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The U.S. Department of Justice's unusual decision to intervene in a False Claims Act lawsuit against a private equity firm as the majority owner of a pharmacy allegedly involved in a fraudulent scheme should grab the attention of general counsel at such firms, a legal expert said.

But it is too early to tell whether the case represents a new health care fraud enforcement trend for the federal government, or is just a one-off based on the circumstances of the alleged conduct, the expert said.

The government announced in December its intent to intervene in a civil qui tam lawsuit filed in the U.S. District Court for the Southern District of Florida in Fort Lauderdale. The named defendants include Diabetic Care Rx, which does business as Patient Care America, a compounding pharmacy in Coral Springs, Florida; Patient Care's president and CEO Patrick Smith; and its chief operating officer, Matthew Smith, as well as Riordan, Lewis & Haden, a Southern California-based private equity firm and majority owner of Patient Care America.

Plaintiff-relators Marisela Carmen Medrano and Ada Lopez allege that, from September 2014 to June 2015, the company provided about $40 million in illegal kickbacks to a handful of marketing agencies, in exchange for military member patients as well as prescriptions for topical pain creams, scar creams, wound care creams and metabolic supplements and capsules that would be reimbursed by military insurance provider TRICARE. Medrano and Lopez are Patient Care America's former director of marketing and former reimbursement services manager, respectively.

Although the False Claims Act sets a high bar for liability—knowingly causing the presentation of a false claim—the government's complaint filed last month provides important information about when a private equity firm's involvement in the operations of one of its portfolio companies is enough for the government to go after the firm for the company's alleged misconduct, said Elizabeth D. Scott, a partner in the Dallas office of Akin Gump Strauss Hauer & Feld.

Although it is difficult to say with certainty exactly what acts on the part of Riordan, Lewis & Haden convinced the government that the private equity firm was sufficiently involved to impute Patient Care America's alleged conduct to it, the complaint provides some clues, said Scott. She specializes in defending lawsuits filed under the FCA and representing public companies and their officers and directors in litigation and other various proceedings.

For example, she said, the government alleges that Riordan, Lewis & Haden installed two of its partners as officers of Patient Care America and funded commission payments to marketers when they became due, prior to Patient Care America's receipt of TRICARE reimbursements.

Scott noted that the complaint also states that Riordan, Lewis & Haden acquired Patient Care America in 2012 with the intent of selling it for a profit in five years; directed Patient Care America's entry into the topical compound drug business; and required Patient Care America's CEO to consult with partners of the equity firm before entering certain contracts.

Attorneys for Patrick Smith, Alejandra Berlioz and Daniel Fridman of White & Case, did not immediately return requests for comment. Daniel Gelber, Gerald Greenberg and Jarred Reiling, all of Gelber Schachter & Greenberg, are representing Diabetic Care Rx, and did not immediately return emailed requests for comment about the case.

Matthew Smith's attorney, Ryan Stumphauzer, in Miami, declined to comment. It was not immediately known who is representing Riordan, Lewis & Haden, which also did not immediately return an emailed request for comment.

“This could indicate a shift, but we're in a wait-and-see mode at this point,” Scott said of the significance of this case in government intervention in FCA litigation going forward. “We're waiting to see, 'Is this an outlier, or will they start pursuing other third-party companies with an investment or auditor interest?''”

Despite this uncertainty, there are certain actions, beyond being aware of this case, that private equity firms and their top lawyers can take to ensure they are not the next target of the government's decision to intervene in such a case:

• Make sure that your due diligence continues beyond the initial investment. For example, when promoting, approving or funding a specific business initiative, consult legal counsel in advance to ensure that whatever business is planned does not present any potential FCA issues.
• Require that all portfolio companies that do business with the federal government have robust internal compliance policies in place and prepare reports about those policies. In addition to regularly reviewing both the policies and the reports, document the steps you took in doing so.
• Be aware of any significant uptick in revenue related to federally reimbursable products and perform due diligence to ensure that the management is engaging in proper compliance efforts.

Steven Grover in Fort Lauderdale is representing Lopez and Medrano, while Susan Torres and Nicholas Perros are prosecuting the case on behalf of the government.