Aug 22022

Fourth Circuit Underscores the Risk of Commission-Based Compensation Agreements with Independent Contractors

Jaime L.M. Jones, Brenna E. Jenny and Ahsin Azim
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In a recent decision, the Fourth Circuit Court of Appeals for the second time in two years held that commission-based compensation arrangements with independent contractors cannot be safe harbored and do violate the Anti-Kickback Statute and FCA.  See United States ex rel. Nicholson v. Medcom Carolinas, Inc., No. 21-1290 (4th Cir. July 21, 2022).

The court affirmed the district court’s dismissal of FCA claims based on relator’s allegations that the defendant paid independent contractors commission-based compensation to sell skin graft products to hospitals affiliated with the Veterans Administration, in violation of the AKS because the complaint failed to meet the heightened Rule 9(b) pleading standard.  Specifically, the complaint failed to provide any details about “how the payments were split up or how representatives were paid,” other than that the payments were at least partially based on commission and included “no detail about the actual inducement of sales, whether and how representatives were supposed to push the product.”  But the court nonetheless affirmed the viability of the relator’s theory of liability.  The panel first noted that the compensation to independent contractors did not satisfy the safe harbor for remuneration to bona fide employees and could not meet the personal services safe harbor because it was based on the volume or value of referrals before concluding that “it would violate the Anti-Kickback Statute, and therefore violate the False Claims Act, to pay a medical-device salesperson by commission per sale or based on the value of sales and get paid back in federal healthcare money; any such sale under that scheme would be a false claim.”

This case is consistent with last year’s decision by the same Circuit in the “BlueWave” case.  In that case, discussed further here, the court upheld a jury verdict against a blood testing laboratory, its owner, and leadership from the lab’s independent contractor sales company, BlueWave, on claims that the lab’s contract with BlueWave, which included a monthly base fee plus a percentage-based commission on revenue generated from sales of the lab’s tests to physicians, violated the AKS and FCA.  United States ex rel. Lutz v. Mallory, 988 F.3d 730 (4th Cir. 2021).

While it remains to be seen how other Circuits will evaluate theories of FCA liability based on commission-based compensation arrangements, it is clear that there is wind in the sails of claims that might be brought by whistleblowers or DOJ directly on this basis.  As such, life sciences companies should review such arrangements to ensure they are consistent with current risk-tolerance levels and confirm that compliance guardrails are in place to address any concerns that such arrangements might incentivize specific conduct known to increase enforcement scrutiny, such as promoting medically unnecessary items or promotional statements that are potentially misleading.

A copy of the decision is available here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.

Jaime L.M. Jones

Chicago

jaimejones@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

Ahsin Azim

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