DOJ Targeting Private Equity Firms in False Claims Act Litigation

The False Claims Act (FCA) has long been a powerful tool for the federal government to generate large recoveries from government contractors, including companies in the healthcare industry. In fiscal year 2017 alone, the US Department of Justice (DOJ) recovered more than $3.7 billion in settlements and judgments in civil cases brought under the FCA. The government’s focus on continued aggressive FCA enforcement is not expected to go away anytime soon. Based on its recent complaint in intervention in United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America et al., No. 15-CV-62617 (S.D. Fla.), DOJ may be setting its sights on a new class of potential defendants in FCA cases: private equity firms.

DOJ’s decision to pursue private equity firm Riordan, Lewis & Haden Inc. (RLH) as a defendant in an FCA case against one of the firm’s portfolio companies (a compounding pharmacy) should be a warning bell for private equity firms whose portfolio companies contract with and/or are reimbursed by the government such that they are exposed to potential FCA liability. Private equity firms are now on notice that they should take steps to limit the risk that the government would target them in an FCA case against a portfolio company.

In its complaint, DOJ alleges that in 2012, RLH invested in Diabetic Care Rx, LLC dba Patient Care America (PCA) with a plan to increase the company’s value in advance of a planned exit five years later. At that time, PCA generated revenue primarily by providing nutritional therapy to end-stage renal disease patients covered by Medicare. Soon after RLH invested, Medicare’s reimbursement rates for that therapy dropped, and so did PCA’s revenues. In an attempt to restore PCA’s revenues, RLH and two RLH partners serving as officers and/or directors of PCA allegedly exerted control over PCA and directed its entry into the business of non-sterile compounding of topical creams for “pain management.” According to DOJ, RLH recognized that was an extremely profitable therapy because of favorable reimbursement rates then offered by TRICARE, the federal healthcare program for active duty military personnel, retirees, and their families. DOJ alleges that RLH was actively involved in developing and implementing the company’s business strategy around maximizing TRICARE reimbursement through illegal kickbacks and beneficiary inducements. RLH allegedly helped direct PCA’s business model notwithstanding warnings from counsel that its referral practices could be illegal.

In Medrano, the government apparently found sufficient involvement by the private equity firm and two of its partners in the operation of the pharmacy to allege that the private equity firm caused its portfolio company to submit false claims to the government for reimbursement in violation of the FCA.

The critical takeaways for private equity firms are to pay close attention to:

  • Pre-Investment Due Diligence: Prior to making an investment, private equity firms should research and understand the specific line of business, the levels of available government reimbursement, the audit systems in place to detect and report errors, and the actual error rates for the portfolio company’s claims for reimbursement. They should identify the company’s government contracts, investigate the company’s business practices with respect to those contracts, and appreciate the risks (if any) associated with the company’s government contracting from an FCA perspective.
  • Level of Involvement in Day-to-Day Operations and Business Decisions: DOJ’s allegations against RLH signal that a private equity firm’s risk of being named in an FCA case against the underlying portfolio company increases based on its involvement in and control over the day-to-day operations of the portfolio company. When providing financial incentives to the portfolio company’s executives for increasing profits and/or the overall value of the company, private equity firms should understand whether such incentives could be viewed by the government as “causing” the submission of false claims for reimbursement.
  • Ongoing Compliance Activities: In industries where the risk of FCA liability is significant, private equity firms should help establish “a culture of compliance” in their portfolio companies to provide government contracting anti-fraud and abuse training and to monitor the company’s compliance with applicable laws and regulations. The board of directors of a portfolio company in an at-risk industry would be well-served to establish a sub-committee designed to monitor the company’s ongoing compliance with its internal policies and applicable industry standards.
  • Understanding and Appreciating the Risk and Following Appropriate Guidance: It is fair to infer that the government’s decision to pursue a FCA case was impacted by its belief that RLH and the individuals disregarded legal advice warning that paying commissions to marketers could violate the Anti-Kickback Statute and result in the submission of false claims. Private equity firms and their portfolio companies would be wise to seek and follow appropriate advice from counsel and consultants with the requisite knowledge of and expertise in potential FCA liability.

 


 

Nathan J. Andrisani’s (LAW ’95) practice focuses on defending organizations and individuals facing government investigations and litigation. Nathan represents clients in white collar criminal cases and FCA and qui tam litigation, and a variety of other complex government investigations.

Eric W. Sitarchuk has 30 years of experience representing clients in government investigations, including FCA and quitam litigation, Foreign Corrupt Practice Act, and a variety of white-collar crime litigation. He is the chair of Morgan Lewis’ white collar and corporate investigation practice. Eric has experience conducting internal investigations of corporations and aiding in the development of corporate compliance programs.

Matthew D. Klayman provides a variety of litigation, regulation, and investigation services. His practice focuses on counseling clients in business and corporate disputes and class action defense.