Last week, the Department of Justice (DOJ) announced a $12 million settlement with spinal device manufacturer, Innovasis Inc. (Innovasis) and senior executives Brent Felix and Garth Felix related to allegations that they violated the False Claims Act (FCA) by paying kickbacks to surgeons to induce their use of its spinal devices.
Allegedly, between 2014 and 2022, Innovasis provided consulting fees; registry payments and performance shares in Innovasis; travel expenses to attend a company-sponsored conference at a luxury ski resort; and lavish dinners, among other things, to surgeons to induce them to use its devices and other equipment in violation of the Anti-Kickback Statute (AKS).
There are a few interesting points to note here.
First, DOJ remains focused on the AKS as an enforcement priority despite the causation Circuit split brewing. For context, there is a growing Circuit split as to whether the DOJ must show but-for causation between an alleged kickback and a specific claim for the claim to have "resulted from" an alleged kickback in violation of the FCA. Despite this uncertainty, it appears that DOJ remains undeterred where the conduct at issue appears particularly egregious. DOJ has taken the position that company-sponsored conferences at entertainment venues like luxury ski resorts, lavish dinners, and parties (not even addressing the consulting fees, registry payments or performance shares) arguably reflect a clear intention to induce referrals. Where the alleged behavior is so glaring, it is often more difficult to show a lack of but-for or proximate causation. Thus, when considering whether a company's policies and procedures violate the AKS, one should not view any of the potential activities in a vacuum, but rather whether all of the activities collectively might suggest that misconduct is afoot.
Second, this resolution implicates the dreaded "self-disclosure." According to publicly-available information, Innovasis and the two executives self-disclosed certain conduct to the Department of Health and Human Services Office of Inspector General (HHS OIG) in May 2019, prior to the filing of the qui tam complaint in October 2019. Despite the disclosure, apparently, the government would not resolve the matter without a $12 million settlement, with $6 million of that amount being restitution.
Generally, a self-disclosure to the government results in 1.5 to 2 times the single damages amount. Though disclosing misconduct to the government can be somewhat risky, and, frankly, should not be done without consulting sophisticated counsel, that risk is calculable. The question of exposure generally turns on how the company (or the government) views single damages. In some instances, it is very straight-forward, whereas, in others, like cases involving the AKS, the single damages analysis can turn on several factors such as the relevant time period, claim population or value implicated. Here, using the government's single damages or restitution amount, the damages could have ranged from $9 million to $12 million. In short, this settlement is within the range of general practice for self-disclosure resolutions. Any surprise associated with the total settlement amount must have turned on what the company believed the single damages amount to be.
Third, the Department's specific inclusion of Brent Felix, the president and chairman of the board of Innovasis, and Garth Felix, the former CFO, in the settlement demonstrates the DOJ's commitment to individual accountability. As you may recall, in September 2022, Deputy Attorney General Lisa Monaco announced changes to the DOJ's Corporate Criminal Enforcement Policies, emphasizing the importance of holding individuals accountable for corporate wrongdoing. While, arguably, it is seemingly more difficult to hold individuals accountable in the civil context, given that they don't risk jail time and only face a settlement amount which may be ultimately paid by the company, in my view, naming an individual, specifically, a senior executive in a press release of an arguably egregious fraud scheme could be harmful to that individual's reputation and future opportunities and could have a chilling effect on such conduct.
Notably, the allegations referenced in the press release and in the qui tam are particularly egregious and, if true, could have exposed the company and the individuals to criminal liability. Allegedly, an internal audit commenced by the board of directors revealed that a high-level Innovasis employee had placed himself over the compliance committee and was also negotiating and executing physician agreements using his own discretion and incentives, while actively excluding compliance committee members from meetings. Despite this, neither the executives named in the settlement nor Innovasis was charged criminally or faced criminal liability.
Takeaways
A global resolution may have looked a lot different (i.e. an exclusion or a corporate integrity agreement) had the company not self-disclosed. Although self-disclosures are tricky to navigate, in the FCA context, there are appreciable bounds for what a resolution could look like (even if you and the government don't agree as to what those boundaries are). When evaluating whether a self-disclosure is appropriate, one should realistically consider the full range of exposure and how to effectively navigate discussions with the government, so that the company may make an informed decision about self-disclosing versus defending a civil (and sometimes criminal) investigation in the future.
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