The White Collar Appeal: Sixth Circuit Reaffirms “Willfulness” Standard for Healthcare Fraud and Vacates Restitution Orders

• Despite a plainly erroneous “willfulness” instruction, which related to the key issue at trial, the Sixth Circuit affirmed the defendant’s conviction because he had stipulated to the erroneous instruction.

• The Sixth Circuit did, however, vacate restitution orders totaling nearly $7 million because they lacked evidentiary support, were based on an unsupported apportionment analysis, and erroneously included both legitimate and fraudulent claims.

• The decision provides guidance both on the standard of willfulness under 18 U.S.C. § 1347 and on challenging restitution orders.

Background

The gravamen of the scheme in Clay  was to steer patients to a pharmacy that paid the defendants a portion of the pharmacy’s proceeds from filling prescriptions for certain compounded skincare creams.  Kevin Clay and Matthew Maluchnik recruited people to obtain prescriptions and fill them at complicit pharmacies and then paid those recruits a cut of their kickbacks from the pharmacies.  Many of the recruits were employees at a nearby Jeep factory, whose employee health insurance plan covered the compounded creams.  The government ultimately charged Clay, Maluchnik, and certain recruits with healthcare fraud and conspiracy.  The government also brought tax charges against Clay related to a charitable foundation he set up to shield taxable income.

Clay went to trial, where he stipulated to a number of jury instructions.  Among those instructions was that “knowingly and willfully” committing healthcare fraud means that the defendant did an act “voluntarily and intentionally, and not because of mistake or some other innocent reason.”

A jury convicted Clay of conspiracy, healthcare fraud, and making a false statement to the IRS regarding his foundation’s status.  The district court sentenced him to 51 months’ imprisonment and ordered restitution of approximately $6.4 million to Fiat Chrysler (owner of the Jeep plant).  That figure represented 90 percent of the amount Fiat Chrysler paid in connection with the compounded cream prescriptions, which reflected that Maluchnik—who pleaded guilty before trial—had agreed in his plea agreement to pay 10 percent of the total restitution amount.  The restitution order also included all claims submitted to Fiat Chrysler, both fraudulent and medically necessary prescriptions.  The district court reasoned that, whether medically necessary or not, the payments were procured by kickbacks and thus subject to restitution.  The district court also ordered restitution of approximately $400,000 to the IRS.

Holdings

Willfulness Instruction.  Clay challenged the definition of willfulness the district court provided to the jury.   Because he had not objected, the Sixth Circuit reviewed for plain error, under which a court of appeals will reverse only if (1) there was an error that (2) was plain, that (3) affected the defendant’s substantial rights, and that (4) “seriously affects the fairness, integrity, or public reputation of judicial proceedings.”  Here, the instruction was plainly erroneous:  only a few months ago, the Sixth Circuit held that willfulness for purposes of healthcare fraud under 18 U.S.C. § 1347 requires the government to prove that the defendant “acted with knowledge that his conduct was unlawful,” even if he does not know which specific statute he violated.  See United States v. Singh, 147 F.4th 652, 658 (6th Cir. 2025).

As to substantial rights and grave injustice—the third and fourth plain-error factors—the panel was not persuaded.  Although “much of Clay’s defense” was that he never thought the scheme was wrong, the court pointed to evidence in the record suggesting that Clay was conscious of his own wrongdoing—things like using fake names and steering patients to specific doctors and pharmacies.  As a result, the panel found the third factor was a “close question.”  And as to grave injustice, the panel held that, because Clay had stipulated to the jury instruction, he had “invited” the error, thereby undermining any claim that it caused a grave injustice.

Restitution.  The panel, however, found a number of errors in the district court’s restitution order.  As to the $6.4 million owed to Fiat Chrysler, the court held that the order should not have included medically necessary prescriptions and that the 90–10 apportionment was baseless.  Fiat Chrysler’s insurance would have covered medically necessary claims regardless of whether they were “procured by kickbacks,” so, the Sixth Circuit reasoned, “payment for such claims wasn’t a loss caused by Clay’s conduct.” 

The panel also held that apportionment based solely on one defendant’s plea agreement was erroneous.  The Mandatory Victim Restitution Act permits courts to “apportion liability among the defendants based on” two factors:  “their culpability and economic circumstances.”  18 U.S.C. § 3664(h).  Here, however, the district court did not consider those factors.  It simply allowed the agreement between the government and Maluchnik to determine Clay’s restitution obligation. 

The court also rejected the IRS restitution order.  In support of its claim for $400,000, the government offered nothing more than the IRS’s bare assertion of its losses.  But a victim’s mere say-so is insufficient to meet the preponderance-of-the-evidence standard.  

Key Takeaways

The Bryan standard of willfulness applies to healthcare fraud under Section 1347.  Clay was unable to undo his conviction notwithstanding an erroneous willfulness instruction, but there should be no ambiguity about what the correct standard is.  Singh and Clay make clear that, under Section 1347, the government must demonstrate that a defendant “acted with knowledge his conduct was unlawful,” even if he does not know the specific law he is violating.  That tracks the definition of willfulness provided in Bryan v. United States, 524 U.S. 184 (1998), which supplies the interpretation for numerous statutes.

Invited error may be impossible to overcome.  The court’s resolution of the willfulness instruction suggests that invited error may preclude appellate review.  The decision suggests that, although the invited-error doctrine ordinarily forecloses appellate review,  appellate courts may apply plain-error review, in their discretion, when the government “was equally to blame for the error and the defendant claims a violation of his constitution rights.”  But the Clay court’s application of plain-error review treated the defendant’s invitation of the error as a basis to find there was no grave injustice and thus no basis to reverse under the plain-error standard.  This would suggest that an invited error precludes appellate relief under either standard.

The restitution apportionment win may be a Pyrrhic victory.  As the government argued, the district court could have held Clay jointly and severally liable for the entire amount of the restitution order as opposed to apportioning him only 90 percent.  The panel responded that Clay would have a contribution claim against his codefendants.  But that would seem like little comfort to most defendants, who presumably would prefer to limit their overall liability rather than roll the dice on a claim against a codefendant who may well be judgment-proof.  Clay thus may find himself worse off on remand than he was before.

Nevertheless, defendants should advocate for apportionment.  Particularly where a defendant has a compelling argument why apportionment is more fair, defendants should continue to argue for that method of setting restitution.  Situations that may lend themselves to apportionment would include conspiracies where the defendants have markedly different culpability or economic circumstances, particular defendants can be matched to particular victims, or there is some other way of distinguishing between the relative harm caused by each coconspirator.

Victims submitting restitution claims should provide corroboration of their losses.  The difference between the Fiat Chrysler submission and the IRS submission was stark.  Whereas the Fiat Chrysler submission provided records to support every claim for compounded prescription cream (medically necessary or otherwise), the IRS simply offered a number without supporting analysis or corroboration.  Victims of fraud seeking restitution should assume that defendants will contest restitution submissions vigorously and should be prepared to prove up their claims.