Not-So-Safe Harbor: Court Finds Relator Need Not Plead Facts to Negate Anti-Kickback Statute Safe Harbor

A recent decision may make it harder for defendants to obtain dismissal of an FCA case on the grounds that a relator has failed to plead facts that would refute the elements of an affirmative defense. 

On February 23, 2022, in United States ex rel. Chao v. Medtronic, PLC, No. 2:17-cv-01903, 2022 WL 541604 (C.D. Cal., Feb. 23, 2022), the court denied Medtronic’s motion to dismiss, finding that a relator is not required to plead facts that would negate one or more of the elements of an affirmative defense.

The case—originally filed in 2017—has a long and winding history. The relator’s complaint, which has been amended numerous times, included a number of kickback allegations. Chief among them was that Medtronic paid physician “proctors” to teach other physicians how to use one of its devices, and that those payments were in fact kickbacks intended to incentivize physicians to order more of its device. Id. at *1.

After the government declined to intervene in 2020, Medtronic moved to dismiss the complaint in January 2021. Medtronic argued, in part, that the relator had not “plead[ed] with particularity a cognizable AKS violation falling outside of safe harbor protection.” Medtronic Motion to Dismiss Relator’s First Amended Complaint [Dkt. 67], at p. 7, filed Jan. 13, 2021. Specifically, Medtronic argued that the relator had offered only a “conclusory contention that the personal services safe harbor does not apply, because the payments were not reasonably necessary or exceeded fair market value.” Id. at p. 10.

In April 2021, the court granted the motion in part and denied it in part. Of particular relevance here, Judge Mark Scarsi noted in a footnote that “[t]here is a dispute between the parties as to whether the safe harbor exceptions may properly be considered under a Motion to Dismiss.” 2021 WL 4816647, fn 2 (C.D. Cal., Apr. 12, 2021). Citing United States v. Corinthian Colleges, 655 F.3d 984, 993-94 (9th Cir. 2011), the court determined that it “must properly consider whether the relator’s claims sufficiently allege that the safe harbor provisions do not apply in establishing their FCA claim.” Id. at fn 2.

In its April 2021 decision, the court found that although the relator had alleged that proctors were overpaid, he had not alleged what fair market value (FMV) is for the services provided and therefore found that “Relator’s many allegations of overpayment are conclusory and, without an alleged point of fair market value for reference, the Court cannot find those allegations supported by fact.” Id. at *7. The court concluded that “Relator only makes conclusory allegations of overpayment that cannot be accepted as true. As a result, Relator has not adequately pleaded facts showing Defendants’ acts fall outside the AKS safe harbor.” Id. at *8.

The relator then amended his complaint twice, and Medtronic moved to dismiss a second time. Picking up on the court’s holding in its prior opinion, Medtronic argued that “[w]here a relator’s claims are predicated on AKS violations, the relator must plead with particularity both the elements of an FCA violation and a cognizable AKS violation falling outside of safe harbor protection.” Medtronic Motion to Dismiss Relator’s Third Amended Complaint [Dkt. 106], at p. 7, filed Aug. 2, 2021 (emphasis in original). Medtronic then argued that the relator’s amended complaint “still fails to substantiate his conclusory allegations that the payments fell outside of the AKS safe harbor.” Id. at p. 18.

In response to Medtronic’s second motion, the United States government filed a Statement of Interest, arguing that the relator had alleged all of the required elements of an AKS violation, and that, as an affirmative defense, any safe harbors to the AKS are the defendant’s burden to prove at trial. United States’ Statement of Interest [Dkt. 108], at p. 5, filed Aug. 31, 2021. The government argued that “plaintiffs are not required to ‘plead around affirmative defenses,’” unless “there is ‘some obvious bar to securing relief on the face of the complaint.’” Id. (internal citations omitted). “‘In other words, dismissal based on an affirmative defense is permitted when the complaint establishes the defense.’” Id. at p. 6 (internal citations omitted). Distinguishing Corinthian Colleges, the government argued that “[h]ere, the face of relator’s complaint does not establish the defense of the personal services safe harbor. In fact, the complaint alleges multiple reasons why the safe harbor does not apply.” Id.

The court denied Medtronic’s second motion to dismiss. Of note, the case had since been transferred to a different judge—Judge Otis Wright, II—who may have signaled his disagreement with the prior decision, noting that “[t]his Court finds it appropriate to conduct an analysis of [Relator’s Third Amended Complaint] from the ground up, unbound by any prior legal determinations made in connection with a now-inoperative pleading.” 2022 WL 541604, at *4.

The court found that the relator had pleaded each of the elements of an AKS violation sufficiently and that, therefore, “[t]he Court must stop there; [Relator] alleges the kickback scheme in sufficient detail, and no more is required.” Id. at *5. As to Medtronic’s arguments regarding the AKS personal services safe harbor, the court noted that “Medtronic argues that the Court must dismiss the [Third Amended Complaint] because [Relator] fails to address the potential applicability of this safe harbor, including principally by failing to allege that the payments Medtronic made to its proctors exceeded the fair market value of the proctors’ services.” Id. at *6. The court noted that “Medtronic argues that [Relator] fails to ‘negate the safe harbor’ with his allegations, suggesting that it is [Relator’s] burden to plead specific facts negating the safe harbor.” Id.

The court found that “regardless of whether this safe harbor is an affirmative defense, [Relator] must allege facts that make it plausible that the safe harbor will not defeat his claim…. And he must allege these facts with particularity…. This is not the same as what Medtronic wants the Court to require [Relator] to do: set forth the negation of one or more of the elements of the affirmative defense with particularity.” Id.

Ultimately, the court held that “[h]ere, it is plausible based on [Relator’s] allegations that the payments and benefits Medtronic provided its proctors exceeded the fair market value of the services the proctors provided. Thus, it is plausible that the personal services safe harbor does not apply. The Court need go no further; the affirmative defense does not, at this stage, defeat the claim.” ¹ Id.

Judge Wright clearly seems to have applied a more stringent standard than that followed by Judge Scarsi. What is unclear, however, is whether the decisions reflect a deeper disagreement about the correct interpretation of Corinthian Colleges, a Ninth Circuit decision. After Judge Scarsi cited it in support of his decision, the government attempted to distinguish the case in its Statement of Interest. And although Judge Wright’s decision generally echoed the arguments set forth by the government, he did not cite the decision at all in his opinion, which may leave open a question as to how the decision should be interpreted in future cases.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.