On May 20, 2025, the US Court of Appeals for the Fifth Circuit issued another decision regarding the application of the AKS to marketing and advertising service arrangements. The decision in United States v. Donofrio1 reaffirms the court’s guidance from last year, in United States v. Marchetti, which we blogged about here and which drew a clear distinction between (i) permissible payments for straightforward marketing arrangements involving the promotion of health care products and services and (ii) impermissible payments to individuals who exercise undue influence on physicians and other decision makers.
BACKGROUND
The AKS is an extremely broad statute. Assuming the presence of the requisite state of mind, the AKS makes it unlawful for A to pay B to (i) “refer” Medicare, Medicaid, or other federal health care program (FHCP) patients to A (or any other person); (ii) “recommend” that someone else (e.g., C) “purchase,” “order,” or “lease” an item or service covered by an FHCP; or (iii) “arrange for” someone else to purchase, order, or lease an item or service covered by an FHCP.
Given the breadth of the AKS, the following question arises: if a clinical laboratory, for example, has entered into a services agreement with a marketing agent to promote the lab’s services to physicians, might the lab and/or the marketing agent be violating the AKS?
According to HHS-OIG, the lead enforcement agency with the respect to the AKS, the answer, at least broadly speaking, is “yes,” this arrangement may violate the AKS. In a 1991 rulemaking, for example, the agency stated that “many marketing and advertising activities may involve at least technical violations” of the AKS.2 In a 2002 advisory opinion, the agency went further, stating that “[a]dvertising activity, like any marketing, implicates the [AKS] because, by its nature, it is meant to recommend the use of a product.”3 And in a 2012 advisory opinion, the agency connected all the dots: “Advertising activity, like any marketing, is meant to induce the use of an item or service. Where the advertised items or services are reimbursable, in whole or in part, by a Federal health care program, the [AKS] is implicated.”4
The agency’s position remained largely unchallenged until last year’s Marchetti decision. In a major ruling, the Fifth Circuit held that simply paying for marketing was not enough to establish an AKS violation. Instead, the government (or a whistleblower) also needs to show that the marketing arrangement involved the exercise by the marketing agent of some form of “undue influence” over physicians or other relevant decisionmakers. Marchetti is no longer an outlier because just last month, the Seventh Circuit, in United States v. Sorensen,5 which we blogged about here, adopted the Fifth Circuit’s reasoning.
Unfortunately, however, HHS-OIG’s guidance to the contrary has been on the books now for nearly 35 years. During this period, some health care organizations, cognizant of the agency’s position, abandoned what are now recognized as permissible marketing arrangements in favor of workarounds designed to achieve the same objective (i.e., to reward a marketing or sales agent for generating commercial and FHCP business). In Donofrio, the Fifth Circuit concluded that one such workaround violated the AKS.
US v. DONOFRIO
Facts and Procedural History
Donofrio was a criminal action brought against Steven Donofrio, the founder of Genematrix LLC (Genematrix), a healthcare distributor, for conspiring to violate the AKS. At issue were certain Genematrix arrangements aimed at promoting Vantari Genetics LLC (Vantari), a laboratory that performed pharmacogenetic tests (i.e., swab tests that identify how patients metabolize drugs).
The Vantari Arrangements
Under Vantari’s original business model, Vantari would contract with distributors to market Vantari’s swab tests to physicians. If a physician selected Vantari, the physician would swab the patient and ship the swab to Vantari’s laboratory for testing, using a prepaid UPS label that came with the swab. Vantari would then bill the patient’s insurance for the swab test. Vantari paid each distributor a percentage of its collections from commercial and FHCP payors for swab tests generated by the distributor’s marketing efforts.
In 2014, Vantari’s founder, Nicolas Arroyo, approached Donofrio about entering into such an arrangement, pursuant to which (i) Genematrix would market Vantari’s swab tests to physicians and (ii) Vantari would pay Genematrix 35% of its collections from commercial and FHCP payors for swab tests generated by Genematrix. Notably, Donofrio asked his attorney to review the proposed arrangement. The attorney advised Donofrio that the arrangement posed potential AKS and Medicare compliance issues. Notwithstanding these concerns, Donofrio (on behalf of Genematrix) entered into the agreement with Vantari.
Eventually however, the parties’ arrangement “hit speed bumps.” Vantari’s Chief Financial Officer circulated an HHS-OIG advisory opinion “suggesting that Vantari’s arrangements with distributors” were “essentially illegal.” In response, Arroyo amended Vantari’s contracts with distributors “such that they only provided commissions for private payors.” To make distributors whole for their lost “federal commissions,” Vantari made monthly payments to its larger distributors, including Genematrix, for sham activities performed by its sales representatives. Donofrio allegedly played a leading role in creating monthly activity reports used to justify the sham activity-based compensation.
The Codon Arrangements
At some point, Arroyo developed a different workaround to provide Medicare-based commissions to Vantari’s distributors. Arroyo created a new distributor, Codon DX Services LLP (Codon), and hired a friend to lead the company. Codon, in turn, contracted with Althea, a laboratory that normally competed with Vantari. Arroyo developed a scheme whereby Codon convinced physicians that they were ordering Vantari swab tests, but in reality Codon sent swab tests for Medicare patients to Althea (and not Vantari), and Codon paid a portion of its commissions to certain Vantari distributors for those tests.
To effectuate this workaround, Codon packaged Althea test swabs in kits with Vantari requisition forms. Physicians were thus deceived into using Althea test swabs. The Althea swabs (accompanied by the Vantari requisition forms) were sent to a distribution center where a Codon employee divided the swabs based on the patient’s insurer as follows:
- Private insurance test swabs were sent to Vantari’s lab, and the distributor received a commission from Vantari.
- With respect to Medicare test swabs, the Codon employee (i) transcribed the physician-provided information from the Vantari requisition form to an Althea requisition form, (ii) forged the physician’s signature on the Althea requisition form, and (iii) then sent the test swab to an Althea lab. Althea would then pay Codon 50% of the ensuing Medicare collections and Codon, in turn, would pay one of two Vantari distributors (Genematrix or a distributor owned by Vincent Marchetti, who was the subject of the Marchetti case).
According to the court, there was evidence that in addition to furnishing marketing and promotion services under the Vantari arrangements, Donofrio was aware of, participated in, and benefited from the Codon arrangements. Among other things, Donofrio apparently introduced Arroyo to Althea’s Chief Executive Officer and was aware of why Codon was sending “Medicare business down to Althea.” Further, there was evidence that Genematrix “funneled money from Codon to Vantari.”
Donofrio was indicted for conspiring with Arroyo and others to violate the AKS. Following a mistrial, Donofrio was convicted by a second jury and sentenced to 42 months’ imprisonment and a forfeiture judgment of $769,000. Donofrio appealed to the Fifth Circuit.
Fifth Circuit Decision
The Fifth Circuit affirmed Donofrio’s conviction on the grounds that a reasonable juror could find beyond a reasonable doubt that Donofrio had conspired to violate the AKS. In reaching that conclusion, the Fifth Circuit distinguished between the Vantari arrangements, which it viewed as involving permissible payments for marketing, and the Codon arrangements, which it viewed as violating the AKS.
Citing Marchetti, the court reaffirmed that where a contractor (such as Genematrix) markets, advertises, or otherwise promotes the services of a particular laboratory (such as Vantari) to a physician, that activity, in and of itself, is not enough to establish an AKS violation. Rather, the payee’s “interaction with the relevant decision maker” has to be considered when determining whether a payment is intended to “induce referrals, which is illegal,” or instead to “compensate advertisers, which is permissible.”
With respect to the Vantari arrangements, the Fifth Circuit held that the government had not established an AKS violation because the government had not provided “sufficient evidence demonstrating that Genematrix influenced any physicians or other medical professionals, or received any type of referral for Vantari conduct.” Notably, the government tried to distinguish Marchetti by arguing that the sham activity-based compensation paid by Vantari to Genematrix (and hence Donofrio) was not actually payment for advertising. While the Fifth Circuit acknowledged that “Donofrio himself may not have done much in the way of advertising as the ordinary person would understand it,” marketing is broadly defined for AKS purposes: “[T]o the extent that Arroyo’s express intent was to pay Donofrio in return for arranging Medicare business, Donofrio was advertising in the eyes of the AKS,” regardless of whether the payments were referred to as activity-based compensation.
The court reached a different conclusion with respect to the Codon arrangements. By convincing physicians that they were ordering Vantari swab tests and then—unbeknownst to the physicians—sending some of those swabs to Althea, the parties to the Codon arrangements “became the relevant decisionmakers: they influenced selection of services without letting the patient or physician decide.” That, in the court’s view, made Althea’s payments to Codon, and Codon’s payments to the distributors, payments for referrals – i.e., a “substantive AKS violation.”
CONCLUSION
The good news is that Donofrio, like Marchetti and Sorensen, are part of a growing body of caselaw rejecting an overbroad interpretation of an already overbroad statute. The bad news is that because it took so long for this jurisprudence to develop, a number of companies, believing—incorrectly, it would later turn out—that they were in a frying pan, proceeded to jump into a fire. Ironically, had the parties stuck to their original commission-based arrangement (which the court in Donofrio concluded was legal) and not implemented their (unnecessary) workaround, it is quite possible Donofrio’s conviction would have been overturned.
- 2025 WL 1443577 (5th Cir. May 20, 2025). For ensuing quotations from this case, internal citations and internal quotation marks have been omitted. ↩︎
- 56 Fed. Reg. 35952 (Jul. 29, 1991). ↩︎
- HHS-OIG Advisory Opinion 02-12 (Aug. 21, 2002). ↩︎
- HHS-OIG Advisory Opinion 12-02 (Mar. 20, 2012). ↩︎
- 134 F.4th 493 (7th Cir. 2025). ↩︎
