A recent settlement reinforces the potential liability facing private equity investors in the life sciences industry. As we previously reported, late last year The Gores Group (“Gores”) entered into a $1.5 million settlement agreement with the United States to resolve claims that the alleged off-label promotion by its portfolio company of combination drug-medical device systems for pediatric patients resulted in the submission of false claims to federal healthcare programs. Last month, Gores entered into a separate $1.5 million settlement agreement with certain states to resolve claims that the same alleged conduct resulted in the submission of false claims to state Medicaid programs. See U.S. ex rel. Johnson v. Therakos, Inc., Case No. 12-cv-1454 (E.D. Pa., filed Mar. 22, 2012). The participating states in the more recent settlement have sixty days to agree to the terms of that agreement; thus far at least California has joined. The claims resolved in these settlements arose from a qui tam suit.
Gores acquired the immunotherapy company Therakos in December of 2012, prior to selling it in 2015. The qui tam alleged that during Gores’ ownership the portfolio company marketed the systems for use in pediatric patients, despite the fact that Food and Drug Administration had not approved them for pediatric use. Neither the publicly available qui tam complaint nor the settlement agreements make specific allegations regarding Gores’ level of involvement in the oversight and management of the portfolio company. However, the press release by the California AG – notably, HHS Secretary-nominee Xavier Becerra – notes that Gores “continued the improper marketing tactics when it acquired” the portfolio company. The earlier-issued DOJ press release contains a similarly general reference to Gores having “continued the alleged improper sales and promotion practices.” While the specific facts regarding Gores’ conduct that drove the United States and the participating states to pursue a resolution involving the private equity fund are not public, the settlements may signal the governments’ willingness to pursue investors under the False Claims Act under certain circumstances, even where they are not actively engaged in the management of their portfolio companies. As we discussed previously, DOJ continues to assert a commitment to using its enforcement discretion to ensure private equity firms provide oversight of acquisitions, particularly those in the life sciences and other highly regulated industries.
Sidley will continue to monitor for further action by DOJ and the states against private equity investors in the healthcare and life sciences industries.