October 10, 2019

Private Equity: Fund Tagged for Portfolio Company False Claims Issue

I’ve previously blogged about situations in which a fund’s entanglement in its portfolio company’s operations have resulted in some pretty significant liability exposure.  This Ropes & Gray memo discusses a recently settled False Claims Act lawsuit in which the DOJ sought to hold a PE fund liable for its role in an alleged kickback scheme involving a prescription pain cream.  This excerpt provides some background on the case and how the fund came to be caught up in it:

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 Patient Care America 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 Riordan Lewis & Hayden, 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.

After some legal maneuvering, the parties settled with the DOJ for $21 million without an admission or determination of liability. The memo notes, however, that prior to the settlement, a federal magistrate ruled that the DOJ had adequately pled knowledge & causation on the part of the PE fund with respect to one of the alleged schemes involving the portfolio company’s payment of third-party commissions.

The memo says that the key takeaways for PE funds with portfolio companies in the healthcare industry are the need for close monitoring of their involvement with those companies’ operations, the importance of portfolio company compliance programs, and the need to be on the look-out for “red flags” – such as a decision to disregard legal advice.

John Jenkins