Seventh Circuit Holds Settlement Arising From Alleged False Claim Act Violations Does Not Necessarily Constitute Uninsurable “Restitution” under Illinois Law

Wiley Rein LLP

The United States Court of Appeals for the Seventh Circuit, applying Illinois law, has held that a $100 million settlement between the United States government and a pharmaceutical company for claims arising under the False Claims Act for underlying violations of the Anti-Kickback Statute do not constitute uninsurable “restitution” under Illinois law. Astellas US Holding, Inc. v. Federal Ins. Co., 66 F.4th 1055 (7th Cir. May 3, 2023).

The insured, a pharmaceutical company, introduced a new cancer drug to the market. In an effort to offset the cost of the drug not being covered by Medicare, the company contributed to “patient assistance plans” to cover portions of costs of the new treatment. In 2017, the U.S. Department of Justice began investigating the contributions for possible violations of the False Claims Act and the Anti-Kickback Statute, alleging that the government suffered Medicare losses attributable to the company’s contributions to funds for the company’s own product. Before a complaint was filed, the government and company settled for $100 million, half of which was labeled as “restitution.”

The company was insured under a D&O policy with a $10 million limit of liability, under which the definition of “Loss” carved out “matters which may be deemed uninsurable under applicable law.” The D&O insurer denied coverage on the basis that the settlement represented an overlap between the company’s gains and the government’s losses, and thus was wholly restitutionary, and uninsurable under Illinois law.

The Seventh Circuit acknowledged that Illinois prohibits insurance coverage for losses incurred from settlement payments that are restitutionary in character, but it concluded that the insurer failed to establish that the settlement constituted restitution. As an initial matter, the court determined that the “restitution” label in the settlement agreement was for tax purposes only; was not indicative of the nature of the settlement payment; and, in any event, only referenced half of the settlement amount. Next, the court held that, because the False Claims Act does not provide for restitutionary damages, the settlement payment could not be characterized as restitution solely on that basis. Finally, the court held that the insurer failed to establish that the $100 million payment was for funds obtained fraudulently from the United States or for profits gained by the insured. The court acknowledged that the insurer was not required to prove that its insured profited “in a technical or accounting sense,” but held that the insurer nonetheless “needed to offer some evidence that would allow a reasonable inference of benefits to [the insured] that were returned to the government in the settlement, and that the benefits were large enough such that any insurance coverage would amount to coverage of restitution.” In this instance, the court held, the insurer failed to meet that burden.

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