DOJ Targeting Private Equity Firms In False Claims Act Litigation

A recent complaint by the US Department of Justice against private equity firm Riordan, Lewis & Haden signals that such firms could be a new class of defendants in False Claims Act cases. Private equity firms are thus well-advised to be vigilant and take steps to limit the risk of enforcement litigation.

The False Claims Act (FCA) has long been a powerful tool for the federal government to generate large recoveries from government contractors, including companies in the healthcare industry. In fiscal year 2017 alone, the US Department of Justice (DOJ) recovered more than $3.7 billion in settlements and judgments in civil cases brought under the FCA. The government's focus on continued aggressive FCA enforcement is not expected to go away anytime soon. Indeed, based on its recent complaint in intervention in United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America et al., No. 15-CV-62617 (S.D. Fla.), DOJ may be setting its sights on a new class of potential defendants in FCA cases: private equity firms.

DOJ's decision to pursue private equity firm Riordan, Lewis & Haden Inc. (RLH) as a defendant in an FCA case against one of the firm's portfolio companies (a compounding pharmacy) should be a warning bell for private equity firms whose portfolio companies contract with and/or are reimbursed by the government such that they are exposed to potential FCA liability. Private equity firms are now on notice that they should take steps to limit the risk that the government would target them in an FCA case against a portfolio company.

In its complaint, DOJ alleges that in 2012, RLH invested in Diabetic Care Rx, LLC dba Patient Care America (PCA) with a plan to increase the company's value in advance of a planned exit five years later. At that time, PCA generated revenue primarily by providing nutritional therapy to end-stage renal disease patients covered by Medicare. Soon after RLH invested, Medicare's reimbursement rates for that therapy dropped, and so too did PCA's revenues. In an attempt to restore PCA's revenues, RLH and two RLH partners serving as officers and/or directors of PCA allegedly exerted control over PCA and directed its entry into the business of non-sterile compounding of topical creams forpain management. According to DOJ, RLH recognized that was an extremely profitable therapy because of favorable reimbursement rates then offered by TRICARE, the federal healthcare program for active duty military...