, 340B Management was responsible for
“obtaining Centers that qualify for the 340B Program and have contracts
executed with [Blue Star].” Agreement, ¶ 3. Thus, pursuant to the
Agreement, 340 Management would receive remuneration “in return for
arranging for or recommending” the services of Blue Star, “for which
payment may be made in whole or in part under a Federal health care
program[.]” 42 U.S.C.A. § 1320a-7b(b)(1)(B). Similar to the interpretation
of the AKS applied by federal courts, performance under this Agreement is
the type of conduct that the broad language of the AKS was enacted to
prevent. The “safe harbor” provisions afford no relief, as 340B
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Management’s remuneration “takes into account the volume and value of
any referrals or business otherwise generated between the parties for which
payment may be made in whole or in part under Medicare….” 42 C.F.R.
§ 1001.952(d)(5).
We additionally observe that, upon the termination of the relationship
between a center and Blue Star, 340B Management would receive
remuneration for directly arranging with the patient to purchase items
from Blue Star, and its remuneration, again, would not fall within the “safe
harbor” provisions, as it would take into account the value of referrals and
business generated. See 42 U.S.C.A. § 1320a-7b(b)(1)(B); 42 C.F.R.
§ 1001.952(d)(5).
Thus, the plain language of section 42 U.S.C.A. § 1320a-7b(b)(1)(B)
would bar 340B Management to receive remuneration “in return for …
arranging for purchasing” the products of Blue Star, “for which payment
may be made in whole or in part under a Federal health care program.” 42
U.S.C.A. § 1320a-7b(b)(1)(B) (emphasis added). We agree with the trial
court’s conclusion that the Agreement is unenforceable, in that it
contemplates a business arrangement that is prohibited by § 1320a-
7b(b)(1)(B). Accordingly, we cannot grant 340B Management relief on this
claim.
In its second claim of error, 340B Management argues that it is
entitled to a new trial as to its breach of contract claim. Brief for Appellant
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at 40. 340B Management argues that the trial court improperly found that
the Agreement was illegal on its face, because the terms of the Agreement
allow for performance without violation of the statute. Id. 340B directs our
attention to language in the Agreement that 340B Management was to
additionally review the accounts and maintain an ongoing relationship with
the health care centers. Id. 340B Management argues that the Agreement
required it to have continued responsibility for “servicing” each health care
center. Id. at 41. According to 340B Management, “[t]hese substantial and
important services” “would not be considered ‘arranging or recommending’
under the [AKS].” Id. at 42.
Our review of the Agreement discloses that 340B Management’s
compensation was “determined in a manner that takes into account the
volume of value of any referrals or business otherwise generated between
the parties for which payment may be made in whole or in part under
Medicare[.]” 42 C.F.R. § 1001.952(d)(5). Restricting 340B Management’s
obligation under the Agreement to only “servicing” the healthcare centers
would restructure 340B Management’s obligations, thereby impacting the
compensation which it would be owed. This Court will not reform the
parties’ Agreement to nullify its illegal portions, retain its legal provisions,
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and yet retain the same compensation structure. As a result, we cannot
grant 340B Management relief on this claim.4
Judgment affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/19/2017
4 340B Management’s claim that Shim and Jake were aware of the
Agreement’s violation of the AKS affords no relief, as knowledge by either
party does not change the ultimate conclusion that the Agreement is the
type of transaction prohibited by 42 U.S.C.A. § 1320a-7b(b)(1)(B).
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