By Christopher A. Rothe
Medical device companies that enter into product development agreements with physicians and surgeons need to be aware of federal and state anti-kickback laws. The penalties for failure to comply with anti-kickback laws can be severe. In 2007, the U.S. Attorney’s Office completed a criminal investigation and found five medical device companies in violation of the Federal Anti-Kickback Statute. The companies were accused of paying kickbacks to orthopedic surgeons to induce the surgeons to use their products. All five companies avoided criminal prosecution by paying large financial settlements and signing agreements containing specific requirements for complying with the Federal Anti-Kickback statute.
The settlement agreements set forth remedial and compliance measures, including several restrictions governing how the companies could compensate consultants. It is reasonable to assume that these “compliance measures”, as they are called in the agreements, represent guidelines for all medical device companies to follow or at least consider in their own consulting agreements. If so, there are a number of compliance measures that are worthy of attention, particularly those relating to payments for intellectual property. Intellectual property is a complex and often misunderstood area of the law, and companies can make incorrect assumptions about intellectual property that they acquire. If a company makes incorrect assumptions about the quality or value of intellectual property that it purchases, and payments for the intellectual property are not justified, the company could be accused of making improper payments in violation of the Federal Anti-Kickback Statute.
This article provides an overview of the Federal Anti-Kickback Statute, a review of some of the compliance measures contained in the Settlement Agreements, and a discussion of compliance issues that may be raised when a company pays a medical professional for intellectual property received during the course of a consulting agreement.
The Federal Anti-Kickback Statute
The Federal Anti-Kickback Statute prohibits payment schemes that place profits ahead of patient care. For example, the statute prohibits medical device companies from paying medical professionals to promote or endorse their medical devices. This prevents medical professionals from putting their own financial positions ahead of the interests of the patient when choosing a treatment option. The Federal Anti-Kickback Statute applies to products and services that are paid for by federal healthcare programs. Therefore, the statute further serves to prevent schemes that defraud federal healthcare programs, such as Medicare.
The Federal Anti-Kickback Statute reads in part:
Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person . . . to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony…
Violation of the Federal Anti-Kickback Statute results in criminal penalties, which may include a fine up to $25,000 and/or imprisonment for up to five years.
Safe harbors
The Federal Anti-Kickback Statute casts a wide net that applies to many types of payment arrangements between medical device companies and medical professionals. Nevertheless, there are number of “safe harbors” that exempt certain payment arrangements from criminal penalty. One safe harbor allows medical device companies to compensate medical professionals for consulting services. This safe harbor, sometimes referred to as the “personal services” safe harbor, applies only if specific standards are met. For example, the consulting agreement must be in writing and signed by the parties, and must specify all of the services the consultant provides to the company. Moreover, the compensation paid to the medical professional over the term of the agreement must be set in advance, and be consistent with fair market value in arms-length transactions.
The 2007 settlement agreements
Following the 2007 criminal investigation, the U.S. Attorney’s Office filed criminal complaints against four of the five companies that were targeted. The fifth company was spared from criminal charges because of their early cooperation with authorities. The four companies that were charged entered into deferred prosecution agreements (DPAs), which subjected them to monitoring and required them to make reforms to ensure future compliance with federal laws. The fifth company entered into a non-prosecution agreement (NPA), containing essentially the same requirements for monitoring and reforms set forth in the DPAs. After eighteen months, all five companies were found in compliance with their obligations. The criminal charges were dropped, but the five companies were still monitored for compliance.
Since the events in 2007, at least two other medical device companies have been investigated and accused of paying illegal kickbacks. One company was accused in two separate investigations of paying kickbacks to doctors and hospitals who implanted its heart devices in patients. The company has since settled with the U.S. Government. Another company was accused of paying kickbacks to orthopedic surgeons who implanted the company’s hip and knee replacement products. That company entered into a DPA in September, 2010, agreeing to compliance measures very similar to those in the DPAs issued in 2007. In April 2011, the U.S. Attorney’s Office accused the company of breaching the DPA. The alleged breach was still under investigation at the time of this article. Needless to say, the U.S. Attorney’s Office continues to investigate medical device companies who enter into consulting relationships with medical professionals.
The compliance measures in the NPA and DPAs make it clear that companies need to do more than simply keep consulting agreements in writing. Payments to a medical professional can not be tied to the professional’s efforts in promoting a medical device. Compliance with this measure can be tricky, and the appearance of non-compliance is possible where a medical device company pays a royalty to a medical professional based on sales of devices invented by the medical professional.
The following sections explore some of the compliance measures contained in the NPA and DPAs, and the problems that medical device companies may face in their attempts to comply with them.
How should a consultant be paid?
The U.S. Attorney’s Office closely scrutinizes payments made to physicians and surgeons who work under consulting agreements. Under the 2007 NPA, for example, the compliance measures only permit the company to pay consultants on a product development team for actual time spent providing services, but at no more than a fair market value hourly rate. Royalties can also be paid to a consultant on a product development team for any product the team develops. Hourly rates and royalty payments are the only forms of compensation a consultant can receive for participation on a product design team. The company is not permitted to make any flat rate payments or minimum guaranteed payments in lieu of or in addition to hourly rate payments and royalties.
These general limitations on consultant compensation seem fairly straightforward. But as one reads the NPA further, contradictions arise between the general limitations on compensation, and other limitations regarding compensation for intellectual property. For example, the NPA states that the company can pay a fixed amount to a surgeon for intellectual property provided to the company, in lieu of royalties, provided that the fixed amount is “commercially reasonable.” In the case of patents and patent applications, the company can pay the surgeon royalties, patent fees and costs and/or a fixed amount to acquire or license the patents and patent applications, subject to approval by the person(s) monitoring compliance with the NPA. These provisions allowing for flat payments directly contradict earlier provisions that prohibit flat rate payments to consultants on a product development team, raising the question: if a surgeon is a member of a product design team, and the team designs a product that includes the surgeon’s intellectual property, can the company make a flat payment to the surgeon? One section of the NPA suggests no, but the other section of the NPA suggests yes.
One possible explanation for this disparity is that one section applies to payments for participation on a product development team, whereas the other section applies to payments for intellectual property. If this explains the difference, then a surgeon who wants to receive a flat lump sum payment for intellectual property may wish to be left off of a product design team to avoid scrutiny under these guidelines. Such a solution may not be feasible in every case, and it may be perceived as transparent, especially in cases where the surgeon’s input is essential throughout the design process.
Another possible explanation is that the NPA creates an exception that allows flat payments for intellectual property, but not for consulting work. This can be a gray area, particularly where the consulting work involves a continuous contribution of know-how, or other forms of intellectual property. Regardless of how one reads the NPA, it is evident that the U.S. Attorney’s Office closely scrutinizes flat payments to medical professionals in consulting agreements.
Special issues with patents and patent applications
As noted above, the NPA from 2007 permits royalty payments to physicians and surgeons for intellectual property. It states “[t]he Company may pay royalties to a Consultant only for Intellectual Property received by the Company and approved by the Monitor.” The 2007 NPA and DPAs define “Intellectual Property” broadly to include “patents, trade secrets, and know-how.”
For patented technology, the NPA states that royalties may not extend beyond the term of the patent. This can be a huge trap for companies during the term of the consulting agreement. Patents generally expire 20 years after their “priority date”, which often is the filing date of the patent application. But patents can expire much earlier if the owner fails to pay the government’s fees for maintaining the product. If the patent owner fails to pay maintenance fees during the consulting agreement, the company could unknowingly pay royalties based on an expired patent, raising questions about their conduct and the basis for their payments.
After identifying intellectual property, a company must determine if they are actually receiving intellectual property from the medical professional. The medical professional must have some ownership interest in a patented invention in order to justify receiving royalty payments for sales of products that embody the invention. An individual establishes an ownership interest in the patented invention by being named as an inventor on the patent application. U.S. patent applications are filed in the names of the inventors, and inventors legally own the patent applications and claimed inventions unless ownership is transferred.
Companies that file U.S. patent applications on medical devices must identify and name all the inventors in the patent application. In many instances, a company will feel obligated to name a consulting surgeon as an inventor on an application. Naming the surgeon as an inventor is appropriate if the surgeon contributed to the subject matter of at least one claim in the patent application. But incorrectly naming a surgeon as an inventor on a patent can have dire consequences. The patent can be rendered unenforceable, and royalty payments may be found improper. If the error is deliberate, and clearly unwarranted, the company could be accused of using a sham patent royalty agreement to disguise a kickback scheme.
Patent claims are another aspect of patents that create compliance issues. If a consulting agreement obligates a company to pay royalties to a surgeon on products covered under the surgeon’s patent, then those payments are only justified if one or more claims of the patent cover the product. During the application process, claims that cover the product may be changed over time, and no longer cover the product that is ultimately sold. In addition, the product may be changed after the patent issues and no longer fall within the scope of the claims. Companies and their patent counsel should review any product modifications as the patent application is being pursued, and during the term of the patent. If the product is no longer covered by any claim in the patent, or never was covered, then patent royalty payments could be questioned.
Special issues with unpatented technology
What if the technology is not patented, but the surgeon still considers it intellectual property? The 2007 NPA states “[i]f the Intellectual Property has not been patented, royalties may not extend beyond a reasonable period” in light of factors such as the life cycle and commercial advantages of the products and Intellectual Property, and the burden of administering the royalty arrangement. Opinions will vary on what a “reasonable period” is. Regardless, there are certain situations that make it difficult to justify a long royalty period. For example, the physician or company may have tried but failed to obtain a patent on a product because the product’s design was already well known. Or the technical field may be very crowded with products that are similar to the physician’s unpatented technology. The physician’s contribution may make a very small improvement over prior designs. These circumstances might raise questions about whether the technology has any commercial advantages, and whether royalty payments over a long period are justified.
Determining the consultant’s contribution
The 2007 NPA states that “[t]he Company shall establish processes for reviewing individual Consultant contributions to determine whether Intellectual Property has been provided to the Company…” In other words, the company has the burden to determine whether the material received from the surgeon is the surgeon’s intellectual property. This can be a heavy burden. The company must determine, among other things, what the state of the art is, what the surgeon is adding to it, and whether the addition is the surgeon’s own creation or someone else’s creation. If the surgeon claims to be contributing a patentable invention that is not yet patented, then the company needs to verify the claim. This requires a due diligence review of the technology, which will require an independent prior art search to determine if the contribution is in fact an invention for which the surgeon can take credit.
Take the situation where a physician claims to be the inventor of a patent pending device, and provides a copy of their patent application claiming the device. If a prior art search reveals that a device identical to the physician’s device was manufactured ten years earlier by someone else, then the device is not intellectual property belonging to the physician. The physician may still contribute other forms of intellectual property during the design process, however. For example, the physician may contribute valuable feedback and recommend design changes based on the physician’s know-how or trade secrets. Therefore, companies should base consultant compensation on all forms of intellectual property, and avoid agreements that limit intellectual property to patent rights.
Conclusion
The Federal Anti-Kickback Statute was intended to prohibit the practice of paying medical professionals solely to endorse and promote the use of medical devices and products. The 2007 NPA and DPAs suggest that unjustified payments to medical professionals can violate the Federal Anti-Kickback Statute, or at a minimum raise questions of non-compliance. Product development agreements involving payments to medical professionals for intellectual property can raise non-compliance issues, particularly where the scope of the intellectual property is difficult to evaluate and confirm.
To avoid issues of non-compliance, companies may wish to pay surgeons and physicians based on hourly rates and/or royalties, which may raise fewer questions than large fixed payments. Companies may also wish to review and identify all forms of intellectual property being acquired from medical professionals at the outset of any consulting relationships, including not only patentable inventions, but also trade secrets and know-how. Consulting agreements should state that payments are being made for all intellectual property being transferred or utilized during the product’s development. If a payment to a medical professional is premised solely on the transfer of patent rights, and no patent rights exist, the payment may be considered unjustified, raising compliance issues under the Federal Anti-Kickback Statute.
Christopher Rothe is a medical device patent attorney and shareholder at the intellectual property law firm of RatnerPrestia, PC, located in Valley Forge, Pennsylvania. Rothe counsels clients with intellectual property law issues involving mechanical and biomedical technology. He is an expert in counseling medical device companies on various aspects of intellectual property, including strategic planning, risk management, portfolio management and international patent prosecution. Rothe is currently responsible for managing large patent portfolios for a global manufacturer of spinal implants and for one of the nation’s top children’s hospitals. He may be reached at carothe@ratnerprestia.com.
The statements made in this Article are those of the author and are not necessarily the opinions of the author’s firm. This article presents general information about the topic, and does not constitute legal advice. Laws are subject to change, and parties interested in obtaining legal advice should consult with their attorney.
