In a new development in False Claims Act (“FCA”) litigation, the United States Department of Justice (“DOJ”) has filed a complaint-in-intervention naming, among other defendants, California-based private equity firm, Riordan, Lewis & Haden, Inc. (“RLH”). The lawsuit, United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America, et. al., No. 15-CV-62617 (S.D. Fla.), was originally brought by two former employees of Diabetic Care Rx, LLC d/b/a Patient Care America (“PCA”) acting as relators, but as permitted under the FCA, the United States has intervened in the matter. While it has long been understood that private equity firms and institutional investors could be held liable under a variety of federal statutes for violations committed by their portfolio investments, DOJ has not traditionally targeted private equity owners or funds as defendants in FCA actions, and the addition of RLH in this matter potentially represents a new focus area for DOJ.

RLH manages and, through one of its funds, holds a stake in PCA, which together with RLH and the named executives are alleged to have engaged in a scheme to give renumeration to marketers and patients to induce prescriptions for compounded drugs that would be reimbursed by TRICARE, the federal healthcare program for active duty military personnel, retirees, and their families. According to DOJ’s complaint, while compound prescriptions are intended to be formulated specifically for individual patients’ needs, the Defendants manipulated the formulations to ensure the highest possible reimbursement from TRICARE. Further, through the use of independent consultants referred to as “marketers,” the pharmacy allegedly induced telemedicine doctors to prescribe the medicine for patients they had never examined and allegedly paid patients’ copayments to induce them to accept the drugs. Through these actions, DOJ alleges that PCA and RLH conspired to violate the False Claims Act (“FCA”) and the Anti-Kickback Statute (“AKS”).

DOJ took pains to articulate in its complaint the basis for liability for RLH as a private equity owner of the pharmacy. The complaint focuses on the structural control RLH had over PCA, in particular noting that two RLH partners were officers of the pharmacy, RLH controlled the pharmacy’s board of directors, and required that the pharmacy’s CEO and RLH conduct “joint decision making” for all key decisions affecting the company. The complaint also laid out how RLH knew of and directed the pharmacy’s actions, detailing how in the first instance, two RLH officers directed the pharmacy to conduct research into Medicare reimbursement for the compounded drugs, and then recommended an individual for the position of CEO despite being warned that the individual would require “more careful management,” and tied the CEO’s compensation to profits. The complaint also provides that RLH periodically funded commission payments to the marketers involved in the scheme, a central part of the alleged scheme violating the FCA. Finally, DOJ’s complaint also alleges that “RLH knew when it acquired PCA in July 2012, that health care providers that bill federal health care programs are subject to laws and regulations designed to prevent fraud, including the AKS,” but despite this knowledge, failed to implement compliance oversight of PCA.

While the District Court granted Defendants’ motion to dismiss the DOJ’s complaint on the grounds that DOJ insufficiently pled that the claims were falsely certified, DOJ was granted leave to amend its complaint. DOJ filed its amended complaint on March 18, and in turn, the Defendants again filed motions to dismiss. The deadline for DOJ to file its opposition memorandum to the renewed motions to dismiss is April 22. Even if DOJ is unable to sustain its complaint in this matter, DOJ’s actions potentially signal increased scrutiny and related enforcement against similar investors in the future.

Given DOJ’s focus on private equity investors in FCA matters, it is now more important than ever that private equity firms and institutional investors conduct thorough pre-acquisition diligence of any potential investments holding contracts with or receiving grants, benefits, or reimbursements from federal or state government entities to ensure compliance with relevant laws, including federal and state FCA regulations. For private equity firms and investors holding majority or controlling interests in such entities, it is critical that the firms and investors understand their obligations under federal and state law, and that Board members appointed by such firms and investment companies regularly ask for information about the entities’ compliance programs designed to ensure continued compliance with relevant federal and state laws.