First of Its Kind? Private Equity Firm Riordan, Lewis & Hayden Inc. and its Portfolio Company Patient Care America Settle False Claims Act Lawsuit

By: Alexander M. Owens

On September 18, 2019, the Department of Justice announced a $21.35 million settlement with compounding pharmacy Patient Care America, PCA executives Patrick Smith and Matthew Smith, and, most notably, the pharmacy’s private equity backer, Riordan, Lewis & Haden Inc.  The private equity firm and the pharmacy will fund substantially all of the settlement ($21.036 million).  The case has been closely watched for the Department of Justice’s targeting of a private equity firm.  The case appears to be the first time the federal government has intervened against a private equity firm in an FCA matter.  The government’s efforts have proven fruitful.

The case stems from a whistleblower complaint filed in 2015 in the Middle District of Florida.  United States ex rel. Medrano, et al. v. Patient Care America, et al., 15-62617 (S.D. FL.)  In early 2018, the United States, joining in the action, filed a False Claims Act Complaint in Intervention against the defendants.  The government alleged that the pharmacy had paid kickbacks to independent marketers to procure prescriptions for compound pain medications, a violation of the Anti-Kickback Statute and False Claims Act.  The government sought to hold the private equity firm liable as well, alleging that the investment firm knew and approved of the illegal referral arrangement.

While the settlement with a private equity defendant appears to be a first of its kind, it is unlikely to be the last.  See, e.g., Commonwealth ex rel. Martino-Fleming v. South Bay Mental Health Center, Inc., CV 15-13065-PBS, (D. Mass.) (state of Massachusetts intervened in FCA complaint against healthcare company and its private equity firm).  In recent years, private equity firms have been investing more and more heavily in the healthcare space, particularly in retail healthcare companies, which have perhaps the highest level of exposure to FCA liability.

As the allegations in Patient Care America show, private equity firms often take a very hands management role in their portfolio companies. That level of control brings with it the potential for extensive FCA liability.  FCA liability is not limited to the individual or entity that files a false claim.  In fact, the law is clear that individuals owning or managing companies engaged in fraud may be held liable under the FCA.   See, e.g., Martino-Fleming, CV 15-13065-PBS, 2018 WL 4539684, at *5 (D. Mass. Sept. 21, 2018) (refusing to dismiss claims against private equity firm that owned healthcare company allegedly involved in fraud); U.S. ex rel. Schagrin v. LDR Industries, LLC, 14-cv-09125, 2018 WL 6064699, at *6 (N.D. Ill. Nov. 20, 2018) (individuals that owned and managed company engaged in fraud could be held liable for failing to stop fraudulent conduct).  In announcing the settlement, United States Attorney Ariana Fajardo Orshan referred to the government’s “commitment to hold all responsible parties to account for the submission of claims to federal health care programs that are tainted by unlawful kickback arrangements.”  The comment echoes the DOJ’s Yates memo which reminded individuals that liability does not end at the corporate boundary.  Patient Care America may serve as a corollary to the Yates memo, putting private equity firms on notice that their liability may not be limited to just their financial exposure in the portfolio company.  A private equity firm may itself face direct liability.

The settlement in Patient Care America is likely to embolden relators and prosecutors in future cases where private equity firms have benefitted from their investment in, and management of, enterprises alleged to have engaged in fraud.

 

Reprinted with permission from the September 27, 2019 issue of The Legal Intellgiencer. © 2019 ALM Media Properties, LLC.

Further duplication without permission is prohibited. All rights reserved.

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