Why it matters: Medical device manufacturers, beware! On April 2, 2015, the DOJ announced that Memphis-based medical device manufacturer/supplier Medtronic had agreed to pay the government $4.1 million in settlement of a suit that had been brought under the qui tam provisions of the FCA alleging that Medtronic had sold medical devices to the government in violation of the “country of origin” restrictions of the Trade Agreements Act of 1979 (TAA). This constitutes only the second time that the FCA qui tam provisions have been so invoked with respect to the manufacture of medical devices and the “country of origin” question. The first time was in connection with an $8.3 million settlement in September 2014 involving the Memphis operations of U.K. medical device manufacturer/supplier Smith & Nephew, in which medical device “country of origin” violations under the TAA were also alleged. TheMedtronic and Smith & Nephew qui tam cases have similar fact patterns, right down to the same whistleblower who had never even worked at Medtronic.

Detailed discussion: On April 2, 2015, the DOJ announced that Memphis-based Medtronic and its affiliated companies (Medtronic) had agreed to pay $4.41 million to resolve allegations that they violated the FCA by making false statements to the U.S. Department of Veterans Affairs (VA) and U.S. Department of Defense (DoD) regarding the country of origin of certain Medtronic medical device products sold to those agencies. The government alleged that, from 2007 to 2014, Medtronic sold to the VA and DoD medical devices it certified would be manufactured in the U.S. or other approved countries designated in the TAA, when in fact the products were manufactured in the TAA “prohibited” countries of China and Malaysia.

In the press release, the DOJ stated that “[t]his settlement illustrates the government’s emphasis on combating health care fraud and marks another achievement for the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative” using the “powerful tool” of the FCA. Indicating that the government has turned its focus onto the medical device manufacturing industry, Acting Assistant Attorney General Benjamin C. Mizer of the DOJ’s Civil Division said that “[t]oday’s settlement demonstrates our commitment to ensure that our service members and our veterans receive medical products that are manufactured in the United States and other countries that trade fairly with us . . . . The Justice Department will take action to hold medical device companies to the terms of their government contracts.”

The government pointed out that the Medtronic lawsuit was brought by three individuals under the qui tam provisions of the FCA, which permit private citizens, or “relators,” to file lawsuits on behalf of the U.S. government and receive a portion of the proceeds of any recovery. In this case, the DOJ announced that the three “whistleblowers” would share an award of almost $750,000.

The qui tam complaint filed on October 5, 2012 identifies two of the three whistleblowers as “Original Source” Memphis-based Medtronic employees who worked in shipping/receiving and human resources, respectively, during the relevant time period.

The complaint identifies the third whistleblower as Samuel Adam Cox, III, a Memphis resident who “worked as an information-technology consultant and executive in the medical device industry in 2007 and 2008.” The complaint refers to the then ongoing Smith & Nephew case, stating that Cox “began investigating country-of-origin violations by medical-surgical-supply companies with operations in or near Memphis after blowing the whistle on such violations by his former employer, Smith & Nephew Inc.” While it does not appear that Cox ever worked at Medtronic, the complaint establishes Cox as an “Original Source” for purposes of the qui tam provisions because he “conducted an independent investigation into Medtronic’s wrongdoing and acquired documents and other evidence supporting the allegations in this Complaint.” Consequently, Cox “has direct and independent knowledge of the false claims and certifications that Medtronic . . . submitted to the Government.”

The case referred to in the Medtronic complaint—where Cox “blew the whistle” on former employer Smith & Nephew—is reportedly the first time the FCA qui tam provisions were used in a medical device “country of origin” context. As noted in the factual allegations set forth in the Order Denying Defendant Smith & Nephew, Inc.’s Motion to Dismiss, Cox filed a qui tam motion against Smith & Nephew on December 1, 2008 alleging that the company violated the FCA by making false statements to the VA regarding the true country of origin of certain Smith & Nephew medical devices sold under two contracts with that agency. Cox alleged that, while working at the Memphis facilities of Smith & Nephew as the company’s Information Technology Global Director of Enterprise Resource Planning from mid-December 2007 through his termination in September 2008, he became aware that the medical devices sold to the VA under the contracts were in fact made in the “prohibited” country of Malaysia in contravention of the TAA. Cox alleged that he attempted to bring the violations to the attention of his superiors but was dismissed. In September 2008 he reported what he knew to Smith & Nephew’s whistleblower hotline, and was terminated soon thereafter.

After a protracted litigation with respect to which the government declined to intervene (although Cox’s attorneys thanked the DOJ for being “instrumental in crafting the settlement”), on September 4, 2014 a settlement was announced pursuant to which Smith & Nephew agreed to pay the government a penalty of $8.3 million. As the whistleblower, Cox received the hefty sum of $2.3 million.

In a press release issued on September 4, 2014 announcing the settlement, Cox’s attorneys Sanford Heisler LLP (who represented Cox in both the Medtronic and Smith & Nephew settlements) gave a strong indication that we will be seeing more settlements like this “inaugural” one where FCA qui tam provisions are used in medical device “country of origin” actions—a statement that is borne out by the April 2 Medtronicsettlement and seems to imply that there may be others in the works. One of Cox’s attorneys stated that the case “reaffirms the vital role that whistleblowers play in uncovering fraud against the government.” Another said that “Mr. Cox should be commended for having the courage and integrity to expose this wrongdoing and the tenacity to fight this battle on behalf of the United States.” And a third summed it up with an emphatic warning to the medical device manufacturing industry: “Today’s settlement sends a clear message to those medical device companies that routinely violate the Trade Agreements Act by misrepresenting the ‘Country of Origin’ of goods sold under contract to U.S. Government agencies . . . . This inaugural settlement will create a ripple effect for other medical device companies that choose to turn a blind eye to their obligations under the Trade Agreements Act. The Government has turned its attention to these flagrant violations and is stepping up enforcement.”

Medical device manufacturers, take heed: the gauntlet has been dropped.

See here to read the DOJ press release dated 4/2/15 regarding theMedtronic settlement.

See here to read the complaint in United States of America ex rel. Samuel Adam Cox, III, Meayna Phanthavong, and Sonia Adams v. Medtronic, Inc., Medtronic USA, Inc., and Medtronic Sofamor Danek USA, Inc., Civil No. 12-sc-2562 (PAM/JSM).

See here to read the press release dated 9/4/14 issued by Cox’s attorneys Sanford Heisler regarding the Smith & Nephew settlement.

See here to read the Order Denying Defendant Smith & Nephew, Inc.’s Motion to Dismiss in United States ex rel. Cox v. Smith & Nephew Inc., 749 F. Supp. 2d 773 (W.D. Tenn. 2010).

For more on this matter, refer to the press release dated 4/2/15 issued by Cox’s attorneys Sanford Heisler regarding the Medtronic settlement.