California Court: Fair Market Value Payments Cannot Avoid Bribery Liability | McGuireWoods LLP

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In February 2022, the U.S. District Court for the Central District of California denied a defendant’s motion to dismiss a who tam action alleging that the defendant violated the federal anti-kickback law (AKS). In its decision, the court noted that “even certain payments at fair market value will be considered illegal bribes.”

In the complaint, the plaintiff-relator alleged that the defendant, a manufacturer of medical devices, illegally bribed doctors to induce them to order the defendant’s medical device. The parent alleged that the bribes took four forms:

  1. The device company maintained a surveillance program whereby it overpaid physicians for professional surveillance services.
  2. The device company acquired companies in which doctors using a high volume of devices held stakes at an inflated rate.
  3. The device company maintained two data collection logs used to conceal bribe payments to doctors.
  4. The device company distributed illegal kickbacks to doctors and hospitals disguised as scholarships, grants and research funds based in part on the volume of use of the devices by doctors or hospitals.

In its motion to dismiss, the device company argued, in part, that the plaintiff-relator had not alleged that the payments the device company made to physicians under the monitoring program exceeded the fair market value (FMV) and, therefore, that the plaintiff-relator had not addressed the applicability of the personal services safe harbor under the AKS. The US Department of Justice (DOJ) filed a statement of interest in the case, urging the court to deny the motion to dismiss. The DOJ noted that the lack of FMV is not an element of AKS violations, arguing that payments intended to induce referrals violate the AKS even if those payments are FMV for services rendered. The DOJ felt that “[t]To the extent that FMV has any relevance, it is one of several elements that defendants bear the burden of proving if they seek to rely on certain safe harbor defences.

In denying the device company’s motion to dismiss, the court agreed with the DOJ, finding that payments to FMV for services rendered may violate the AKS when those payments were intended to induce referrals. The court noted that such an intention “to take[s] payments outside the safe harbor, whether or not such payments were made at fair market value.

In assessing AKS compliance, this decision serves as a reminder that a fair market value assessment alone cannot insulate entities from AKS liability.

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