Astellas presented the question of whether a False Claims Act investigation and settlement were insurable under Illinois law. The Department of Justice alleged that Astellas, a pharmaceutical manufacturer, had made improper donations to various charitable patient assistance programs causing false Medicare claims to be submitted to the federal government in violation of the False Claims Act and federal Anti-Kickback Statute.
Astellas settled those claims for a payment of $100 million, plus interest, to the United States. The settlement labeled $50 million of that total as “restitution to the United States,” consistent with the Department of Justice’s standard form False Claims Act release. That label – “restitution to the United States” – is designed to satisfy the requirements for tax deductibility under the Tax Cuts and Jobs Act of 2017. That statute provides that amounts paid in settlement to the government are only tax deductible if the payment is “identified as restitution or as an amount paid to come into compliance with such law” in the settlement agreement.
Astellas demanded that its excess insurer, Federal Insurance Company (a Chubb company), provide its $10 million coverage limits to reimburse Astellas for that $50 million payment. Federal denied coverage, and the litigation ensued.
At summary judgment, Federal attempted to avoid liability by arguing the settlement was uninsurable disgorgement of an ill-gotten gain, under the Seventh Circuit’s decision in Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908 (7th Cir. 2001). In support, Federal relied primarily on the label “restitution to the United States” in the settlement agreement and cases describing False Claims Act damages as “restitution to the government of money taken from it by fraud.” After a thoughtful and lengthy examination of the issues raised, the court granted Astellas’ motion, holding “the Settlement Payment constitutes a Loss under the Federal Policy, and public policy does not bar coverage.”
In reaching its conclusion the court first confirmed that the insurer bears the burden of proof on a coverage limitation regardless of whether the limitation is labeled as an “exclusion” or is contained elsewhere in the policy (here the limitation in question – excluding “matters which may be deemed uninsurable under applicable law” – was found in the definition of “Loss”). The court held that Federal did not meet its burden for five reasons.
First, the court analyzed whether the settlement constituted “payment to compensate the Government for a loss or injury” or if it “was intended to divest Astellas of the net benefit it received as a result of its alleged wrongdoing.” The court rejected Federal’s argument that the label “restitution to the United States” demonstrated the payment was for unjust gains because (a) citing Black’s Law Dictionary, the definition of “restitution” encompasses both disgorgement and compensation; and (b) “more importantly,” the labeling of the settlement payment as “restitution” was done “to identify the tax-deductible portion of the settlement as required under [the Tax Code] 26 U.S.C. section 162(f).”
Second, the court considered the purpose of the False Claims Act and the damages allowed thereunder. The court acknowledged that some cases label False Claims Act damages as “restitution.” However, the court found more persuasive the Southern District of New York’s decision in U.S. ex rel. Taylor v. Gabelli, 2005 WL 2978921 (S.D.N.Y. Nov. 4, 2005), which engaged in a lengthy analysis of the False Claims Act’s damages provisions, legislative history, and relevant case law, “all of which ‘leave no doubt that the [False Claims Act’s] remedial framework does not extend beyond ‘make-whole damages’ to include ‘disgorgement of unjust enrichment’ restitution.’” Accordingly, the court held that the False Claims Act allows “only for civil penalties and compensatory damages, not for restitution in the form of disgorgement,” and therefore the portion of settlement allocated to “restitution’ under the settlement was necessarily insurable compensatory restitution.
Third, the court analyzed the intent of the settlement agreement to determine whether the parties intended the settlement payment to function as disgorgement or compensatory damages. The court found that the parties intended the settlement payment as (insurable) compensatory damages because the Department of Justice calculated the settlement amount based on the amount of alleged loss the United States suffered from Astellas’ activities as opposed to the amount of money that Astellas allegedly wrongfully gained.
Fourth, the court rejected Federal’s argument that the release of other statutory claims that permit recovery of disgorgement caused the settlement to be uninsurable. The court held that Astellas had demonstrated that a “primary focus” of the Department of Justice’s investigation and the settlement was a violation under the False Claims Act and therefore was an insurable compensatory loss, which was covered by the Federal policy.
Finally, the court then considered whether coverage of the settlement was contrary to public policy. In finding that coverage for the settlement aligned with public policy, the court reasoned that (a) Astellas did not admit to any wrongdoing or liability in the settlement agreement; (b) public policy bars coverage for recovery of the proceeds of a fraud, but it does not bar coverage for the damages to the government; and (c) Illinois case law does not prohibit coverage for claims involving allegations of fraud that settle before a trial, and the Northern District of Illinois court was unwilling to “invent” such a public policy.
This decision adds several important arrows to policyholders’ quiver. It confirms that the label “restitution” – whether found in the tax code, the False Claims Act, or otherwise – should not by itself place a settlement outside the scope of coverage because that term includes payments to compensate for loss. It further provides an important guide to policyholders seeking to navigate the tax code’s requirement for deductibility of settlement amounts and insurance policy exclusions for “ill-gotten gains” or “amounts deemed uninsurable under applicable law.” Since we can anticipate that after passage of the Tax Cuts and Jobs Act more settlements will include “restitution” language to confirm tax deductibility, this issue will inevitably arise in the future. This important early decision should help guide future courts to the proper result.
Client Alert 2021-274
