Client Alert: Private Equity Firms and the False Claims Act

Client Alerts Healthcare

United States Intervenes in False Claims Act Case Against Private Equity Firm

Private equity firms in certain health care arrangements might have cause for concern based on a recent case brought by two whistleblowers under the federal False Claims Act (the “FCA”).  A violation of the FCA can result in civil penalties ranging from $11,181 to $22,363 per claim, as well as treble damages. Given the FCA’s significant penalties, it is important that private equity firms investing in the health care context understand the possible implications of this case.

The lawsuit, United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC, et al., No. 15-CV-62617 (S.D. Fla.), was originally filed by two former employees of the defendant compounding pharmacy.  The federal Government intervened, throwing the weight of the federal Government behind the whistleblowers’ case.  The suit alleges that the pharmacy paid illegal kickbacks to contracted marketers to induce prescriptions for compounded drugs, which resulted in over $68 million billed in false claims to the federal TRICARE program. The alleged illegal scheme involved, among other things, kickbacks to marketers who targeted military members for certain compounded cream prescriptions.  Kickbacks to the marketers were based on a percentage of the pharmacy’s profit from filling these prescriptions.

Unique to this case is the inclusion of a private equity firm as a defendant.  The allegations against the private equity firm are based on the level of control the firm exercised over the pharmacy. According to the Complaint, this control allegedly began as early as 2012 when the Los Angeles based private equity firm, Riordan, Lewis & Haden, Inc. (“RLH”), made a controlling investment in the compounding pharmacy through a RLH private equity fund. RLH allegedly “controlled and directed” the conduct of the compounding pharmacy through its role as manager of the private equity fund. RLH’s control over the pharmacy was further evidenced by two RLH partners who both served as officers of the compounding pharmacy and were officers and board members of the pharmacy’s management company. The Complaint also points to multiple e-mails sent by RLH officials, which discuss opportunities to “capitalize on ‘the extraordinarily high profitability of this therapy’” and for “‘quick and dramatic payback’ on its investment.”

The Government’s involvement in this case signals its support for FCA liability for private equity firms investing in the health care industry, when those firms play a direct and active role in conduct that may violate the FCA. In fact, a Department of Justice press release makes clear that “‘pharmacies, and those companies that manage them, [will be held] responsible for using kickbacks to line their pockets at the expense of taxpayers and federal health care beneficiaries.’” Therefore, private equity firms operating in the health care space should be aware that they may be taking on potential liability if they are actively involved in the management and direction of health care companies whose conduct could run afoul of the FCA.

If you have any questions related to this Client Alert, please contact one of the following members of our Healthcare Practice Group.

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NOT LEGAL ADVICE:  This publication is not to be considered specific legal advice and should not be relied upon in lieu of advice from an attorney.  Each client’s situation is unique, and if you have need for legal advice, you should seek advice from an attorney.