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September 2023 Labs in Court

by Glenn S. Demby | Aug 31, 2023 | Essential, Lab Compliance Advisor, Labs in Court

In last month’s key cases, Illumina and Guardant seek to dismiss lawsuit related to trade secrets and breach of contract.

Illumina Withdraws Trade Secrets Misappropriation Lawsuit against Guardant Health

Case: In 2012 and 2013, a pair of key employees left Illumina for the new genetic test manufacturing company they had incorporated in 2011 called Guardant Health. In addition to breach of contract, Illumina accused the ex-employees of stealing thousands of confidential documents containing proprietary information about the firm’s gene sequencing technology and filed a lawsuit for misappropriation of trade secrets and breach of contract.¹ Guardant claimed the suit was frivolous and intended to drive the company out of the market.² On August 1, the companies announced that they’ve resolved their legal differences and will jointly ask the federal court to dismiss the lawsuit. As part of the settlement, Illumina and Guardant entered a new three-year purchase and supply arrangement while agreeing to share specimen samples to advance cancer research.³

Significance: The relationship between the companies changed significantly after Illumina acquired GRAIL, turning Guardant into not just an Illumina customer but also a rival within the liquid biopsy space. The anti-competitive optics of the lawsuit may have contributed to Illumina’s decision to bury the hatchet with Guardant. In July, the European Commission fined Illumina €432 million for closing the GRAIL acquisition without regulatory approval; the company also faces possible additional antitrust penalties on this side of the Atlantic from the US Federal Trade Commission.⁴

Severance Release Doesn’t Bar Employee’s Qui Tam Lawsuit—But Lack of Specifics Does

Case: A Texas provider terminated its controller after she expressed concerns about “anomalies” in the company’s financial statements. As part of the separation agreement, the controller signed a written release waiving all her legal claims against the company and its principals. A year and a half later, she brought a qui tam lawsuit against the company for allegedly paying kickbacks to physicians. These alleged kickbacks were in the form of medical directorships to physicians in exchange for referrals of Medicare patients to the firm’s skilled nursing facilities. The physician defendants claimed that the controller had violated the release agreement and asked the DC federal court to dismiss her lawsuit without a trial. The court ruled that the release was unenforceable, but dismissed the case on other grounds.

Significance: Employees who sign a release can’t bring a False Claims Act (FCA) qui tam lawsuit later if the federal government knew about the potential FCA claims at the time the release was executed. However, if the government isn’t aware of the potential claims, the release is enforceable only if barring the lawsuit would serve the public interest. In this case, the court found that the government wasn’t aware of the controller’s FCA claims but that the government’s interest in investigating the claims and rooting out the potential fraud outweighed the interest in enforcing the release. So, the release was unenforceable. However, the controller won the battle but lost the war when the court tossed her case because the fraud claims in the lawsuit lacked the particularity required to meet federal rules, specifically, Federal Rule of Civil Procedure 9(b) which requires that a fraud complaint “state with particularity the circumstances constituting fraud”⁵ [United States ex rel. Winnon v. Lozano, 2023 U.S. Dist. LEXIS 138100].

Physician Owner of Maryland Urgent Care Chain Convicted of Over $15 Million COVID-19 Testing Fraud

Case: A Baltimore federal jury convicted the owner and medical director of Drs ERgent Care LLC, dba First Call Medical Center and Chesapeake ERgent Care, of running a scam that generated over $15 million worth of false claims to Medicare and commercial insurers. The scheme was run out of drive-through COVID-19 testing sites across two Maryland counties. According to the U.S. Department of Justice (DOJ), Dr. Ron Elfenbein, 49, ordered employees to bill for not only the COVID-19 tests but also high-level evaluation and management (E&M) visits that weren’t provided. That included billing tests for asymptomatic patients who required testing for employment purposes or because they needed clearance to travel, rather than medical reasons. During the three-week trial, the jury heard evidence that Elfenbein instructed employees that patients were “there for one reason only—to be tested” and not to “solve complex medical issues.”⁶

Significance: Having been convicted of five counts of healthcare fraud, Elfenbein faces a maximum sentence of 50 years in federal prison. Sentencing is scheduled for November 7. Elfenbein, a three-time candidate for Maryland state office, is the first doctor convicted of overcharging the federal government for COVID-19 tests, but likely won’t be the last. The DOJ and Centers for Medicare & Medicaid Services (CMS) have committed significant resources to crack down on false billing of COVID-19 testing, including for medically unnecessary add-on tests.⁷

Anti-Kickback Statute Ban on Commission Payments Doesn’t Violate the First Amendment

Case: A pharmacy owner was sentenced to 12 months in prison and ordered to pay $3.176 million in restitution after pleading guilty to violating the Anti-Kickback Statute (AKS). The owner made commission-based payments to independent contractors for sales and marketing of non-FDA-approved compounded drugs that were then fraudulently billed to TRICARE. Unhappy with the ultimate outcome of the plea deal, the owner appealed the conviction on First Amendment grounds. The argument: Regulations that distinguish between favored and disfavored speakers violate the right to free speech. That’s what the AKS does to the extent that the bona fide employee exception allows for commission-based payments with W2 employees but not independent contractors who complete 1099 tax forms. Unswayed, the Maryland federal court upheld the conviction.

Significance: The First Amendment protects speech, not conduct, the court explained. The restrictions imposed by the AKS apply to conduct, namely, payments to independent contractors to induce referrals. Speech is implicated only to the extent that it constitutes an offer to pay kickbacks in return for referrals. Such an offer is illegal under the AKS. The First Amendment doesn’t protect speech “used as an integral part of conduct in violation of [a] valid criminal statute.” Commercial speech doesn’t fall under First Amendment protection unless it concerns “lawful activity,” the court concluded [United States v. Blair, 2023 U.S. Dist. LEXIS 134066, 2023 WL 4896604].