Alexander M. Owens of Pietragallo Gordon Alfano Bosick & Raspanti.

On Sept. 18, the Department of Justice announced a $21.35 million settlement with compounding pharmacy Patient Care America, executives Patrick Smith and Matthew Smith, and, most notably, the pharmacy's private equity backer, Riordan, Lewis & Haden Inc. The private equity firm and the pharmacy will fund substantially all of the settlement ($21.036 million). The case has been closely watched for the Department of Justice's targeting of a private equity firm. The case appears to be the first time the federal government has intervened against a private equity firm in an False Claims Act (FCA) matter. The government's efforts have proven fruitful.

The case stems from a whistleblower complaint filed in 2015 in the U.S. District Court for the Middle District of Florida in Medrano v. Patient Care America, 15-62617 (S.D. FL.)  In early 2018, the United States, joining in the action, filed a False Claims Act complaint in intervention against the defendants. The government alleged that the pharmacy had paid kickbacks to independent marketers to procure prescriptions for compound pain medications, a violation of the Anti-Kickback Statute and False Claims Act. The government sought to hold the private equity firm liable as well, alleging that the investment firm knew and approved of the illegal referral arrangement.

While the settlement with a private equity defendant appears to be a first of its kind, it is unlikely to be the last. See, e.g., Martino-Fleming v. South Bay Mental Health Center, CV 15-13065-PBS, (D. Mass.) (state of Massachusetts intervened in the FCA complaint against the health care company and its private equity firm). In recent years, private equity firms have been investing more and more heavily in the health care space, particularly in retail health care companies, which have perhaps the highest level of exposure to FCA liability.

As the allegations in Patient Care America show, private equity firms often take a very hands-on management role in their portfolio companies. That level of control brings with it the potential for extensive FCA liability. FCA liability is not limited to the individual or entity that files a false claim. In fact, the law is clear that individuals owning or managing companies engaged in fraud may be held liable under the FCA.  See, e.g., Martino-Fleming, CV 15-13065-PBS (D. Mass. Sept. 21, 2018) (refusing to dismiss claims against private equity firm that owned a health care company allegedly involved in fraud); Schagrin v. LDR Industries, 14-cv-09125 (N.D. Ill. Nov. 20, 2018) (individuals that owned and managed the company engaged in fraud could be held liable for failing to stop fraudulent conduct). In announcing the settlement, U.S. Attorney Ariana Fajardo Orshan referred to the government's "commitment to hold all responsible parties to account for the submission of claims to federal health care programs that are tainted by unlawful kickback arrangements." The comment echoes the DOJ's Yates memo that reminded individuals that liability does not end at the corporate boundary. Patient Care America may serve as a corollary to the Yates memo, putting private equity firms on notice that their liability may not be limited to just their financial exposure in the portfolio company. A private equity firm may itself face direct liability.

The settlement in Patient Care America is likely to embolden relators and prosecutors in future cases where private equity firms have benefited from their investment in, and management of, enterprises alleged to have engaged in fraud.

Alexander M. Owens is an associate in the Philadelphia office of Pietragallo Gordon Alfano Bosick & Raspanti. He is a member of the qui tam/False Claims Act practice group. Since its inception, the firm's False Claims Act practice group has recovered nearly $2 billion on behalf of federal and state taxpayers.