Arizona Fraud Suit Opens New Front in the Legal War against Theranos

Suing Theranos has become something of a cottage industry. And now a whole new front in the legal war appears ready to open: state consumer fraud lawsuits. The Arizona Attorney General's Office (AGO) fired the first shot by issuing a request for outside attorneys to sue Theranos and its subsidiaries for alleged violations of the Arizona Consumer Fraud Act. The case centers on the representations the privately-held blood testing firm made in the State of Arizona about its blood testing equipment and Wellness Centers.

Theranos Becomes a Legal Target
The Arizona state fraud case is the latest legal threat to the company previously heralded for its proprietary technology that was expected to revolutionize the diagnostic blood testing industry. In July 2016, the Center for Medicare and Medicaid Services imposed sanctions against Theranos and excluded its CEO, Elizabeth Holmes, from operating a blood testing lab for two years. Thereafter, the company shifted its focus to developing technology—namely the miniLab (a compact 2.5 cubic feet device containing a mini-robot processing single use cartridges). "Our ultimate goal is to commercialize miniaturized, automated laboratories capable of small-volume sample testing, with an emphasis on vulnerable patient populations, including oncology, pediatrics, and intensive care," the company explained in an Oct. 5 statement.

CMS's regulatory enforcement actions were just the beginning of Theranos's legal problems. The company also faced a series of civil lawsuits, including a class action fraud suit by investors and a breach of contract claim by Walgreens. (See "Walgreens Terminates Contract with Theranos," LIR, July 7, 2016.)

A New Legal Threat
Although Arizona is hardly Theranos's first plaintiff, the threatened Arizona consumer fraud case is different from the other cases in that it would be the first filed by a state government alleging violations of state law. And it could spawn more consumer fraud suits from other states where Theranos did business, including California where Theranos is based. (For more on the Theranos saga, see "Theranos Shifts Focus from Labs to Technology," Diagnostic Testing
& Emerging Technologies, Oct. 26, 2016.)

The company, however, continues to put on a brave face with releases in January noting a reengineering of its operations and streamlining of staff with a "core team of 220 professionals" to pursue its business plan including commercialization of the miniLab. It explained this "restructuring follows a period of significant change at the company that has included the building out of its executive team with substantial additional regulatory, compliance and operational expertise." As late as Jan. 17, 2017, the company also announced formation of an eight-member Technology Advisory Board that will "work alongside Theranos' leadership and internal research and development teams in various areas, including advising the company on peer-reviewed publication submissions and on presentations at scientific meetings."

Takeaway: The legal battles facing Theranos continue to grow as the company streamlines and focuses on technology development.