This spring, in United States v. Mallory, et al., the U.S. Court of Appeals for the Fourth Circuit upheld a $111 million verdict against LaTonya Mallory, the owner of a blood testing laboratory, Health Diagnostic Laboratory, Inc., (the “Laboratory”), and two individuals who led the Laboratory’s sales operation (collectively, the “Defendants”). Founded in 2008, the Laboratory generated $383 million in revenue by 2013, of which, as reported in the Wall Street Journal, 41% came from Medicare.
Underlying the Mallory case was the Laboratory’s payment of a $20 “processing and handling” fee (“P&H Fees”) to physicians who ordered the Laboratory’s test. In addition to the P&H Fees, the Laboratory entered into a marketing arrangement with BlueWave Healthcare Consultants, Inc. (“BlueWave”). The Laboratory paid BlueWave a base fee, plus 13.8% to 19.8% of all laboratory testing fees that BlueWave’s marketing activities generated for the Laboratory. To carry out its marketing duties, BlueWave in turn hired independent contractors and paid them a volume-based commission.
At trial, the jury found that the payment of the P&H Fees to referring physicians, the revenue-sharing model between the Laboratory and BlueWave, and the volume-based payments from BlueWave to its independent contractors, each constituted a violation of the Anti-Kickback Statute (“AKS”). The AKS makes it a criminal offense to knowingly and willfully solicit, receive, offer, or pay any remuneration to induce or reward referrals for, or orders of, items or services reimbursable by a Federal health care program. Remuneration is defined broadly, and can encompass anything of value, including payments made directly or indirectly, overtly or covertly, in cash or in kind.
On appeal, the Defendants raised several issues, some of which are briefly summarize below.
As an initial matter, the Defendants argued that the district court erred in in denying them judgment as a matter of law because they did not “knowingly and willfully” violate the AKS. The Fourth Circuit declined to side with the Defendants and found that the jury had “ample” evidence to conclude that the Defendants knowingly violated the AKS. The Court highlighted the numerous warnings that the Defendants had received over the years concerning their activities. For example, the Laboratory’s general counsel in 2012 advised the Laboratory’s Board of Directors that the Laboratory’s payment practices posed a high degree of risk.
The Defendants also asserted that they were entitled to judgment as a matter of law because, they argued, commissions to sales representatives cannot constitute a kickback under the AKS. The Court plainly disagreed, and indicated that the applicable safe harbor that can protect such payments applies to bona fide employees, not independent contractors.
Key Takeaways
Complex Regulatory Landscape
The Mallory matter highlights the degree to which healthcare transactions can sometimes involve an uncertain degree of risk. Although the Defendants attempted to argue that they never received explicit advice articulating that their conduct was illegal, the Court highlighted that, even ignoring the numerous concerns raised by internal stakeholders, ample external red flags were raised. This included the opinion of one physician’s attorney, who advised his client in an email ultimately forwarded to the Defendants, that the Laboratory’s P&H Fee agreement was “blatantly illegal as anything I have seen in a long time.”
Violations Can Lead to Significant and Compounded Penalties
In addition to finding a violation of the AKS, the jury in Mallory also found that such violations resulted in false claims pursuant to the False Claims Act, a federal law that imposes liability on persons and companies that defraud government programs. With respect to violations of the False Claims Act, it is important to underscore the degree to which violations of the law lead to compounded damages. In Mallory, the jury found that Defendants had indeed violated the False Claims Act and assessed actual damages of about $16 million. Nevertheless, the False Claims Act required the actual damages to be trebled, in addition to an assessment of civil monetary penalties. As such, the district court ultimately entered judgment against the Defendants for $111 million.
Commission-Based Sales Practices Must Be Carefully Structured to Avoid Violating the AKS
In its press release regarding the Mallory case, the Department of Justice reiterated its position that commission-based payment structures violate the AKS. In addition, the Department took the position that BlueWave’s payments to its sales representatives for recommending a product was similarly a violation of the AKS. Sales practices, especially those that involving commission-based payments, must be closely scrutinized and structured so as to comport with applicable law, including the AKS and state equivalents.
How Frier Levitt Can Help
Continued enforcement activity concerning marketing relationships reinforces the importance of obtaining competent healthcare counsel to evaluate these arrangements. As demonstrated by the Mallory case, marketing arrangements are rife with regulatory risk. These relationships may present one of the largest sources of exposure to an otherwise innocuous business model.
Contact Frier Levitt for review of your agreements with sales representatives or other commission-based contractors.
