The Law Offices of Steven Goldsobel regularly represents laboratories and companies specializing in marketing for healthcare providers. While national testing for COVID-19 exposure appears to be the key to reopening the economy, and estimates indicate that U.S labs have performed and processed almost 4 million tests for COVID-19, testing poses its own array of potential compliance concerns and risks, especially since private labs have performed 85% of COVID-19 testing. Accordingly, laboratories providing COVID-19 testing should ensure that their marketing and compensation arrangements comply with the federal Anti-Kickback Statute (AKS) and the Eliminating Kickbacks in Recovery Act (EKRA).

The U.S. Department of Justice (DOJ) remains vigilant in rooting out fraud and abuse associated with the pandemic, and has instructed U.S. Attorneys’ offices across the country to “prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.” Indeed, the DOJ already has filed an indictment against Erik Santos, the head of a Georgia healthcare marketing company, with steering Medicare patients to testing facilities for COVID-19 in exchange for kickbacks.

While DOJ has long used the AKS to prosecute healthcare fraud violations, it also may use EKRA as a sword to combat COVID-19-related fraud. Under EKRA, which was signed into law in 2018, it is a crime to solicit or receive payment in exchange for referring a patient to a laboratory, to pay or offer any payment to induce someone to make such a referral or to pay or offer any payment in exchange for an individual using a lab.  EKRA also has broader applications than the AKS because EKRA is not limited to services reimbursed by Medicare or other federal healthcare reimbursement mechanisms. In other words, EKRA applies to COVID testing billed to commercial insurers as well as to Medicare, while the AKS only applies to services paid for by federal programs.  Therefore, a lab may be in violation of EKRA while simultaneously complying with the AKS. Therefore, labs must become familiar with the scope and applicability of EKRA to ensure compliance.

Although EKRA provides statutory exceptions, those exceptions do not necessarily follow the AKS safe harbors regarding compensation for marketing. For instance, EKRA does not allow a volume or value-based compensation structure to employees. Thus, common compensation models, such as paying sales employees commission-based compensation, are deemed to be improper kickbacks under EKRA, even though such compensation may be, in certain circumstances, permitted under the AKS.

The expected increases in COVID lab testing may elevate EKRA as a future enforcement tool. As a result, labs must closely evaluate their current compensation models for marketing practices, including any practices related to COVID testing, to avoid any potentially noncompliant methods.

Imagine you are a partner in a medical radiology group that has an exclusive contract with a hospital that provides radiological diagnostic services to the hospital’s patients, and that revenues derived from this exclusive contractual relationship comprise a large percentage of your annual income.  Now, imagine that a large third-party radiology company seeks to build out a specialized oncological radiology department at this hospital through a joint venture, and as part of its negotiations, demands that the hospital terminate its exclusive contract with your radiology group.  Since a state-of-the-art oncological radiology department will increase the hospital’s revenues exponentially, the hospital agrees, enters into the joint venture with the third-party radiology company, and terminates its contract with your medical group consistent with the termination provisions set forth in your contract, causing substantial financial damage to you and your partners.  To obtain compensation for your financial loss, you intend to file a lawsuit against the third-party radiology company for intentional interference with your exclusive contract.  However, a pending case before the California Supreme Court may determine whether such interference is permissible under California law.

California Business and Professions Code, Section 16600 states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  Pursuant to this statute, California courts have struck down a number of restrictive covenants in contracts with employees in California, including non-compete provisions, customer non-solicit provisions, and certain employee non-solicit provisions.  The Ninth Circuit now wants to know whether the statute should apply outside of the employment context to an agreement between two businesses.

The Ninth Circuit has certified questions to the California Supreme Court in Ixchel Pharma v. Biogen seeking guidance as to: 1) whether section 16600 of the California Business and Professions Code extends to contracts between businesses; and 2) whether pleading an independent wrongful act is required to state a claim for intentional interference with a contract outside the at-will employment context. The California Supreme Court accepted the Ninth Circuit’s inquiry and the Supreme Court will likely rule in the summer or fall of 2020. The California Supreme Court’s ruling could have major implications for business litigation going forward.

Ixchel Pharma and Forward Pharma are both biotech ventures engaged in the business of developing pharmaceutical drugs. Ixchel and Forward entered into a collaboration agreement in January 2016 to develop a new drug to treat a neurological disease.

Forward and Biogen, another biotech company, began negotiating an intellectual property dispute in 2016 after Forward and Ixchel entered into their collaboration agreement. The intellectual property dispute had no relationship to the new drug being pursued under the collaboration agreement between Ixchel and Forward, but Biogen discovered during its negotiations with Forward that the new drug being developed between Ixchel and Forward would be competing with a new drug under development by Biogen.  Accordingly, the settlement negotiations between Forward and Biogen resulted in a settlement agreement in January 2017, wherein Forward agreed to stop working with Ixchel to develop their experimental drug pursuant to a non-compete provision in the Forward/Biogen settlement agreement. Forward then terminated its collaboration agreement with Ixchel and ceased all work on the new drug.

Ixchel subsequently sued Biogen for: (1) tortious interference with a contract; (2) intentional and/or negligent interference with prospective economic advantage; and (3) violations of California’s unfair competition law which prohibits “any unlawful, unfair or fraudulent business act or practice,” Cal. Bus. & Prof. Code § 17200.  Ixchel alleged that Forward gave Biogen a copy of their collaboration agreement without Ixchel’s consent, that Biogen deemed Ixchel’s development work on the new drug a threat to Biogen’s own drug, and that Biogen asked Forward to cut off ties with Ixchel as settlement in their intellectual property dispute.

The district court dismissed Ixchel’s complaint for failing to state a claim for intentional interference with prospective economic advantage and tortious interference with a contract, reasoning that Ixchel failed to plead that Forward engaged in an independent wrongful act. The district court concluded that the collaboration agreement was an at-will contract, requiring Ixchel to plead a wrongful act. The UCL claim also failed because the complaint failed to allege an actionable unlawful business practice.

Ixchel subsequently amended its complaint to allege a violation of section 16600 of the California Business and Professions Code based on Biogen’s settlement agreement with Forward, which wrongfully restrained Forward from engaging in lawful business with Ixchel.  The district court dismissed the amended complaint on the basis that section 16600 barred non-compete agreements between employer and employee and did not apply to agreements outside of the employment context such as the Forward-Biogen agreement.

Neither the Ninth Circuit nor the California Supreme Court has addressed whether section 16600 extends beyond the employment setting to contractual restraints between businesses. The terms of section 16600 state it applies to contracts restraining “anyone” from engaging in lawful business of any kind.  However, the term “anyone” is not defined.

Under California law, a claim for intentional interference with contractual relations in the context of an at-will employment contract requires the claimant to prove an independently wrongful act.  Reeves v. Hanlon (2004) 33 Cal. 4th 1140. However, the California Supreme Court has not addressed whether Reeves applies outside the at-will employment context.

A broadened interpretation would expand section 16600 to bar contracts restraining a business from engaging in lawful business, potentially invalidating contracts like the Forward-Biogen agreement. The expansion may extend to all contracts, including those dealing with joint ventures, leases, distribution agreements, license agreements, and other widely used business agreements that might fall under the purview of a newly broadened section 16600.

Expanding the independent wrong requirement to at-will contracts beyond the employment context would require aggrieved plaintiffs to plead an independently wrongful act to prove an intentional interference with contract claim.

Winter ex rel. United States v. Gardens Regional Hosp. & Me. Ctr., Inc., __ F.3d __, 2020 WL 1329661 (9th Cir. Mar. 23, 2020)

As reported by the California Society of Health Care Attorneys, Jane Winter was responsible for reviewing patient medical records at Gardens Regional Hospital and Medical Center to determine whether admission orders met the Hospital’s medical necessity admission criteria. Shortly after a nursing home acquired ownership in the management company that oversaw operations at the Hospital, Winter alleges she noticed a spike in the number of emergency room patients transported from the nursing home—an overwhelming majority of whom were admitted for inpatient treatment. Believing this to be improper, Winter repeatedly tried to raise her concerns with hospital management, without success. Instead, she was instructed not to question the admissions, and then she was fired.

Winter brought a qui tam action under the False Claims Act alleging that the Hospital and affiliated persons submitted Medicare claims falsely certifying that patients’ inpatient hospitalizations were medically necessary. The district court dismissed Winter’s complaint for failure to plead a plausible claim, ruling that “to prevail on an FCA claim, a plaintiff must show that a defendant knowingly made an objectively false representation” and claims involving a doctor’s clinical judgment can never state a claim under the FCA because “subjective medical opinions . . . cannot be proven to be objectively false.” Winter appealed.

The Ninth Circuit reversed, explaining that “a plaintiff need not allege falsity beyond the requirements adopted by Congress” in the FCA, and Congress did not impose a requirement of proving “objective falsity.” The FCA imposes liability for all “false or fraudulent claims” and does not distinguish between “objective” and “subjective” falsity, nor does it carve out an exception for clinical judgments and opinions. The Ninth Circuit further held that “a false certification of medical necessity can give rise to FCA liability” and can be “material because medical necessity is a statutory prerequisite to Medicare reimbursement.” A doctor’s certification that inpatient hospitalization was “medically necessary” can be false or fraudulent for the same reasons any opinion can be false or fraudulent. Thus, a medical necessity certification is actionable under the FCA if the opinion is not honestly held, or if it implies the existence of facts—namely, that inpatient hospitalization is needed to diagnose or treat a medical condition, in accordance with accepted standards of medical practice—that do not exist.

Congress has set aside $500 billion in the CARES Act to help certain hard-hit businesses during the coronavirus pandemic, but those funds come with a special inspector general whose oversight may result in civil and criminal enforcement actions similar to that seen in the aftermath of TARP and the 2008 financial crisis.

In light of the many requirements that come with the loans, employers will be required to make a host of certifications and provide financial statements during the application process and after funding, giving rise to potential False Claims Act violations and triggering other government enforcement actions.  The special inspector general will have subpoena power to investigate the veracity and accuracy of applicants’ submission materials and subsequent expenditure of the funds.  In addition, the special inspector general will participate in a joint committee with numerous federal agencies to conduct investigations into False Claims Act violations.

Accordingly, applicants must take caution about what information and documents they submit to the government and to use the funds consistent with the representations made to the government, because an applicant’s submission materials likely amount to material statements for purposes of the False Claims Act, and false statements upon which the government relies to approve and disburse funds can expose an applicant to liability, including treble damages.

By its holding in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015), the Ninth Circuit rejected the Second Circuit’s requirement of a meaningful close personal relationship between the insider (tipper) and the tippee that represents at least a potential pecuniary gain or something similarly valuable.  United States v. Newman, 773 F.3d 438, 452 (2d. Cir. 2014).   In rejecting Mr. Salman’s argument that he lacked knowledge of the tipper’s personal gain, the Ninth Circuit relied on Dirks v. S.E.C.’s holding that the test is whether the insider personally will benefit, directly or indirectly, from his disclosure, and the tippee (Mr. Salman) knows or should know of this personal benefit, which can include the gift of confidential information to a relative who trades on it.   See 443 U.S. 646, 660 (1983).