United States of America v. Reliance Medical Systems, LLC et al, No. 2:2014cv06979 - Document 19 (C.D. Cal. 2014)

Court Description: ORDER DENYING DEFENDANTS MOTION TO DISMISS CASE 12 by Judge Dean D. Pregerson . (lc). Modified on 11/5/2014 (lc).
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United States of America v. Reliance Medical Systems, LLC et al Doc. 19 1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 UNITED STATES OF AMERICA, 12 Plaintiff, 13 14 15 16 17 18 v. RELIANCE MEDICAL SYSTEMS,LLC; APEX MEDICAL TECHNOLOGIES, LLC; KRONOS SPINAL TECHNOLOGIES, LLC; BRET BERRY; JOHN HOFFMAN; ADAM PIKE; and ARIA O. SABIT, M.D. , Defendants. ___________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 14-06979 DDP (PJWx) ORDER DENYING DEFENDANTS’ MOTION TO DISMISS CASE [DKT. NO. 12] 19 20 Presently before the Court is Defendants’ motion to dismiss 21 the action (the “Motion”). (Docket No. 12.) For the reasons stated 22 in this order, the Motion is DENIED. 23 I. Background 24 Plaintiff United States of America (“Plaintiff”) brings this 25 action against Reliance Medical Systems, LLC (“Reliance”); Apex 26 Medical Technologies, LLC (“Apex”); Kronos Spinal Technologies, LLC 27 (“Kronos”); Bret Barry (“Barry”); John Hoffman (“Hoffman”); Adam 28 Pike (“Pike”); and Aria O. Sabit, M.D. (“Dr. Sabit”) (collectively, Dockets.Justia.com 1 “Defendants”) to recover damages and civil penalties under the 2 False Claims Act (“FCA”) and related common law claims. (See 3 Complaint, Docket No. 1, ¶ 1.) Plaintiff alleges that Defendants 4 were part of a scheme to knowingly submit fraudulent claims to 5 Medicare. (Id.) 6 Reliance is a company that sells spinal implants, which are 7 medical devices surgically inserted into patients by doctors during 8 spinal fusion surgeries to help stabilize the spine.1 (Id. ¶¶ 2, 9 44.) Reliance operated and controlled multiple distributor 10 companies for their spinal implant products, including Apex and 11 Kronos, that had financial relationships with physician-investors. 12 (Id. ¶¶ 9-13.) 13 Defendants Berry and Pike are founders and owners of Reliance, 14 and each is an investor in approximately twenty companies that 15 distribute Reliance spinal implants, including Apex and Kronos. 16 (Id. ¶¶ 14, 16.) Defendant Hoffman is a distributor for Reliance 17 and an investor in approximately five companies that distribute 18 Reliance spinal implants, including Apex and Kronos. (Id. ¶ 15.) 19 Defendant Dr. Sabit was an Apex physician-investor from 2010 to 20 2012. (Id. ¶ 17.) 21 Plaintiff alleges, essentially, that Berry and Pike offered 22 investment opportunities in Kronos and Apex to physicians who 23 agreed to use Reliance implants in their spinal surgeries. (Id. ¶ 24 98.) Plaintiff alleges that this arrangement was improper and 25 violated the Anti-Kickback Statute (“AKS”). (Id. ¶ 303.) Plaintiff 26 27 28 1 Paragraphs 49-58 of the Complaint describe certain types of spinal implant devices and the amount that Reliance charged for those devices. 2 1 alleges that physicians who were asked to invest often actually 2 invested very little or no capital and were subject to a “trial 3 period,” during which time Apex or Kronos would determine whether 4 the physician was using a high volume of Reliance implants. (Id. ¶¶ 5 138-155.) If the physician was using a sufficient volume of 6 Reliance implants, the physician was asked to become an “investor” 7 and would be paid a substantial amount in comparison to that 8 physician’s smaller capital contribution. (Id. ¶¶ 108-110, 115-119, 9 223-242.) Plaintiff alleges that this “investment” scheme was 10 really a scheme to pay the physicians for their use of Reliance 11 devices in their surgeries. (Id. ¶¶ 112, 120.) In some instances, 12 physician-investors were pushed out, or their shares “bought out,” 13 by Apex or Kronos (or by another physician-investor), allegedly 14 when the original physician was not using a high enough volume of 15 Reliance products. (Id. ¶¶ 156-169.) Plaintiff includes substantial 16 specific factual allegations that illustrate this arrangement and 17 that support its allegation that Berry, Pike, and Hoffman expected 18 physician-investors to meet this “requirement” that they use a high 19 volume of Reliance products. 20 Plaintiff alleges that Defendants violated the False Claims 21 Act through this scheme, by which they knew that the physician- 22 investors and hospitals would submit false or fraudulent Medicare 23 claims for surgeries performed by the physician-investors. 24 Plaintiff alleges that the Medicare claims were false or fraudulent 25 because the claims were tainted by the kickbacks that the 26 physician-investors received in exchange for their use of Reliance 27 implants. Further, Plaintiff alleges that some of the surgeries 28 performed were not medically necessary or were more extensive than 3 1 necessary as result of this scheme, as physician-investors 2 allegedly performed such surgeries to increase their usage of 3 Reliance products (and thereby increase the amount of kickbacks 4 received). Plaintiff alleges that some of the Medicare claims were 5 false or fraudulent for this additional reason. Plaintiff also 6 alleges a conspiracy claim under the False Claims Act, unjust 7 enrichment claims against Berry, Hoffman, Pike, and Dr. Sabit, and 8 a payment by mistake claim against Dr. Sabit. Defendants, with the 9 exception of Dr. Sabit,2 now move to dismiss all claims. (Docket 10 No. 12.) 11 II. Legal Standard 12 A complaint will survive a motion to dismiss when it contains 13 “sufficient factual matter, accepted as true, to state a claim to 14 relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 15 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 16 570 (2007)). When considering a Rule 12(b)(6) motion, a court must 17 “accept as true all allegations of material fact and must construe 18 those facts in the light most favorable to the plaintiff.” Resnick 19 v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000). Although a complaint 20 need not include “detailed factual allegations,” it must offer 21 “more than an unadorned, the-defendant-unlawfully-harmed-me 22 accusation.” Iqbal, 556 U.S. at 678. Conclusory allegations or 23 allegations that are no more than a statement of a legal conclusion 24 “are not entitled to the assumption of truth.” Id. at 679. In other 25 words, a pleading that merely offers “labels and conclusions,” a 26 “formulaic recitation of the elements,” or “naked assertions” will 27 2 28 Dr. Sabit has not appeared in the action and has not joined the Motion. 4 1 not be sufficient to state a claim upon which relief can be 2 granted. Id. at 678 (citations and internal quotation marks 3 omitted). 4 “When there are well-pleaded factual allegations, a court 5 should assume their veracity and then determine whether they 6 plausibly give rise to an entitlement of relief.” Id. at 679. 7 Plaintiffs must allege “plausible grounds to infer” that their 8 claims rise “above the speculative level.” Twombly, 550 U.S. at 9 555. “Determining whether a complaint states a plausible claim for 10 relief” is a “context-specific task that requires the reviewing 11 court to draw on its judicial experience and common sense.” Iqbal, 12 556 U.S. at 679. 13 III. Discussion 14 There appear to be two reasons that Plaintiff contends that 15 the claims submitted for Medicare reimbursement as part of the 16 alleged scheme were false: (1) all of the claims involved unlawful 17 kickbacks, and (2) some of the claims were for procedures or 18 devices that were not medically necessary or were more extensive 19 than necessary. 20 A. Kickbacks 21 As to the unlawful kickbacks, Defendants do not directly 22 challenge the sufficiency of these allegations, though they 23 certainly disagree as to what the underlying facts will show after 24 discovery. However, one theme of Defendants’ papers is that the 25 overall allegations in Plaintiff’s complaint are implausible. As a 26 result, a brief discussion of the law surrounding whether the 27 claims at issue represent “false” claims under the FCA as a result 28 of a violation of the AKS is warranted. 5 1 The Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, prohibits 2 “knowingly and willfully solicit[ing] or receiv[ing] any 3 remuneration (including any kickback, bribe, or rebate) directly or 4 indirectly, ... in cash or in kind” in exchange for referring, or 5 inducing another to refer, an individual to particular goods or 6 services “for which payment may be made in whole or in part under a 7 Federal health care program.” Under the False Claims Act, “any 8 person who ... knowingly presents, or causes to be presented, a 9 false or fraudulent claim for payment ... is liable to the United 10 States Government.” 31 U.S.C. § 3729(a)(1). Essentially, 11 Plaintiff’s claim in this action is that the scheme at issue 12 constituted a violation of the AKS; as a result, the claims for 13 Medicare reimbursement for the medical procedures and equipment 14 resulting from the kickback scheme were “false” claims because the 15 submission of such claims for reimbursement implies compliance with 16 applicable laws, where such compliance is required for payment. See 17 Hanlester Network v. Shalala, 51 F.3d 1390, 1399 (9th Cir. 1995); 18 see also U.S. ex rel. Wilkins v. United Health Group, Inc., 659 19 F.3d 295, 313-14 (3d Cir. 2011); U.S. ex rel. Hutcheson v. 20 Blackstone Medical, Inc., 647 F.3d 377, 389 (1st Cir. 2011). 21 Under Hanlester, the Ninth Circuit has found a claim of this 22 nature to be viable where it was implied to investors that 23 “eligibility to purchase shares depended on an agreement to refer 24 program-related business;” where prospective investors were told 25 that “the number of shares they would be permitted to purchase ... 26 would depend on the volume of business they referred;” and where 27 “partners who did not refer business would be pressured to leave 28 the partnerships.” Hanlester, 51 F.3d at 1399. However, mere 6 1 “encourage[ment]” of physician-investors to refer business, along 2 with telling the investors that the “success of the limited 3 partnerships depended on referrals from the limited partners,” is 4 not enough to establish a FCA claim under these circumstances. Id. 5 A high volume of referrals, or a large return on investment, 6 similarly are not enough. Id. Further, in order to prove a 7 violation of the AKS, the conduct must have been knowing and 8 willful. Id. 9 Plaintiff’s allegations in this case are sufficient to support 10 a plausible inference that the scheme at issue here crosses the 11 line articulated in Hanlester. Plaintiff does not merely allege 12 that Defendants “encouraged” the physician-investors to use 13 Reliance products in their surgeries, but also includes facts that 14 strongly suggest that Apex and Kronos would not even consider 15 offering a physician an interest in the company until the company 16 could verify that the physician performed substantial surgeries 17 using Reliance products. Further, Plaintiff alleges that some of 18 the physicians invested almost no capital. There are also facts 19 suggesting that physician-investors who continued to use a high 20 volume of Reliance products began receiving higher payments from 21 Apex and Kronos, while physician-investors who performed fewer 22 surgeries or did not otherwise meet the “expectations” of Reliance 23 were bought out of their investment. It is also plausible to infer 24 from the alleged facts that Berry, Pike, and Hoffman knew that, as 25 a result of their inducements of the physician-investors, false 26 claims would be submitted; indeed, the complaint includes facts 27 suggesting that Defendants ignored legal advice that specifically 28 informed them that such a scheme would be a problem under existing 7 1 law. (Complaint ¶¶ 179-202.) Therefore, as a general matter, 2 Plaintiff has alleged sufficient facts to survive the Motion. 3 Defendants bring up two specific arguments regarding the 4 alleged violations of the AKS. First, Defendants argue that none of 5 the claims submitted prior to March 23, 2010 may be deemed to be 6 false under the Ninth Circuit law prior to that date. Second, 7 Defendants argue that all claims submitted on or after that date 8 may only be found to be false as to the hospital bills, which 9 include payments for medical devices, but not on the physician 10 11 bills, which presumably bill only for physician labor or services. On March 23, 2010, Congress amended the AKS to include the 12 following: “in addition to the penalties provided under [the AKS], 13 a claim that includes items or services resulting from a violation 14 of this section constitutes a false or fraudulent claim for the 15 purposes of [the FCA].” 42 U.S.C. § 1320a-7b(g). Defendants argue 16 that until this amendment was made, if a hospital submitted claims 17 that it had no reason to believe were false, those claims cannot be 18 considered to be “false claims” under the FCA. Plaintiff contends 19 that the amendment was merely a clarification of the existing law 20 such that the amendment has retroactive effect. The question, then, 21 is whether, prior to the March 23, 2010 amendment, a hospital 22 submitting a Medicare claim that resulted from a violation of the 23 AKS would have to know about the kickbacks in order for the claim 24 to constitute a violation of the FCA. 25 Prior to this amendment, other circuits were already following 26 the approach announced by the amendment. The Ninth Circuit joined 27 these other circuits in recognizing the viability of an “implied 28 false certification” theory, whereby the submission of a claim 8 1 impliedly certifies that the claim complies with all express 2 requirements for payment under the applicable federal law. See 3 Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 996-97 (9th Cir. 4 2010). In Ebeid, the Ninth Circuit cited the standard articulated 5 by the Second Circuit in Mikes v. Straus, whereby “a claim under 6 the [FCA] is legally false only where a party certifies compliance 7 with a statute or regulation as a condition to governmental 8 payment.” 274 F.3d 687, 697 (2d Cir. 2001). Further, Mikes holds 9 that “[l]iability under the [FCA] may properly be found therefore 10 when a defendant submits a claim for reimbursement while knowing 11 ... that payment expressly is precluded because of some 12 noncompliance by the defendant.” Id. However, it does not appear 13 that this logic is inconsistent with allowing Plaintiff’s claims to 14 proceed here. Though the hospital did not have knowledge that the 15 claims were false when it submitted them, Plaintiff’s theory is 16 that Defendants caused the hospital to submit false claims that the 17 Defendants knew were false because of violations of the AKS. 18 Defendants further argue that even after March 23, 2010, the 19 only bills that may be considered violations of the FCA are 20 hospital bills, which include billing for surgical devices, but not 21 the physicians’ bills for services. This argument is unavailing. 22 The use of a particular device, and the need for reimbursement for 23 the cost of the device itself, does not occur in a vacuum. A 24 physician must perform a surgery during which the device is 25 implanted in a patient. The AKS plainly states that “a claim that 26 includes items or services resulting from a violation ... 27 constitutes a false or fraudulent claim.” 42 U.S.C. § 1320a-7b(g) 28 (emphasis added). This makes sense; without a qualified physician 9 1 willing and able to perform the surgery to implant a Reliance 2 device, there is no need for the device. Thus, the physician’s 3 services are themselves an integral part of the alleged scheme at 4 issue here, and claims for reimbursement for physician services 5 stemming from the scheme constitute false claims to the same extent 6 that claims for reimbursement for the implants do. Therefore, the 7 Court DENIES the Motion as to Plaintiff’s claims based on 8 violations of the AKS. 9 10 B. Medically Unnecessary Procedures Defendants also argue that Plaintiff has not sufficiently 11 alleged FCA claims based on the performance of medically 12 unnecessary (or more extensive than necessary) surgeries using 13 Reliance devices. As Plaintiff points out in its opposition, this 14 is an alternative basis for establishing the fraudulent nature of a 15 subset of the claims at issue in this case. Plaintiff alleges that 16 all claims submitted as part of the alleged scheme were false due 17 to the kickbacks, but that some of the claims are false for the 18 additional reason that the procedures for which reimbursement was 19 sought were not medically necessary. 20 Plaintiff includes sufficient details regarding five specific 21 procedures to plausibly establish that some of the medical 22 procedures performed as part of the alleged scheme were medically 23 unnecessary. (See Complaint, ¶¶ 251-301.) As to Dr. Sabit, who 24 allegedly performed three of the five “example” procedures, it is 25 clear that Plaintiff has stated a claim, since it would be highly 26 plausible that Dr. Sabit, as a medical professional, would have 27 known that the procedures were unnecessary (or more extensive than 28 necessary) and therefore known that false claims would be submitted 10 1 regarding those surgeries. Whether the surgeries were in fact 2 medically unnecessary is not an issue that may be resolved at this 3 time. 4 As to the moving Defendants (those other than Dr. Sabit), the 5 requisite knowledge is less clear, but the Court finds that the 6 pleadings plausibly establish that Berry, Pike, and Hoffman may 7 have known that their scheme would induce physicians to perform 8 more surgeries than necessary in order to satisfy the quotas 9 expected of them. (See Complaint ¶ 173.) Generally, a defendant may 10 be held liable for causing another to submit a false claim where 11 the submission of such claim was “reasonably foreseeable.” See U.S. 12 ex rel. Cantekin v. Univ. of Pittsburgh, 192 F.3d 402, 415-16 (3d 13 Cir. 1999). If Plaintiff is successful in proving that the 14 physician-investors received unlawful kickbacks for their use of 15 Reliance devices, it is plausible to infer that Defendants knew 16 that the physicians would do whatever it took to continue receiving 17 such large kickbacks, including performing unnecessary or more 18 extensive than necessary surgeries. Therefore, the Court DENIES the 19 Motion as to this alternative theory of liability. 20 IV. Conclusion 21 For the foregoing reasons, the Motion is DENIED. 22 23 IT IS SO ORDERED. 24 25 26 Dated: November 5, 2014 DEAN D. PREGERSON United States District Judge 27 28 11