United States: Private Equity Firm Settles With DOJ In False Claims Act Matter Based On Claims Submitted By Its Health Care Portfolio Company

Compounding pharmacy Diabetic Care Rx, LLC d/b/a Patient Care America (“PCA”), two individual executives, and the pharmacy’s private equity fund owner, Riordan, Lewis & Haden, Inc. (“RLH”) recently reached a $21 million settlement with the U.S. Department of Justice (“DOJ”) to resolve allegations that the parties engaged in an illegal kickback scheme resulting in submission of false claims to the government in violation of the False Claims Act (“FCA”).

Ropes & Gray previously issued an Alert on this lawsuit in 2018 following DOJ’s then-unprecedented decision to intervene against not only the portfolio company that allegedly submitted false claims, but also against its private equity owner. The parties’ $21 million settlement demonstrates the potential viability of DOJ’s approach and highlights a risk that private equity firms may face, particularly when investing in portfolio companies in the health care space, where most FCA recoveries occur. This is a developing area of FCA exposure that Ropes & Gray will continue to monitor going forward.

Allegations in DOJ’s Original Complaint and RLH’s Involvement

As detailed in our March 2018 Alert, the allegations in Medrano v. Diabetic Care Rx, LLC d/b/a Patient Care America et al. (S.D. Fla. No. 15-62617-civ) stem from the defendants’ decision to enter the compound pain cream business in early 2014. According to DOJ, TRICARE reimbursement rates for topical pain creams were known to be unusually high at the time, which allegedly prompted PCA to enter into a scheme with three marketing companies to target and refer TRICARE beneficiaries to PCA for pain cream prescriptions. The government alleged that the resulting prescriptions were medically unnecessary and that PCA’s commission payments to the marketing firms amounted to illegal kickbacks under the Anti-Kickback Statute (“AKS”), which resulted in PCA’s submission of false claims to TRICARE.

The government’s February 2018 Complaint in Intervention also includes allegations that the marketers paid kickbacks to patients by covering patient copayments regardless of financial need, and that the marketers paid telemedicine physicians to write prescriptions without proper consent or a legitimate prescriber-patient relationship. Finally, the government included two common law claims for payment by mistake and unjust enrichment based on the same alleged misconduct.

With respect to private equity owner RLH, the government claimed that the firm played a leading role in promoting PCA’s alleged misconduct. Two RLH partners served as directors of the portfolio company and allegedly encouraged its pursuit of the pain cream business to generate a “quick and dramatic payment” on the fund’s investment. According to the government, RLH knew and approved of PCA’s May 2014 decision to use independent contractors rather than employed sales staff to generate prescriptions for topical pain creams. Further, the Complaint in Intervention alleged that RLH knew based on the advice of counsel that paying commissions to marketers could violate the AKS and that compliance with the AKS was a material requirement for reimbursements from TRICARE. Based on this advice and on RLH’s experience investing in the health care industry, the government argued that the private equity firm knew or should have known that PCA’s practices violated federal health care laws.

Before Settlement, RLH Moved to Dismiss on the Grounds that DOJ Failed to Adequately Establish Its Knowledge and Causation of the Alleged Schemes

The defendants filed motions to dismiss the government’s original Complaint in Intervention. PCA’s argument centered on the government’s failure to adequately plead that the claims submitted were knowingly false as required under the FCA. Meanwhile, RLH focused on the government’s “unprecedented” attempt to impose FCA liability on a private equity firm for the wrongdoing of a portfolio company. RLH argued that the Complaint in Intervention failed to sufficiently establish that the firm knew of, participated in, or made any money from the fraud. RLH emphasized that the FCA requires both knowledge of a claim’s falsity and an action by a defendant that causes the claim to be presented to the government. RLH maintained that the government failed to adequately plead these elements.

In March of 2019, a district court judge in the Southern District of Florida, in reliance on a magistrate’s recommendation, dismissed the government’s FCA claim without prejudice, holding that the allegedly false claims were not pleaded with the requisite specificity. Because the district court judge dismissed the FCA claim on these grounds, the decision did not reach the issue of RLH’s knowledge and causation.

Notably, the magistrate judge did opine on RLH’s argument that the government failed to adequately plead its knowledge and causation of the alleged schemes. Though ultimately rendered moot by the judge’s order, the magistrate concluded that the government’s allegations regarding the private equity sponsor’s involvement were sufficient as to one of the three schemes, namely, the alleged commission payments to the marketing firm in violation of the AKS. The magistrate pointed to the government’s allegations that RLH (i) approved of PCA’s decision to use marketers to generate referrals; (ii) knew that TRICARE was the source of the majority of PCA’s revenue; (iii) received monthly financial statements reporting the commissions paid to the marketers; and (iv) funded certain commission payments. The magistrate further highlighted the fact that RLH received legal advice regarding the risks of submitting claims to federal programs based on referrals from outside marketers.

DOJ filed an amended complaint several weeks after dismissal of the FCA claim, which the defendants followed with another round of motions to dismiss. Prior to a ruling, the parties announced the $21 million settlement with no determination or admission of liability.

Considerations for Private Equity Firms with Portfolio Companies in the Health Care Industry

While the settlement in Medrano does not create legal precedent, it nevertheless signals the potential viability of DOJ’s new approach to recovering funds in the health care space by pursuing private equity owners under the FCA for claims submitted by their portfolio companies. In announcing the resolution, the government stated that the settlement demonstrates its “continuing commitment to hold all responsible parties to account for the submission of claims to federal health care programs that are tainted by unlawful kickback arrangements.” This rhetoric suggests that DOJ’s interest in looking to private equity sponsors in FCA cases is unlikely to wane.

Private equity companies should consider the following takeaways when investing in portfolio companies in industries with significant FCA exposure:

  • Level of Involvement: Medrano provides some insight regarding how a firm’s involvement in decisions at the portfolio company level may increase its risk of FCA exposure. In Medrano the private equity company was allegedly actively involved in PCA’s decision to use marketers to generate referrals—the core misconduct in the government’s complaint—and knew or should have known that the practices violated federal health care laws. While these allegations make Medrano an outlier, they nevertheless demonstrate that private equity sponsors should be mindful of their touchpoints with portfolio company operations and should document their areas of involvement. This will help firms avoid even the appearance of participation in any portfolio company misconduct.

    This is not to say that all touchpoints with a portfolio company increase a firm’s risk, or that eschewing involvement altogether is an appropriate response to potential red flags. Rather, private equity companies should understand that they assume certain responsibilities when they participate in portfolio company decision-making and should fulfill those responsibilities by, for example, ensuring that personnel involved in portfolio company operations receive proper training and advice regarding the relevant risks.

  • Portfolio Company Compliance: Private equity firms should assure that their portfolio companies operate appropriate compliance programs that address specific risk areas for their industry. This will mitigate the risk that portfolio companies engage in unlawful behavior. Appropriate portfolio company compliance programs help protect against penalties to the portfolio company itself, but may also help protect against a private equity sponsor’s direct exposure. Private equity firm leadership on portfolio company compliance and training also helps establish a robust “tone from the top.”

  • Advice of Counsel; Other Red Flags: In Medrano the government alleged that the private equity sponsor failed to take appropriate actions in response to the advice of counsel with respect to illegal kickbacks. Private equity firms should be aware that their reaction to legal advice or similar red flags may be scrutinized and that declining to follow advice or ignoring warning signs may be used as evidence of intentional wrongdoing. Firms should carefully consider all potential red flags and should document the reasoning behind any decisions not to follow the advice of counsel. Documenting a thorough and thoughtful process for addressing known risks will help avoid the appearance that a private equity company intentionally ignored wrongdoing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions