As discussed in EnforceMintz – Significant 2022 Regulatory and Policy Developments, the Department of Justice (DOJ) issued several memoranda in late 2022 and early 2023, reinforcing DOJ’s approach to individual accountability in charging and resolving cases. When Deputy Attorney General Lisa Monaco announced further revisions of DOJ corporate criminal enforcement policies, she affirmed that the “[DOJ’s] first priority in corporate criminal matters is to hold accountable the individuals who commit and profit from corporate crime.”

In civil False Claims Act (FCA) cases, DOJ’s Civil Fraud Section and its counterparts in the Civil Divisions of United States Attorneys’ Offices likewise must consider during investigations the potential liability of individuals involved in the alleged misconduct. Several case dispositions from this past year, both criminal and civil, reaffirm DOJ’s policy of ensuring individual accountability in resolving allegations of wrongdoing by companies. As these examples show, consistent with DOJ’s recent policy pronouncements, individual accountability is a priority that must be addressed in the resolution of any FCA case. We expect this trend to continue in 2024.

A. Paksn Inc. and its Owner

DOJ brought an FCA lawsuit against an individual owner (Prema Thekkek) and her management company (Paksn), relating to claims submitted by six California skilled nursing facilities under Ms. Thekkek and Paksn’s control (the “SNFs”).[1] In November 2023, Ms. Thekkek, Paksn, and the SNFs entered into a $45.6 million consent judgment and ability-to-pay settlement to resolve allegations that they submitted false claims to Medicare after paying kickbacks to physicians to induce improper patient referrals.

Both the resolution and DOJ’s press release focused on Ms. Thekkek’s alleged conduct. Specifically, under the direction and control of Ms. Thekkek, the SNFs allegedly entered into sham medical directorship agreements with physicians who received stipend amounts based upon expected referral volume. Ms. Thekkek required the SNFs to closely track referrals and instructed employees to withhold stipends from physicians who did not meet patient referral benchmarks.

The ability-to-pay settlement was based upon the defendants’ financial constraints. Three of the corporate defendants will pay at least $385,000 over the next five years pursuant to the settlement agreement’s payment schedule. Additionally, Ms. Thekkek agreed to pay the United States 50 percent of her annual disposable income between $52,000 and $104,000, and then 25 percent of her disposable income beyond $104,000, for the duration of the agreement. In addition, the corporate defendants entered into a five-year Corporate Integrity Agreement that required an Independent Review Organization’s review of the defendants’ physician relationships and imposed other compliance obligations.

B. Nostrum and Founder/CEO

DOJ’s focus on individual accountability also extended to allegations that an executive knowingly assisted his company in making material representations to the Centers for Medicare & Medicaid Services (CMS) in an effort to underpay Medicaid drug rebates. On October 30, 2023, Nostrum Laboratories Inc. (Nostrum) and its founder and CEO, Nirmal Mulye, Ph.D. (“Dr. Mulye”), entered into an ability-to-pay settlement with DOJ resolving FCA-based allegations against both the company and Dr. Mulye. Through the settlement, the defendants agreed to pay a minimum of $3,825,000, with a significant personal contribution by Dr. Mulye of at least $1.5 million, and up to $50 million in contingent payments as specified in the settlement agreement.

As admitted in the settlement agreement, and explained in the government’s press release, Nostrum acquired the drug Nitro OS — used to prevent chest pain in patients with heart disease — from another manufacturer in 2015. In 2018, Nostrum pulled the drug from the market and changed the levels of two inactive ingredients but made no changes to the drug’s dosage or strength. Nostrum then relaunched Nitro OS as a “reformulation” in August 2018 and increased the price of the drug by nearly $2,000. Defendants then failed to pay Medicaid Drug Rebate invoices associated with the price hike, and argued to CMS that this was a “new” drug despite previously representing to the FDA that Nostrum had made no “major changes” from the prior version of the drug. In addition to the financial penalties, Dr. Mulye admitted in the settlement agreement that he disregarded his company’s inconsistent positions in the marketing of Nitro OS in a knowing attempt to avoid the higher rebate payments.

C. Precision Lens and Owner

In addition to these notable settlements, DOJ’s pursuit of individual accountability also extended into the courtroom. In February 2023, after a six-week trial, a jury concluded that Precision Lens and its founder, Paul Ehlen, violated the FCA, through underlying violations of the Anti-Kickback Statute (AKS), by paying ophthalmic surgeons to use their products in cataract surgeries.[2] The government alleged that the company and Mr. Ehlen paid kickbacks to eye surgeons to induce them to use the company’s products for cataract surgeries for Medicare beneficiaries in violation of the AKS, and thus the FCA. The jury found that the defendants maintained a “slush fund” to conceal the kickback scheme and used the money to provide physicians extravagant travel and entertainment opportunities to encourage the use of the company’s supplies and equipment in procedures billed to Medicare.

The verdict resulted in a significant judgment of $487 million, based upon a finding that both Precision Lens and Mr. Ehlen were responsible for the 64,575 false claims submitted to Medicare, resulting in approximately $358 million in statutory penalties, plus over $43.6 million in damages, which were trebled.

The enormous monetary penalty imposed by the jury raises Fifth and Eighth Amendment questions about the constitutionality of the award.[3] Indeed, the court’s May 12, 2023 entry of judgment invited post-trial briefing on the constitutional arguments and acknowledged the possibility of appeal.[4] To sustain an Eighth Amendment challenge, defendants face a high bar of articulating how the judgment is grossly disproportional to the gravity of the defendants’ offenses.[5]

Mr. Ehlen passed away shortly after the judgment in June 2023. In granting the government’s motion to substitute Mr. Ehlen’s estate as a party, the court concluded that the FCA claim survived Mr. Ehlen’s death because a jury concluded that he caused the false claims to be submitted to the United States, and an FCA action “seeking remedial relief survives the death of the defendant, even if the request for punitive relief comes to predominate over the request for remedial relief.”[6] Given that Mr. Ehlen’s estate was not culpable of any wrongdoing, and given the seemingly punitive size of the award, we will continue to monitor defendants’ potential constitutional appeals of the jury’s nine-figure verdict.

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Paksn, Nostrum, and Precision Lens are three recent examples demonstrating how DOJ has implemented its policy of individual accountability as a “first priority.”DOJ’s focus on individual accountability applies both at settlement and at trial, regardless of the alleged wrongdoer’s ability to pay, and, as Precision Lens demonstrates, even after the passing of the alleged wrongdoer.

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