Defective Products: Attention Device Manufacturers

By Robert L. Vogel - December 2000

In December 2000, LifeScan, a wholly-owned subsidiary of Johnson & Johnson, paid the Government $30,350,000 to settle a lawsuit filed by two whistleblowers who claimed that LifeScan had violated the federal False Claims Act. The lawsuit alleged that LifeScan had concealed from the FDA, during both the premarket and postmarket periods, that the SureStep blood glucose monitoring system had two design flaws. Because the SureStep system had been widely sold to beneficiaries of the Medicare program, the lawsuit contended that LifeScan was liable for causing the submission of false claims for defective medical products. The two whistleblowers who filed the case had been employed by LifeScan and, as part of the settlement, shared a substantial monetary reward. Mr. Vogel represented the whistle-blowers.

There is nothing unusual about a medical device manufacturer facing liability under either administrative, civil, or criminal statutes for selling adulterated or misbranded medical devices. What makes the LifeScan case unusual, however, is the Government’s use of the False Claims Act against the manufacturer of the defective medical device. Because the False Claims Act has whistleblower provisions (known as “qui tam” provisions) that encourage company insiders to report misconduct by providing them with a lucrative reward, the long-term consequence of the LifeScan case is that manufacturers of faulty devices may now become an inviting target for whistleblowers.

WHAT IS THE FALSE CLAIMS ACT?

The False Claims Act (the “Act”), codified at 31 U.S.C. §§ 3729-33, is a federal statute that makes persons or companies civilly liable for, among other things, knowingly submitting or causing to be submitted false claims for payment to Government officials. Violators of the Act must pay the Government three times its damages, plus civil penalties of between $5000 and $11,000 per false claim. The Act, sometimes known as the “Lincoln Law,” was originally enacted in 1863 at President Lincoln’s urging in order to fight fraud by unscrupulous contractors to the Union Army. Congress enacted substantial revisions in 1986, which has resulted in widespread use of the Act since that time. While historically the Act has been used most frequently against military contractors, in recent years it has become the Government’s primary weapon against Medicare fraud, including false billings for defective medical products.

The Act provides that a private person who knows of a fraud against the Government may initiate a lawsuit on the Government’s behalf. Such a lawsuit, known as a “qui tam” suit, is to be filed “under seal” ( i.e., secretly) in federal court with copies delivered only to the Department of Justice. The lawsuit remains sealed while the Government is given an opportunity to investigate the claims and decide whether to join in the suit. At the conclusion of its investigation, the Government may elect to intervene in the suit and prosecute the claims; or, the Government may decline to intervene, leaving the whistleblower the option of pursuing the claims on his own. Once the Government makes this election, the lawsuit is unsealed and becomes a public matter. Whether or not the Government joins the lawsuit, if the lawsuit is successful, the whistleblower is entitled to keep a substantial portion of the case proceeds: 15 to 25 percent if the Government has intervened, and 25 to 30 percent if the Government has not. As a practical matter, the likelihood that the lawsuit will be successful is astronomically higher where the Government has chosen to participate.

THE LIFESCAN CASE

In the LifeScan case, the two whistleblowers alleged that LifeScan was knowingly manufacturing and selling to the general public a faulty blood glucose monitoring system consisting of the SureStep meter and test strips. The whistleblowers specifically identified two problems with the system: (1) that the system erred by sometimes giving extremely low readings when the test strip had not been fully inserted into the meter, rather than alerting the user to the fact that the test strip had not been correctly inserted; and (2) that the system improperly displayed an “error” message when the user’s blood glucose level was abnormally high, rather than indicating that the level was high. The whistleblowers also alleged that the labeling was false in that it failed to identify these problems in what was, in actuality, a defective medical device.

The LifeScan whistleblowers further alleged that LifeScan had sought to conceal these problems from the FDA. They alleged that LifeScan knew of these problems prior to making 510(k) submissions for the SureStep but omitted material facts from those submissions, in violation of 21 C.F.R. §§ 807.90(j). The whistleblowers further alleged that, after the SureStep had been approved and several users had had adverse events related to these two problems, LifeScan failed to submit MDRs which would have alerted the FDA to the fact that the Sure Step was a defective medical device.

The whistleblowers alleged that LifeScan’s actions violated not just FDA laws, but also the False Claims Act. They alleged that if the FDA had known about one or both of the problems with the SureStep system, the FDA would not have approved the SureStep system as it was labeled, and thus, SureStep meters and test strips would not have been paid for under Medicare and other federal health insurance programs. In other words, LifeScan allegedly was “causing” ordinary consumers who had purchased the SureStep system to submit “false claims” for Medicare reimbursement. The claims were “false” because the Government allegedly would not have paid for these defective medical products if the FDA had been informed of the problems associated with them.

The whistleblowers filed their lawsuit involving this defective medical device in October 1997. After a lengthy investigation, in December 2000 the Government intervened in the case and reached a settlement with LifeScan. The $30,350,000 settlement payment covered SureStep sales through June 1998, by which time LifeScan had corrected the design of the SureStep system.

THE AFTERMATH OF LIFESCAN

In the aftermath of the LifeScan settlement, medical device manufacturers are likely to have two major concerns. First, with the Government applying the False Claims Act to cases involving the distribution of adulterated or misbranded medical devices, manufacturers of defective medical devices face a broad new avenue of liability. If found liable under the Act, manufacturers would be subjected to treble damages and potentially large civil penalties – in addition to the criminal and administrative sanctions that may apply. Where a manufacturer conceals a product flaw from the FDA -- either during the approval process or after the product has been marketed -- and the Government contends that the FDA would not have permitted the product to be marketed as labeled had the FDA known of the flaw, the Government may claim that its damages are the entire amount of federal payments or reimbursements for the product after the manufacturer learned of the flaw.

Second, the application of the False Claims Act to schemes to market and sell defective medical products entails the prospect of huge rewards for whistleblowers. Thus, a decision to conceal a medical device problem that others may consider a serious defect would be not just risky, but foolhardy. Sooner or later, it is likely that a company insider – someone with access to lots of information about who knew what, and when – will disclose the problem to the Government. Even worse for the company is the fact that the whistleblower may do so in secret, giving the Government plenty of time to investigate and confirm the allegations before the company even realizes that it is a target.