WSGR ALERT

Federal Government Continues to Bring Actions Against Pharmaceutical and Medical Device Companies and Individuals for Alleged Violations of Broad Healthcare Laws

December 17, 2015

The Office of Inspector General (OIG) for the Department of Health and Human Services recently released its Semiannual Report to Congress.1 Through the first three quarters of 2015, OIG announced recoveries of $3.35 billion from pharmaceutical and medical device companies, and 925 criminal and 682 civil actions against individuals in the healthcare sector.

Federal Government Actions Against Medical Device and Pharmaceutical Companies

In the past calendar year, the following actions were taken against medical device and pharmaceutical companies (and one individual):

  • Daiichi Sankyo, Inc., agreed to pay $39 million to resolve alleged False Claims Act (FCA)2 violations. Daiichi was accused of causing the submission of false claims for the prescription drugs Azor, Benicar, Tribenzor, and Welchol by paying kickbacks3 to physicians in order to induce them to prescribe the drugs. As part of the settlement, Daiichi agreed to enter into a five-year corporate integrity agreement4,5 with OIG.
  • OtisMed Corporation of New Jersey was ordered to pay $34.4 million in fines and $5.1 million in forfeiture after pleading guilty to distributing, with intent to defraud and mislead, adulterated medical devices into interstate commerce in violation of the Federal Food, Drug, and Cosmetic Act. OtisMed also separately agreed to pay $41.2 million to resolve civil FCA liability, and to be excluded from participation in Medicare, Medicaid, and all other federal healthcare programs for 20 years.

    Between 2006 and 2009, OtisMed manufactured and sold a total knee replacement device known as OtisKnee. OtisKnee is a knee replacement surgery cutting guide. OtisMed marketed OtisKnee to physicians and others in the U.S., falsely representing that OtisKnee was exempt from United States Food and Drug Administration (FDA) premarket clearance.6 Despite being denied FDA premarket clearance, and against the advice of legal counsel, OtisMed Chief Executive Officer Charlie Chi ordered employees to distribute more than 200 OtisKnee devices to surgeons throughout the U.S. Chi and others took steps to conceal the shipments from the FDA, and no OtisMed employee informed the surgeons that commercial distribution of OtisKnee was prohibited.

    In December 2014, Chi pled guilty to distributing the devices despite the FDA's rejection of the OtisKnee premarket clearance application.7 Chi's lawyer previously asserted that OtisMed shipped the devices with the full knowledge of the FDA.8 In June 2015, Chi was sentenced to two years in prison for his actions, and ordered to serve one year of supervised release and pay a $75,000 fine.9
  • Shire Pharmaceuticals LLC agreed to pay $56 million to resolve allegations that it promoted Adderall XP as clinically superior to other attention deficit hyperactivity disorder (ADHD) drugs despite a lack of clinical data to support these claims. Shire also allegedly promoted Adderall XP for the treatment of conduct disorder, an indication for which Adderall XP was not FDA approved10 and which was not a medically accepted indication.

Conclusion

Being the target of government actions consumes time and resources. Statutory and regulatory violations can result in injunctions, seizures, significant fines, corporate integrity agreements, criminal penalties, consumer and shareholder lawsuits, unwanted publicity, fraying of key government agency-company relationships, and, in extreme cases, debarment from vending to the government. Medical device and pharmaceutical companies can minimize these unwanted events through a variety of actions, including establishing comprehensive training programs for all employees, appointing a compliance committee, and implementing standard operating procedures for formal review and approval of all promotional activities.

For questions regarding government action against medical device and pharmaceutical companies, or any related matter, please contact David Hoffmeister or another member of Wilson Sonsini Goodrich and Rosati's FDA or life sciences practices.

Jon Nygaard and Charles Andres contributed to the preparation of this WSGR Alert.


1 The Fall 2015 OIG Semiannual Report to Congress is available electronically at: http://www.oig.hhs.gov/reports-and-publications/semiannual/index.asp, last accessed December 16, 2015.
2 The False Claims Act (FCA), 31 U.S.C. §§ 3729-3733, prohibits knowingly making, or causing to be presented, false or fraudulent payment claims to the government. The FCA trebles the government's actual damages, provides for per violation penalties of between $5,500 and $11,000, and allows for suspension or debarment from vending to the government. Individuals and companies can be suspended or debarred. Thus, there are strong incentives for companies and individuals to come to a negotiated settlement with the government over alleged FCA violations.
3 The Federal Anti-Kickback Statute (FAKS), 42 U.S.C. § 1320a-7(b), prohibits providers of services or goods covered by (e.g., paid for by) a federal healthcare program from knowingly and willingly soliciting, receiving, or providing any remuneration to induce referral of an individual, or furnishing or arranging for a good or service. The statute is intent-based. Medicare, Medicaid, and TRICARE programs are all federal healthcare programs. Some transactions and arrangements are statutorily exempt from FAKS.
FAKS is a criminal statute and the penalties for violation include felony conviction punishable by imprisonment for up to five years, a fine of up to $25,000, or both.
4 OIG negotiates corporate integrity agreements (CIAs) with companies as part of a settlement for civil violations of the false claims statutes. Negotiated CIAs represent a quid pro quo: companies agree to comply with the CIA obligations, and in return OIG agrees to not seek the company's exclusion from participation in Medicare, Medicaid, and other federal healthcare programs. If a company is excluded (i.e., barred) from vending to the government, the exclusion can bankrupt the company. Excluded individuals generally will not be hired by any company that sells its products to the government. Thus, the threat of exclusion represents a "big stick" wielded by OIG in getting companies to agree to CIAs and individuals to settle.
5 A comprehensive CIA typically lasts five years and generally includes requirements to: i) hire a compliance officer/appoint a compliance committee; ii) develop written standards and policies; iii) implement a comprehensive employee training program; iv) retain an independent review organization to conduct annual reviews; v) establish a confidential disclosure program; vi) restrict employment of ineligible persons; vii) report overpayments, reportable events, and ongoing investigations/legal proceedings; and viii) provide an implementation report and annual reports to OIG on the status of the entity's compliance activities.
6 In fact, in 2009, the FDA denied OtisKnee's application for premarket approval, stating that the company had failed to demonstrate that OtisKnee was as safe and effective as other legally marketed devices.
7 L. Schencker, "Former CEO of Stryker subsidiary sentenced to two years in prison," Modern Healthcare, June 26, 2015, available electronically at: http://www.modernhealthcare.com/article/20150626/NEWS/150629903, last accessed December 16, 2015.
8 Id.
9 Id.
10 A drug is deemed misbranded unless its labeling bears adequate directions for use. See, e.g., 21 U.S.C. § 352(f). A drug promoted outside of the FDA-approved label is misbranded because the labeling of the product does not bear adequate directions for use for the unapproved indication.