A federal judge today rejected a $296 million plea agreement between the U.S. Justice Dept. and Boston Scientific Corp. (NYSE:BSX) subsidiary Guidant Corp. over faulty implantable defibrillators.

Earlier this month the Natick, Mass.-based medical devices giant, which paid $26 billion for Guidant in 2006, agreed to plead guilty to a pair of misdemeanor criminal charges for withholding information from the Food & Drug Administration: specifically, to making a materially false statement about its Ventak Prizm 2DR implantable defibrillator in a required submission and to failing to notify the agency of a “correction” to its Contak Renewal defibrillators. Several patients died due to flaws in the devices that Guidant knew about and moved to correct without notifying the FDA, according to court documents.

In November 2009, Boston Scientific announced that it would pay nearly $300 million to settle the case on behalf of Guidant, even though the alleged infractions occurred prior to its acquisition of the Indianapolis-based company.

But Judge Donovan Frank of the U.S. District Court for Minnesota shot down the plea deal, writing that the deal does not go far enough to address Guidant’s penchant for concealing problems with the devices.

"The Court concludes that two provisions of the Plea Agreement … are not in the best interests of justice and do not serve the public’s interests because they do not adequately address Guidant’s history and the criminal conduct at issue," Donovan wrote.

In February 2002, Guidant discovered a design flaw in the Ventak device, after receiving reports of failures. By April 2002, according to court documents, it had fixed the flaws and begun producing a corrected version of the device — but didn’t recall the defective products.

The company continued to sell the defective devices without revealing their design flaws and malfunctions. On March 13, 2005, 21-year-old Joshua Oukrop’s Ventak Prizm 2 DR short-circuited, killing him. Guidant told his doctor of the problems with the device, disclosed that it knew of 25 other such cases and told the physician that about 24,000 ICDs similar to Oukrop’s had been sold. When the doctor asked Guidant whether the other recipients would be told, the company said no, it did not want to “alarm” anyone, according to court documents. The company kept its word in subsequent Securities & Exchange Commission filings and press releases, never mentioning the defect or Oukrop’s death until an impending New York Times article that was to reveal the device’s flaws forced the company’s hand.

Patients who received the faulty devices —and two high-profile Minneapolis doctors, Robert Hauser and Barry Maron, who treated Oukrop— urged Donovan to reject the deal, arguing that "Guidant, as a company, does not respect the criminal justice system and should be required to do more than simply pay fines as a consequence for its criminal behavior," according to court documents.

But, as Donovan wrote in overturning the plea deal, the alleged victims “are not victims for the purposes of restitution in this case." That’s because the two counts Guidant pleaded guilty to concern only the filing of a false and misleading report to the FDA and a product update kept from the federal watchdog agency longer than the legally required 10-day deadline.

"There is nothing in the record to suggest that any person was harmed in any manner as a result of Guidant’s statement in August 2003 that the November 2002 change — which, by all accounts, made the device safer — did not affect the safety and efficacy of the Prizm,” Donovan wrote. "Much to the alleged victims’ and public’s frustration, Guidant’s motivation for when and how it described the November 2002 change, and for that matter the April 2002 change, makes no difference in the Court’s analysis of Count One, given the elements of the crime as charged in Count One."

As for the second count, Donovan wrote, "There is nothing in the record to suggest that any person was harmed in any manner as a result of Guidant’s failure to provide the FDA with a copy of that product update. In this way, the alleged victims’ reliance on Guidant’s failure to include certain facts about the Renewal failures in March 2005 is irrelevant for the purposes of defining "victim" as it applies to Count Two."

Nevertheless, the law pertaining to this case allows judges to deny plea agreements at their discretion. In rejecting this deal Donovan wrote that he believes "a term of probation would be appropriate in this case and could be fashioned in a manner to serve the public’s interest and address the accountability concerns raised by Drs. Hauser and Maron and likely shared by many others."

"At a minimum, the public’s interest in accountability would be served by Guidant and Boston Scientific being placed on probation, regardless of the fact that Boston Scientific acquired Guidant after the events in question. And, the Court believes that a period of probation would likely benefit, rather than harm, Guidant’s and Boston Scientific’s public image," he wrote. "For instance, as a condition of probation, Guidant, through Boston Scientific, could be ordered to perform community service designed to repair the harm caused by its offenses, namely to help build the public’s confidence in the FDA regulation process, the medical device manufacturers’ quality control efforts, and the cardiac healthcare industry in general. Indeed, Boston Scientific could be ordered, as a condition of probation and in addition to a criminal fine, to dedicate a certain amount of its resources to some of its already-established charitable programs. … Guidant, through Boston Scientific, could also be required to establish a compliance and ethics program, or if one is already established, to dedicate additional resources to that program to address the specific crimes in this case. Such a program could be overseen by a compliance officer skilled in the regulatory area and who perhaps could work in coordination with either the FDA or the Heart Rhythm Society, or both."

Donovan also urged that any revised plea deal include a stipulation that "a significant portion" of any fines be paid to the Medicare program, because it’s "possible that at least 15,000 of the devices at issue in this case went to Medicare recipients and that, as a result, Medicare likely incurred significant expenses related to the Prizm and Renewal devices."

Guidant can now withdraw its guilty plea, he added, cautioning that "if it chooses not to withdraw its guilty plea, the Court may then dispose of this case less favorably than the Plea Agreement contemplated." For it’s part, Boston Scientific is willing to discuss revisions to the deal, saying in a press release that "it plans to work with the DOJ in an effort to develop a modified plea agreement that is acceptable to the Court, the DOJ and the company."

And although Donovan is barred from participating in any discussions between the Justice Dept. and Guidant about a revised deal, "the Court notes that it would likely consider a modified agreement to be in the interests of justice if it addressed the concerns raised in this Order, specifically with respect to probation, community service, coordination with the FDA and any other appropriate regulatory agencies, and a discussion of where the fine and forfeiture funds will go."

The judge closed with an admonition to patients who received the faulty devices that, even if a revised deal goes through, it’s "highly unlikely" that they would be entitled to share in any penalties paid by Guidant to settle the case.

"As Guidant alluded to at the plea hearing, sophisticated medical devices, such as the ones at issue in this case, generally have a very high rate of reliability and provide life-saving benefits to many people. Advances in medical technology have, unfortunately, inflated the public’s expectations so much so that when any device fails, many assume that there must have been a crime committed or that someone is at fault. This is not necessarily always the case," Donovan wrote. "The Court recognizes the frustration that device recipients and the public may have for this criminal proceeding, and the Court is well-aware of the physical and emotional trauma caused by the Guidant recalls. But, as the Court repeatedly stated at the plea hearing, the only matter currently before the Court concerns the criminal case against Guidant and the conduct admitted to, specifically, on the Government’s charges concerning reports Guidant made to the FDA about the Prizm and Renewal devices. …

"Nothing in this Order is intended to give any person who considers herself or himself to be a victim of Guidant’s criminal conduct any expectation of future recovery through this proceeding. While such recovery is not entirely foreclosed through a possible remission petition, the Court believes that such recovery is highly unlikely.