Private Equity Firms—New(ish) FCA Targets?

Last November, DOJ announced its second FCA settlement in two years with a private equity firm. It was a $11.5 million settlement with Medical Device Business Services, Inc. and private equity firm, The Gores Group (TGG).¹ According to the DOJ, Therakos, Inc. improperly marketed and promoted, between 2006 and 2015, one of its medical devices for treating pediatric patients—even though the FDA had never approved its use for the pediatric population. Therakos agreed to pay $10 million to resolve the off-label marketing allegations, but TGG also settled and agreed to pay $1.5 million. The private equity firm had owned Therakos during a portion of the relevant timeframe, acquiring it in 2013 and later selling it in 2015 for $1.325 billion.

Qui Notes readers may recall that back in 2019, we blogged about a case in which another private equity firm, Riordan, Lewis & Haden Inc. (RLH), along with the compounding pharmacy it managed, agreed to pay a combined $21.36 million to resolve allegations that the compounding pharmacy had paid outside marketers to generate medically unnecessary prescriptions and that RLH had financed kickbacks paid to these same individuals.

What makes the recent settlement with TGG noteworthy, however, is the lack of specifics in the complaint or settlement agreement as to any role the firm played in Therakos' alleged off-label practices, let alone the firm's knowledge of the purported scheme. The complaint alleged only that TGG had hired Therakos' new CEO and that Therakos' improper practices continued under the firm's ownership. These thin allegations stand in contrast to those against RLH. The RLH complaint alleged that a RLH partner recommended hiring the compounding pharmacy's CEO (who also settled in his individual capacity) and recommended offering the CEO a compensation plan that incentivized him to significantly grow the value of the business. It also alleged that RLH directed and oversaw the CEO, retained "approval for key decisions affecting the company[,]" and knew of and agreed to the plan to use outside marketers to generate prescriptions.

Perhaps the difference is that RLH settled after the filing of a complaint in intervention by DOJ and the litigation of two motions to dismiss, while TGG settled before the DOJ had to file a complaint. Presumably, had DOJ been required to draft its own complaint aimed at surviving a motion to dismiss, more detail would have been pled (if available) about TGG's actual involvement and/or knowledge of the alleged scheme.

It also is worth noting that both the Therakos/TGG and RLH cases were initiated by relators, who are always a fertile source of FCA cases. In another case, a relator alleged that a mental health center had improperly billed approximately $120 million, primarily by submitting claims for mental health services performed by unqualified and unsupervised clinicians.² The private equity investors, which had purchased the mental health center through a portfolio company, moved to dismiss. They argued for dismissal, in part, on grounds that the relator failed to plausibly allege how they were complicit in the health center's allegedly false submissions. The court disagreed, first noting that a defendant can face FCA liability if the submission of false claims by another entity is the "foreseeable result of a business practice" or if the defendant "operates under a policy that causes others to present false claims." The court observed that there were overlapping officers and members of the boards of the mental health center and the portfolio company. The court went on to conclude the relator's allegations that the portfolio company's CEO and Board were informed about the violations and had rejected a recommendation to take corrective action to bring the mental health center into regulatory compliance constituted "sufficient participation in the claims process to trigger FCA liability." The case is scheduled for mediation in March, but we will continue to monitor it for developments.

To summarize, while it is hard to draw conclusions from just a pair of cases settled within two years and another that survived a motion to dismiss, they do show that private equity firms are not immune from FCA risks, especially when a firm exercises a significant degree of control over the entity submitting claims for payment. It is important for private equity firms to be aware of these risks as they consider the appropriate degree of involvement in a portfolio company's day-to-day operations and implement compliance programs. As always, we at Qui Notes will continue to monitor and report on developments in FCA enforcement whether focused on private equity or beyond.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.