Court Opinion

ID: 4230322
Source: CourtListenerOpinion
Date Created: 2017-12-19 20:23:26.030182+00
Date Added: 2024-06-11T07:47:58.214988
License: Public Domain

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
J-A24036-17

      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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