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UNITED STATES OF AMERICA et al. ex rel. ANDREW HAGERTY V. CYBERONICS, INC

Cyberonics, Inc., is a medical technology corporation based in Houston, Texas. The company produces and sells a medical device called the VNS system which was originally designed to treat a certain kind of epilepsy. In 2004, Cyberonics began focusing on marketing the VNS system toward patients with treatment-resistant depression. However, in 2006, the Centers for Medicare and Medicaid Services (CMS) denied Cyberonics’ request for Medicare coverage of the VNS system to be used for treating depression. In lieu of the possible profits from Medicare coverage and the $132.5 million debt resulting from its marketing campaign, Cyberonics was in deep financial trouble. However, the decision that Cyberonics made failed to account for all the ethical aspects of their behavior, causing legal trouble for the company.
JUDGE SAYLOR This is an action alleging the unlawful promotion of medically unnecessary replacements of devices in epilepsy patients. Relator Andrew Hagerty has brought suit against defendant Cyberonics, Inc., a company that manufactures and sells the Vagus Nerve Stimulator Therapy (“VNS”) system, a medical device used to treat refractory epilepsy and treatment-resistant depression.
On May 19, 2014, Hagerty amended the complaint. The amended complaint alleges that defendant engaged in a fraudulent scheme to promote premature, medically unnecessary VNS replacements to individuals with epilepsy who were covered by government health-care programs. It alleges violations of the Federal False Claims Act (“FCA”) conspiracy to violate the FCA; retaliatory discharge of Hagerty in violation of 31 U.S.C. § 3730(h); breach of contract and breach of the implied covenant of good faith and fair dealing; and wrongful termination and retaliation in violation of public policy and the Massachusetts False Claims Act.
Defendant has moved to dismiss the amended complaint. For the following reasons, the motion will be granted in part and denied in part.
The facts summarized below are set forth in the amended complaint unless otherwise noted.
On May 1, 2007, Daniel Moore became the new CEO of Cyberonics. According to the complaint, he implemented a new incentive structure for the sales force that emphasized sales of replacement VNS devices. Under the previous incentive structure, sales representatives only received commissions on sales of new devices, not replacement devices. Under the new structure, the company began paying commissions to its sales representatives for sales of replacement devices. No commissions were paid for sales of VNS devices to treat depression, although a salesperson could receive $500 for attending a VNS implant for depression at a hospital. Sales quotas also allegedly reflected the emphasis on replacement devices. For example, the quota for the Boston South Region in the first quarter of 2011 was a minimum of four new devices and ten replacement devices.
The complaint further alleges that Cyberonics ignored fraudulent and improper conduct by its sales representatives. For example, in 2012, sales representative Berrishea Carter was allegedly caught backdating when devices had been implanted into new patients to meet her sales quota for an earlier quota. She was initially fired but complained to senior management that backdating was widespread and she was being unfairly singled out. Her supervisor rehired her. According to the complaint, the sales strategy was very successful. By 2010, the company had erased its $130 million of debt.
The complaint alleges that the management at Cyberonics encouraged promotion of early device replacements that were not medically justified. For example, in early 2011, the company sent a list of patients for sales representatives to target for VNS device replacements. Those patients had been using a VNS device for five to seven years. In April 2011, target lists were sent out of patients who had been using a device for four to seven years. In November 2011, the list included patients who had been using a device for three to seven years. Sales representatives were encouraged to use those lists to promote replacement devices.
Finally, the complaint alleges that a number of sales representatives used fraud to sell replacement VNS devices. For example, Gary Muenzen allegedly falsified the results of device tests so that it appeared as though the devices had run out of battery. Physicians would then prescribe an unnecessary battery replacement based on those tests. In addition, a TC named Janet Holland, when under pressure to meet her sales quota, allegedly gave a fabricated battery life estimate to a physician’s staff for one device. As a result, the physician prescribed a replacement of the device.
Counts 1 and 2 of the amended complaint alleged violations of the False Claims Act. The FCA, in relevant part, prohibits a person or entity from knowingly causing the submission of false or fraudulent claims to the United States. Private persons, known as relators, can file civil actions on behalf of the United States against persons or entities who violate the act.
Defendant further contends that the FCA claims should be dismissed because the complaint does not satisfy the pleading requirements of Fed. R. Civ. P. 9(b). That rule requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”
The conclusion that the complaint is insufficient under Rule 9(b) gives the Court some pause. It is certainly true that the complaint alleges a widespread scheme that, among other things, subjected vulnerable patients to unnecessary surgical operations. And it certainly seems likely—as a matter of logic—that if the scheme was as widespread as relator alleges, some false claims must have been submitted somewhere, by someone, to the federal government. The question, however, is not whether the scheme should be redressed; indeed, the government had an opportunity to intervene if it chose, and presumably has other weapons in its arsenal for dealing with the issue. Instead, it is whether the complaint here meets the relatively exacting standard for FCA claims.
In summary, the amended complaint fails to state allegations of fraud under the FCA with the particularity required by Rule 9(b). Accordingly, the motion to dismiss the FCA claims will be granted.
laims will be granted. Accordingly, the motion to dismiss will be granted as to the state FCA claims for failure to comply with the requirements of Rule 9(b).
Because the complaint does not state allegations of fraud under the FCA with the particularity required by Rule 9(b), the conspiracy claim under the FCA must fall as well. In any event, there is an independent reason why the conspiracy claim should be dismissed.
. . . Finally, defendant contends that the complaint does not allege that relator was discharged because he engaged in conduct protected by the FCA. It contends that relator admits that he was terminated for failing to reach his sales goals.
While the amended complaint does state that defendant said it fired relator because he failed to reach his sales goals, the reason an employer proffers for an employee’s discharge is not controlling in retaliation cases, especially at the motion to dismiss stage. Relator alleges that he reported his investigation to his supervisor on November 2, 2011; on December 1, he was put on a performance improvement plan; and on January 9, 2012, his employment was terminated. He further alleges that he had met 90 percent of his quota before he was fired. The “proximity between his protected activity and abrupt termination . . . are sufficient at this stage to allege that he was discharged because of his protected conduct.”
Accordingly, the motion to dismiss will be denied as to the FCA retaliation claim.
For the foregoing reasons, defendant’s motion to dismiss is GRANTED as to the federal FCA claims (Counts 1 and 2), the state FCA claims (Counts 3 through 30), and the claim for breach of contract and breach of the implied covenant of good faith and fair dealing, and DENIED in all other respects.

CRITICAL THINKING

What facts would you like to know to be certain that the judge decided this case correctly?

ETHICAL DECISION MAKING

Although the FCA claims were dismissed by the court, is that the same as saying that Cyberonics was acting ethically?