DOJ Intervenes and Files Complaint in False Claims Act Suit Against Private Equity Firm and Others Based on Portfolio Company’s Alleged Illegal Kickback Scheme

On February 16, 2018, the United States Department of Justice (“DOJ”) filed a complaint in intervention in a False Claims Act (“FCA”) qui tam/whistleblower suit that had been pending against the following defendants: Diabetic Care RX. LLC d/b/a Patient Care America (“Patient Care”), a pharmacy organized under Florida law; Riordan, Lewis & Haden, Inc. (RLH), a private equity firm that holds a majority interest in Patient Care; and Patrick Smith and Matthew Smith, two Patient Care executives who are also RLH partners.[1] The DOJ’s complaint alleges that defendants created an illegal kickback scheme (via Patient Care’s alleged illegal commission payments under the Federal Anti-Kickback Statute to marketing firms to refer patients) to induce TRICARE—a federally-funded healthcare program for military personnel and their families—to pay for unnecessary prescriptions in violation of the FCA.

In July 2012, RLH acquired a controlling stake in Patient Care. RLH purportedly managed and controlled Patient Care through two RLH partners who also served as officers or directors of Patient Care. The DOJ thus contends that RLH participated in the alleged fraudulent scheme through its control of Patient Care. The complaint contains general claims of knowledge on RLH’s part concerning the illegal scheme. Since the FCA imposes liability on those who knowingly present or cause to be presented the submission of false or fraudulent claims to the government to obtain payment or avoid an existing payment obligation, RLH could be held liable for causing Patient Care to submit false or fraudulent claims for payment to TRICARE.

According to the DOJ, Patient Care paid kickbacks to non-employee “marketers” to target military members and their families for certain prescriptions, including compounded pain creams, scar creams, and vitamins—regardless of need. The formulations in these compounds were allegedly manipulated to ensure the most reimbursement from TRICARE. In some cases, marketers paid telemedicine doctors to prescribe these products without physically examining patients. The DOJ further contends that defendants and marketers paid many patients’ copayments to induce patients to accept the compounded drugs. The scheme allegedly generated $68 million in just a few months. Because the FCA can impose treble damages and substantial penalties, RLH’s potential exposure in the suit exceeds $200 million.

Although the DOJ’s decision to name an investment management firm as a defendant in an FCA case against one of the firm’s pharmacy portfolio companies is unusual, it could indicate an increased willingness to pursue private equity firms that back companies that receive federal funds or otherwise have a significant impact on, or interaction with, the government. Notably, the DOJ does not allege direct knowledge or participation in alleged unlawful conduct by the RLH board members. Instead, the allegations seek to infer RLH’s partners had knowledge of the conduct through their participation on Patient Care’s board. This could indicate that the DOJ may pursue claims against investment firms based largely on their ownership and control of portfolio companies.

While the outcome of this case remains to be seen, the DOJ’s complaint in intervention highlights the risk to private equity firms whose portfolio companies operate in industries with significant FCA exposure. Consequently, to reduce their potential exposure to FCA liability when investing in and operating portfolio companies, private equity firms should take a number of issues into consideration. First, private equity firms should determine whether a company it invests in has contracts or significant dealings with the government. Second, investment firms should consider the extent to which the firm shapes operations and decisions at the portfolio company level and, where appropriate, clearly delineate authority for those who serve as representatives of portfolio companies. Third, firms should maintain sufficient oversight of their investments to ensure ongoing FCA compliance. That should include requiring portfolio companies that do business with the government to have internal compliance policies and procedures that guard against the risk of false or fraudulent conduct in government dealings, including in requests for reimbursement from third parties that may ultimately seek reimbursement from the government.

In short, to reduce the risk of FCA liability, private equity companies should not only perform robust due diligence on FCA issues for potential investments, but should also ensure careful compliance oversight throughout the duration of the investment.

For more information please contact Lori Pines or Adam Safwat.

Endnotes    (↵ returns to text)

  1. United States ex rel. Medrano and Lopez v. Diabetic Care Rx LLC d/b/a Patient Care America, Case No. 15-62617.