The Fourth Circuit affirmed a jury verdict in a qui tam case alleging violations of the Anti-Kickback Statute and False Claims Act, finding the district court did not err in denying motions for judgment as a matter of law and for a new trial. The defendants argued the government failed to show that they knowingly and willfully violated the AKS and therefore they could not have knowingly violated the FCA, but both courts found the government provided ample evidence of knowledge, including multiple explicit warnings from outside counsel about the illegality of their conduct. In their request for a new trial, the defendants asserted a variety of legal errors in the jury instructions, but the circuit court disagreed. The court found the district court properly instructed the jury to consider the defendants’ good faith reliance on legal advice, though not in the exact language proffered by defense counsel. The district court also properly advised the jury that it could infer that a witness’ invocation of his Fifth Amendment rights meant that his answer would have been unfavorable to the interests of a co-conspirator. Finally, the appeals court rejected a challenge to the district court’s grant of prejudgment writs of attachment regarding one defendant’s properties. The district court reasonably concluded that the defendant’s sale of multiple multi-million dollar properties to his wife for $5 each seemed suspicious.
The defendants in a qui tam case alleging violations of the Anti-Kickback Statute and False Claims Act appealed a $114 million judgment in their case.
LaTonya Mallory, the owner of a blood testing laboratory, and the two men who led its sales operation, Floyd Calhoun Dent III and Robert Bradford Johnson, were found guilty by a jury of violating the AKS and FCA by paying physicians for drawing patients’ blood and processing the blood samples. After trebling the actual damages and adding civil penalties, as required by the FCA, the district court entered judgment against all three defendants for $111,109,655.30 and against Dent and Johnson for an additional $3,039,006.56. The defendants appealed.
According to the government, the defendants paid physicians a process and handling fee in exchange for ordering one of their blood tests. The remuneration ran between $13 and $20 per blood draw. Between 2010 and June 2014, Medicare and TRICARE paid Mallory’s company, Health Diagnostic Laboratory, approximately $538 million and HDL paid BlueWave Healthcare Consultants, Inc., a company formed by Dent and Johnson to market and sell HDL’s tests, approximately $220 million. Medicare and TRICARE paid another laboratory, Singulex, approximately $47 million, and Singulex paid BlueWave approximately $24 million.
At trial, the government successfully contended that the volume-based commissions paid by HDL and Singulex to BlueWave and its sales contractors violated the AKS because these commissions constituted “remuneration” intended to induce sales representatives to sell as many tests as possible. The government interpreted the AKS as prohibiting HDL and Singulex from paying BlueWave for inducing others to arrange the tests. Similarly, the government contended that the statute prohibited BlueWave from paying its salespeople for recommending purchase of the tests. As a result of the AKS violations, the government alleged the resulting claims were by definition fraudulent. The jury agreed.
The appellants argued that the district court erred in denying them judgment as a matter of law. First, they argued the government failed to show that they knowingly and willfully violated the AKS and therefore they could not have knowingly violated the FCA.
The appeals court disagreed, finding the government provided ample evidence of knowledge and intent. The government produced memoranda and testimony showing that attorneys from within both HDL and BlueWave warned the defendants that paying commissions to independent contractors might violate the Anti-Kickback Statute, and instead advised the company’s to establish an employee-based system. The government also offered evidence that outside lawyers warned all three defendants about the illegality of the commissions. From those clear warnings, a reasonable jury could infer the defendants knowingly and willfully offered illegal remuneration to induce the purchase of their products.
Further, the court explained that the defendants’ justifications for their activities did not undermine the jury’s conclusion. The defendants argued the AKS is ambiguous and therefore they could not have known it prohibited volume-based commissions. However, the court found this assertion ignored the evidence that the defendants received repeated legal advice warning them away from the practice.
The court also was not persuaded by the defendants’ assertion that they could not have known about the commissions’ illegality because attorneys helped draft the contracts providing for commission payments. The defendants could not point to a single legal opinion upon which they relied when they concluded that the AKS permitted commission payments to independent contractors. Moreover, the jury could have reasonably concluded that the defendants should have given more consideration to the many subsequent warnings about the commissions.
The court also held the defendants could not rely on outside audits as a justification for questioning the legality of the commission scheme. In fact, one auditor testified that the services were not designed nor could be relied upon to disclose illegal act.
The defendants also argued that they were entitled to judgment as a matter of law because commissions to salespeople can never constitute kickbacks under the AKS. However, the court found no such language in the statute providing for this exception. Further, federal appellate courts have frequently upheld AKS violations based on commission payments to third parties.
The AKS does include a statutory safe harbor for commissions paid to salespeople who are “employees” that have a “bona fide employment relationship” with their employer. However, the Department of Health and Human Services has expressly recognized that this safe harbor does not cover independent contractors, even when industry opinion ran to the contrary. At the time, HHS said that if an employer wanted to pay salesperson on the basis of the amount of business they generate, it should make these salespersons employees to avoid civil or criminal prosecution.
The defendants also argued that because BlueWave sales representatives did not directly refer HDL or Singulex tests to patients, they should not be held liable. However, the court found they misread the text of the AKS, which expressly prohibits individuals from receiving remuneration in exchange for arranging for or recommending purchasing healthcare services. This prohibition includes sales representatives who are compensated for recommending a healthcare service, like the HDL or Singulex tests, to physicians.
The defendants also appealed the district court’s denial of their request for a new trial. First, they asserted a variety of legal errors in the jury instructions. For example, the defendants argued the district court erred in refusing to give a stand-alone advice-of-counsel instruction. The defendants requested an instruction stating that they “have asserted an affirmative defense of advice of counsel to the government’s allegations that they violated the False Claims Act” and that the affirmative defense, “if true, will completely defeat the Government’s allegations under the False Claims Act.” The district court refused to give this instruction because it concluded that the instruction did not fit the facts of the case.
The appeals court agreed, noting that the defendants did not produce evidence that they made full disclosure of all pertinent facts to counsel, nor did they identify any specific legal opinion, written or otherwise, that they relied upon from HDL and BlueWave’s formation until at least 2012. In response, the defendants cited an email from a private attorney who said that in his “recollection, P&H fees do not run afoul of Anti-Kickback,” but that he “wanted to confirm that no recent OIG opinions have slipped past him.” The court found this a less than hearty endorsement of the defendants’ pay structure. Further, the court found no evidence this email had been read at the time it was sent.
Further, the district court did instruct the jury to consider the defendants’ good faith reliance on legal advice. The appeals court found that the instruction captured the essence of the instruction proffered by the defendants. Thus, the refusal to provide the stand-alone advice instruction had no real effect on the jury and therefore provided no basis for reversal.
Next, the defendants challenged the district court’s instructions about the jury instructions regarding the decision of a BlueWave sales contractor to invoke his Fifth Amendment rights. The court told the jury that if it found the witness was a member of a conspiracy to violate the FCA, they could—but were not required to—infer from their refusal to testify that the answer would have been unfavorable to the interests of a co-conspirator.
The defendants argued the district court improperly instructed the jury that it could infer guilt from his silence. However, the appeals court found otherwise, noting that the Supreme Court has long recognized that the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence against them.
The appeals court found that the district court properly informed the jury that it could draw an adverse inference, because the witness played a substantial role in the alleged scheme and had received $6 million in commissions. The court also instructed the jury that it must first concluded that the witness was a co-conspirator, ensuring that the jury would only consider the witness’ invocation of the Fifth Amendment to the extent it was relevant to the assessment of liability.
The court also rejected additional challenges to the jury instructions. First, the defendants argue that the district court erred by failing to instruct the jury that it must find that a false claim be “material.” Instead, the court instructed the jury that if it found that a claim violated the AKS, the second element of the FCA was necessarily satisfied. The court found this accurate.
The defendants also argued that the district court erred when it told the jury that the government must prove “that at least one purpose of the remuneration” was to induce the referral of services, rather than the “primary purpose of the remuneration.” The court also found no error in this instruction.
Next, the defendants argued the district court erred by excluding three defense experts: Daniel Mulholland, a healthcare attorney; Jessica Schmor, a nurse; and Curtis Udell, a purported expert on the fair-market value of P&H fees.
The district court excluded Mulholland’s testimony as to whether the defendants “would have reason to know what the legal obligations were.” The court explained that this testimony presented a legal conclusion informing the jury about how it should apply the law, which is prohibited.
The district court excluded Schmor’s testimony because her opinion did not rest on sufficient facts or data. Schmor sought to testify as to Medicare’s reimbursement code calculations, but she lacked personal knowledge about Medicare’s precise methodology. Similarly, the district court excluded Udell’s testimony because the court found his methodology for calculating the fair market value of P&H fees unreliable. In excluding the testimony of these experts, the district court did not abuse its discretion.
Finally, Dent challenged the district court’s grant of prejudgment writs of attachment. At issue are three properties that Dent transferred to his wife and to two corporations that she controlled. The district court found that Dent’s property transfers were fraudulent, as it concluded that Dent made the transfer with the intent to delay or defraud a creditor.
The appeals court agreed, finding that the timing of the transfers, as well as the nominal amount of consideration, cuts in favor of the government. Dent made the transfers several months after he knew he was under federal investigation. After receiving a subpoena from HHS, Dent purchase a real property for $1.6 million, then on the same day, sold it to his wife for $5. He repeated this action with multiple additional properties, all of which he sold to his wife or her corporation for $5.
The nominal amount of the sales and the transfer of the property to an insider rendered the transactions suspect. The court agreed that Dent’s actions met the standard for a fraudulent transfer, and therefore the district court did not err in granting the prejudgment writ of attachment.
