Sidley False Claims Act Blog Fourth Circuit Highlights Risk of Commission-Based Arrangements with Independent Contractors
In a recent ruling, the Fourth Circuit Court of Appeals ruled for the second time in two years that commission-based compensation arrangements with independent contractors cannot be protected and violate the Anti-Kickback Law and the FCA. . See United States ex rel. Nicholson vs. Medcom Carolinas, Inc.no. 21-1290 (4th Cir. July 21, 2022).
The court upheld the district court’s dismissal of the FCA’s claims based on the parent’s allegations that the defendant paid commission compensation to independent contractors to sell skin graft products to affiliated hospitals. to the Veterans Administration, in violation of the AKS because the complaint did not meet the increased requirements. Rule 9(b) Oral Standard. Specifically, the complaint did not provide any details about “how the payouts were allocated or how the representatives were paid,” other than that the payouts were at least partially commission-based and not included “no details of the actual inducement of sales, if and how the reps were expected to promote the product. But the court nonetheless affirmed the viability of the parent liability theory. The committee first noted that compensation independent contractors did not meet the Safe Harbor for Good Faith Employee Compensation and could not meet the Safe Harbor for Personal Services as it was based on referral volume or value before concluding that “it would violate the Anti-Kickback Statute, and therefore violate the False Claims Act, to pay a salesperson of medical devices on commission per sale or based on the value of sales and to be re paid in federal money for health care; any such sale under this scheme would be a misrepresentation.
This case is consistent with last year’s decision by the same Circuit in the “BlueWave” case. In this case, discussed further hereThe court upheld a jury verdict against a blood testing lab, its owner and the management of the lab’s independent sales company, BlueWave, over allegations that the lab’s contract with BlueWave, which included a basic fee plus a commission based on a percentage of revenue generated from sales of the lab’s tests to physicians, violated the AKS and FCA. United States ex rel. Lutz vs. Mallory988 F.3d 730 (4th Cir. 2021).
While it remains to be seen how other circuits will assess the FCA’s liability theories based on commission-based indemnification agreements, it is clear that there is wind in the sails of the claims. which could be brought directly by whistleblowers or the DOJ on this basis. As such, life sciences companies should review these agreements to ensure that they are consistent with current risk tolerance levels and confirm that compliance safeguards are in place to address any concern that such agreements may incentivize specific behaviors known to increase law enforcement scrutiny, such as medical promotion of unnecessary items or potentially misleading promotional statements.
A copy of the decision is available here.