Changes in Health Care Laws Allow Retailers to Expand the Scope of Rewards Programs


Rewards programs have become an increasingly popular and important way for businesses to attract new customers and retain their most profitable clientele.  In addition, these programs provide companies with a wealth of data related to consumer purchases that can be used to forecast demand and create targeted marketing initiatives. Typically, rewards programs consist of coupons or rebates given by a retailer to a customer after the customer surpasses specific spending thresholds.  Rewards are usually redeemable on future purchases at the retailer or one of the retailer’s business partners.

Prior to the Patient Protect and Affordable Care Act (“ACA”), retailers faced potential exposure if their programs rewarded customers for the dollars spent on items covered by federal health care programs.  Therefore, retailers generally excluded purchases of medical devices, medical supplies and prescription drugs covered by Medicare and Medicaid from their rewards programs. However, the ACA has created new regulations that directly affect the permissible scope of retailer rewards programs.  As a result, retailers that comply with the new regulations may be able to expand their programs to include purchases related to items covered by federal health care programs.

Changes in Health Care Regulations:

Civil Monetary Penalties

Section 1128A(a)(5) of the Social Security Act (“Act”) provides for the imposition of civil monetary penalties (“CMP”) against any person who offers or transfers remuneration to a Medicare or state health care program (including Medicaid) beneficiary that the benefactor knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of any item or service for which payment may be made, in whole or in part, by Medicare or a state health care program.  The Office of Inspector General (“OIG”) may also initiate administrative proceedings to exclude such party from the federal health care programs.  “Remuneration” includes the transfer of items or services for free or for less than fair market value.  The OIG has taken the position that incentives that are only nominal in value are not prohibited by the statute, and has interpreted “nominal in value” to mean no more than $10 per item or $50 in the aggregate on an annual basis.  Therefore, before the ACA, programs that offered significant rewards to customers based on their purchase of medical devices, medical supplies and prescription drugs covered by programs like Medicare would likely be in violation of the Act and be subject to CMP.

However, the ACA amended the definition of “remuneration” for purposes of CMP by adding a new exception for rewards offered by retailers.  Under the ACA, retailer rewards do not constitute “remuneration” for CMP purposes if they meet the following three criteria:

1)     The rewards consist of coupons, rebates or other rewards from a retailer;

2)     The rewards are offered or transferred on equal terms available to the general public, regardless of health insurance status; and

3)     The offer or transfer of the rewards is not tied to the provision of other items or services reimbursed in whole or in party by the Medicare or Medicaid programs.

Based on this exception, retail rewards programs should be able to avoid CMP as long as they are structured correctly.  If the retailer offers rewards in the form of coupons, rebates or other types of rewards based on a customer’s purchases, the first prong of the exception will likely be satisfied.  In order to satisfy the second prong, the rewards program must be offered on equal terms to all customers.  In other words, all customers of the retailer must be eligible to participate in the rewards program.  The final prong will likely create the most difficulty for retailers.  The rewards program cannot be tied to the provision of other items or services reimbursable in whole or in part by the Medicare or Medicaid programs.  Retailers will have to develop rewards programs that comply with this regulation for both “earning” and “redeeming” transactions.  Retailers should make it a priority to utilize the knowledge of an experienced business and health care attorney to develop a plan that enhances business objectives, satisfies federal regulations and avoids liability.

The Anti-Kickback Statute

The Anti-Kickback Statute (“AKS”) prohibits the payment or receipt of remuneration in return for referring individuals for items or services reimbursable by a federal health care program.  See Section 1128B(b) of the Act.  Under the AKS, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. The statute has been interpreted to cover any arrangement where one purpose of the remuneration is to obtain money for the referral of services or to induce further referrals.  Violation of the statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to five years, or both.  A violation of the AKS will also lead to an automatic exclusion from federal health care programs, including Medicare and Medicaid.

Unfortunately, the AKS does not have a exception to the definition of “remuneration” similar to the one that was created by the ACA for CMP.  However, the OIG recently released an Advisory Opinion related to the AKS and retailer rewards programs.  Although Advisory Opinions have limited application and authority, the OIG’s analysis and determinations are insightful.

The OIG was asked to evaluate a rewards program of a retailer that owned and operated thirteen supermarkets, most of which had in-store pharmacies.  The retailer’s rewards program permitted customers to earn gasoline discounts at a partnering gas station based on the amount customers spent on purchases in the retail supermarkets, including the cost-sharing amounts paid by customers on items covered by federal health care programs purchased at the in-store pharmacies.

After evaluating the retailer’s rewards program, the OIG found that the program posed a minimal risk of fraud and abuse.  The OIG noted that the retailer’s stores sold a broad range of groceries and other non-prescription items.  As such, the risk that the rewards program would steer beneficiaries to the retailer’s stores to purchase federally reimbursable items or services was low.  Customers were not required to purchase prescription items to earn rewards and there was no specific incentive for transferring prescriptions to the retailer’s pharmacies.  The OIG also determined that the rewards program would not likely lead to an overutilization or otherwise increase the costs to federal health care programs.  Any cost-sharing amounts counted towards a customer’s rewards would result from prescriptions already prescribed, and the rewards could not be used on future prescription purchases.  Ultimately, the OIG determined that it would not impose sanctions on the retailer in connection with the AKS.


Based on the changes to the regulatory environment found in the ACA and recent insights from the OIG, retailers may be able to expand their rewards programs to include purchases related to items covered by federal health care programs.  However, retailers must engage in careful analysis and planning to ensure that their rewards programs do not violate health care regulations.  Retailers interested in expanding their rewards programs, or making sure their current rewards programs comply with health care regulations, should seek the advice of an experienced health care attorney and consider obtaining an Advisory Opinion from the OIG based on the specifics of the proposed program.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

Michael James provides representation and counseling related to all facets of business enterprise and healthcare matters. For more information, you can contact Michael at, (810) 936-4040 or

Patent Law Update: The America Invents Act – Part 4: Patent Defense Considerations


In the first three articles in the “Patent Law Update: America Invents Act” series, I discussed the changes to the patent application process and issues that may arise after your patent application has been filed ( Article 1, Article 2, Article 3).  In this final article, I will transition my discussion to issues that may arise in defending your patent rights against potential infringers.  Here, I will cover three critical topics.  First, I will evaluate the changes to the prior use defense and how these changes may be used to protect your intellectual property.   Second, I will examine the changes to the best mode required disclosure and how this may impact patent litigation.  Finally, I will discuss the changes to the advice of counsel defense to infringement actions and their impact on willful infringement claims.

Expansion of the Existing Prior Use Defense

Under the old law, alleged infringers were permitted to advance a “prior use” defense when faced with a patent infringement case.  However, the prior use defense was only permitted in cases involving a business method patent.  In order to properly assert the defense, an accused infringer had to have been able to demonstrate that he or she had practiced the business method at issue at least one year before it was patented.

As of September 16, 2011, the scope of the prior use defense has been expanded to include all subject matter.  Now, if you can demonstrate that you made commercial use of the subject matter in the United States, at least one year before the effective filing date of the patent, the prior commercial may be used as a defense against patent infringement.

The expansion of the prior use defense provides you with a new tool to protect your intellectual property.  If your inventions involve subject matters that are readily understandable once they are placed on the market, the expansion of the public use defense may be of little consequence to you.  It is likely that your intellectual property may be protected against potential infringers as prior art.  However, if your inventions are not self-disclosing, the prior use defense may be an incredibly valuable resource.  Inventions that are not self-disclosing include many business processes and inventions are that concealed within other end products.

Under the old system, inventors were faced with two choices: 1) disclose their non-self-disclosing invention to the public through a patent; or 2) treat the invention as a trade secret and keep it secret.  If the invention was disclosed through a patent, the inventor would gain patent protections, but lose the strategic advantage of maintaining the subject matter’s secrecy.  If the invention was treated as a trade secret, the inventor may preserve his or her confidential information, but risks losing rights to the invention as a result of someone obtaining a patent for the same subject matter.  Both options had their advantages and disadvantages. The new prior use defense under the AIA reduces the difficulty faced by inventors as a result of this trade-off.  Instead, the new law favors maintaining secrecy because it eliminates the risk of someone else being able to patent your invention.

Best Mode Requirement

Under the old patent system, a patent could be invalidated if the inventor failed to disclose the “best mode” of the invention.  The law required that an inventor disclose the best mode for carrying out the invention in his or her application.  The purpose of this requirement was to deter inventors from applying for a patent, while at the same time, concealing from the public the preferred use of the subject matter.  If the inventor was going to receive the exclusive right or monopoly to the invention under a patent, the law required the applicant to disclose its best use.

As of September 16, 2011, the America Invents Act (“AIA”) has eliminated the failure to disclose the best mode for an invention as a basis for invalidating a patent.  This appears to be true even if it is later determined that the inventor knew of a best mode and intentionally failed to disclose it on the patent application.  In eliminating the invalidity or unenforceability defenses from patent litigation, Congress has seemingly eliminated a rule that often conflicted with a patent applicant’s desire to maintain certain aspects of an invention as trade secrets.

However, even though the “best mode defense” has been eliminated from litigation, the best mode requirement has not been eliminated from the patent application process.  Not surprisingly, there remains some debate over how these two best mode provisions will interact with each other.  It is clear that an applicant must include a description of the subject matter that allows an examiner to use the invention over the full scope of its claimed purposes.  What is unclear is whether the application must also delineate a use that is of special value or interest to the inventor.  A potential consequence of failing to disclose a best mode on your patent application is that the application may be rejected by the patent examiner.  In addition, the absence of a best mode description in your application may expose your patent to attacks from third parties under the newly created post-grant review procedures (discussed in Article 3).

Advice of Counsel

Under the old patent law system, the “advice of counsel” defense played a critical role in defending infringement actions, especially when those actions included claims of willful infringement.  Once you were put on notice of an alleged infringement, you were faced with a critical decision.  Do you continue to manufacture and sell the accused product or not?  If you elected to continue with your business enterprise, you could have been subjected to treble damages and attorneys’ fees under a theory of willfulness and bad faith if you lost the infringement claim.  The solution many alleged infringers implemented was to obtain a non-infringement or invalidity opinion regarding the uniqueness of their product and/or the merits of the infringement allegations.  Even if the opinion was ultimately wrong and it was determined that the product infringed upon a valid patent, the opinion could be used to support a finding that no willful infringement took place.  As such, an opinion letter served as potential insurance against treble damages and attorneys’ fees in an infringement litigations.

As of September 16, 2011, judges and juries are not allowed to drawn an adverse inference from an accused infringer’s failure to obtain an opinion letter from counsel as to the alleged infringement.  The same holds true in situations where an alleged infringer refuses to waive attorney-client privilege when asked to disclose an attorney’s opinion regarding his or her own product or the alleged infringement.  As a result, an alleged infringer’s failure to obtain an opinion letter cannot be used to prove willful infringement or bad faith in infringement cases.

Even though AIA prevents an adverse inference from being drawn for failing to obtain the advice of counsel, it may still be in your best interest to obtain a non-infringement or invalidity opinion letter.  When a person becomes aware that he or she may be infringing upon a patent, a duty arises to exercise due care and investigate whether or not your product infringes upon the subject patent.  Most courts consider the totality of the circumstances when deciding if a defendant has willfully infringed a patent.  As part of this analysis, the courts will consider whether the alleged infringer investigated the scope of their patent when he or she learned of the claim and whether he or she formed a good-faith belief that the claim was invalid or that the competing patent was not infringed.  It may be difficult to demonstration that you have performed your due diligence without a non-infringement or invalidity opinion letter.


The AIA involves a number of changes to strategies routinely used and relied on by patent holders in patent litigations.  You should contact your attorney to develop a litigation strategy that capitalizes on the recent changes to the patent laws.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

Michael James provides representation and counseling related to all facets of business enterprise and healthcare matters. For more information, you can contact Michael at, (810) 936-4040 or