Manufacturer ALERT: False Claims Act Violation for Selling Unapproved Medical Devices

On September 13, 2019, Manhattan U.S. Attorney for the Southern District of New York announced that the Government has simultaneously filed and settled a civil fraud lawsuit under the False Claims Act against Avalign Technologies, Inc. (Avalign) and its subsidiary, Instrumed International, Inc. (Instrumed), for manufacturing and selling medical devices that were not cleared by the U.S. Food and Drug Administration (FDA.) As part of the settlement, Avalign and Instrumed (collectively, “Defendants”) agreed to pay the Government $9.5 million. According to the settlement, the Government has reserved the following claims: any liability under the Internal Revenue Code, any criminal liability and any administrative liability, including suspension and debarment rights of any federal agency.

The lawsuit against the Defendants was filed by a former employee (or Relator) of Avalign under the qui tam provisions of the False Claims Act (FCA), a federal law that imposes liability on persons and companies that defraud government programs. The Relator alleged that Defendants violated FCA, among other things, by selling medical devices to customers who then sold directly or indirectly to hospitals and other health care providers for use in medical procedures. Claims for reimbursement were then submitted to federal health care programs, knowing that the devices were not approved or cleared for marketing by the FDA. Specifically, the Government alleged that Instrumed sold medical devices claiming to be qualified as “pre-amendment devices” but knew that the devices did not in fact qualify. To qualify for pre-amendment status, the device’s owner (typically the manufacturer) must, among other things, have marketed the device prior to May 28, 1976 (prior to the Medical Device Amendments of 1976 which modified the Federal Food, Drug, and Cosmetic Act). For purposes of documenting pre-amendment status in regard to the intended use and commercial distribution, information provided [to the FDA] must be adequate to document that the company’s pre-amendment device was labeled, promoted, and distributed in interstate commerce for a specific intended use. In this case, the Defendants received an FDA warning letter in 2014 indicating that it had determined that Instrumed’s devices, “are not pre-amendment devices that were legally on the market in the U.S. prior to May 28, 1976.”      

As part of the settlement, Instrumed admitted that its customer, CareFusion Corporation (CareFusion), made multiple inquiries to Instrumed on whether Instrumed and CareFusion could legitimately rely on Instrumed’s invocation of the pre-amendment status exemption to market its devices. CareFusion repeatedly informed Instrumed that the evidence Instrumed was relying on to justify its claim that certain devices qualified for pre-amendment status exception was insufficient. In May 2019, CareFusion settled civil fraud claims under the FCA for selling Instrumed’s devices and agreed to pay the Government $3.3 million. 

FCA settlements are not new to the healthcare industry. Nearly 90% of recoveries during 2017 and 2018 under the FCA came from the healthcare industry according to Bloomberg Law. In fact, the Department of Justice obtained more than $2.8 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, 2018.

FCA law is constantly evolving, posing new risks to manufacturers and distributors. If your company is in need of an FCA defense or is required to respond to an FDA warning letter, contact Frier Levitt today to speak to an attorney.