United States: Federal Jury Returns $43 Million Verdict For Kickback Scheme In Violation Of The False Claims Act

After a rare False Claims Act (FCA) trial—especially one premised on violations of the Anti-Kickback Statute (AKS)—a federal jury in Minnesota returned a $43 million verdict against Precision Lens, a distributor of medical supplies and devices used in eye surgeries, and its owner, both of which were accused of paying kickbacks to physicians. The verdict triggers potential FCA liability exposure of nearly $490 million.

IN DEPTH

On February 27, 2023, Cameron-Ehlen Group, Inc., doing business as Precision Lens, and its owner (collectively, the defendants) were found by a federal jury in Minnesota to be in violation of the AKS and, in turn, the FCA by paying unlawful kickbacks to physicians to buy and use the products supplied by the defendants in surgeries paid for by Medicare. After the verdict on March 17, the US Department of Justice (DOJ) requested that the court enter judgment, ordering the defendants to pay nearly $490 million in treble damages and related statutory penalties under the FCA. Although the judgment is still pending, counsel for the defendants said their clients plan to appeal to the US Court of Appeals for the Eighth Circuit.

FCA cases rarely go to trial, largely because of the potential for severe financial consequences given the treble damages and related per-claim penalties under the FCA and federal program exclusion.

Given the rarity of FCA trials, this case merits a closer review.

PROCEDURAL HISTORY

The case's lengthy procedural posture began nearly a decade ago when the former vice president of Sightpath Medical, Inc., a company that offers mobile eye surgery services, filed a sealed qui tam suit against the defendants, Sightpath and Sightpath's corporate parent, TLC Vision Corporation. After investigating for four years, the DOJ elected to intervene. In August 2017, the district court lifted the seal.

Also in August 2017, TLC Vision, Sightpath and Sightpath's former CEO entered into a FCA settlement agreement with the DOJ in which the defendants agreed to pay more than $12 million to resolve allegations of kickbacks in the form of trips and sham consulting agreements. Sightpath also entered into a five-year corporate integrity agreement with the US Department of Health and Human Services (HHS) Office of Inspector General (OIG).

Shortly after the DOJ filed its intervenor complaint, the defendants filed a motion to dismiss in March 2018. Although the district court dismissed several alternative claims, it upheld the FCA allegations, which triggered nearly three years of discovery and motions practice.

After a six-week trial, the jury returned a verdict, finding the defendants liable for causing 64,575 false claims to be submitted to Medicare, resulting in more than $43 million in single damages and almost $490 million in potential treble damages and related statutory penalties.

SUMMARY OF ARGUMENTS

The DOJ's theory in the case was that the defendants' business model was based on using remuneration to build strong relationships with physician customers who have influence over which products are used in surgeries to induce them to use and purchase the defendants' products. To accomplish their goal, from January 1, 2006, through December 31, 2015, the DOJ said that the defendants provided kickbacks, both directly and indirectly through Sightpath, in the form of free or discounted luxury trips on private planes, tickets to sporting events, frequent flyer miles and other items of value. For example, the defendants flew several physicians on a private plane to the 2011 Masters Golf Tournament in Augusta, Georgia, and provided them a steak dinner, lodging in a private home and tickets to the tournament. The physicians paid only $500 each for the trip, even though records indicated the flights alone cost tens of thousands of dollars.

The DOJ alleged that the defendants treated these costs as business expenses and linked them directly to sales by, for example, assessing and keeping track of their value to ensure they were provided to physician customers who could benefit the defendants' business.

The defendants allegedly knew their conduct was unlawful because they continued providing kickbacks even after obtaining advice from counsel, reviewing the AdvaMed Code and recent settlements involving kickbacks based on similar conduct, and discussing the need to stop such practices in meetings.

Further, the defendants allegedly knew and understood the surgeries performed with the defendants' products were paid for by Medicare, which included the payment of facility fees and professional fees. The surgery claims were presented to Medicare with billing codes as if they were eligible for payment, but without disclosing that the providers connected with the claim were provided unlawful kickbacks to use the defendants' products in violation of the AKS.

Therefore, by paying the kickbacks, the defendants knowingly caused the submission of false claims to Medicare, violating the FCA.

In response to the allegations of AKS violations, the defendants argued that the alleged kickbacks were nothing more than part of a reciprocal social relationship with the physician customers (who were the owner's close friends or acquittances with common interests) and not intended as an illegal quid pro quo to use the defendants' products. The defendants also argued that the meals and private flights were standard business practices permissible under industry guidance because they were related to legitimate business purposes, such as evaluation or training on their products. Further, the amounts charged were reasonable and within range of fair market value.

The defendants also argued that most of the physician customers used the defendants' products for years before the alleged kickbacks because they either preferred the products—the defendants happened to be the exclusive distributor in the region—or simply used the products because they were required to do so by their respective surgery facilities. The defendants cited long-term data to argue that there was no correlation between the alleged kickbacks and utilization of the defendants' products by the physician customers.

With respect to the FCA allegations, the defendants argued that the OIG and the Centers for Medicare & Medicaid Services (CMS) were made aware of the alleged kickbacks in 2010 and determined that they were not an issue after investigating. The defendants also argued that Medicare continued to reimburse the claims and paid no additional cost than it otherwise would have for the surgeries if other products were used. Therefore, the DOJ could not prove that the defendants caused the submission of false claims, that the alleged kickbacks were material to payment or that the government suffered any damages.

PRACTICAL IMPLICATIONS AND KEY TAKEAWAYS

This case shows the government's sustained focus and scrutiny with respect to medical product company marketing practices. For at least the past 20 years, there have been many FCA settlements with manufacturers over marketing practices, including travel, gifts and entertainment. However, there hasn't been many trials. Given the FCA liability exposure, companies should carefully review their compliance policies and procedures to ensure that their marketing practices—especially marketing practices involving hospitality, meals and entertainment—include the proper controls to ensure they are mitigating risk under the fraud and abuse laws.

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