California Court: Fair Market Value Payments May Not Avert Anti-Kickback Liability

In February 2022, the U.S. District Court for the Central District of California denied a defendant’s motion to dismiss a qui tam action alleging that the defendant had violated the federal Anti-Kickback Statute (AKS). In its ruling, the court noted that “even some fair-market value payments will qualify as illegal kickbacks.”

In the complaint, the plaintiff-relator alleged that the defendant, a medical device manufacturer, paid illegal kickbacks to physicians to induce them to order the defendant’s medical device. The relator alleged that kickbacks took four forms:

1. The device company maintained a proctoring program through which it overpaid physicians for professional proctoring services.
2. The device company acquired companies in which physicians with a high volume of device usage held ownership interests at an inflated rate.
3. The device company maintained two data collection registries used to disguise kickback payments to physicians.
4. The device company distributed illegal kickbacks to doctors and hospitals disguised as fellowships, grants and research funds based in part on the doctors’ or hospitals’ volume of device usage.

In its motion to dismiss, the device company argued, in part, that the plaintiff-relator had failed to allege that payments the device company made to physicians under the proctoring program exceeded fair market value (FMV) and, accordingly, that the plaintiff-relator had failed to address the applicability of the personal services safe harbor under AKS. The U.S. Department of Justice (DOJ) filed a statement of interest in the case, urging the court to deny the motion to dismiss. DOJ noted that lack of FMV is not an element of AKS violations, arguing that payments intended to induce referrals violate AKS even if those payments are FMV for services rendered. DOJ opined that “[t]o the extent that FMV has any relevance at all, it is one element among others that defendants have the burden of demonstrating if they seek to avail themselves of certain safe harbor defenses.”

In denying the device company’s motion to dismiss, the court agreed with DOJ, finding that FMV payments for services performed may violate AKS where those payments were intended to induce referrals. The court noted that such an intent “take[s] the payments out of the safe harbor, regardless of whether those payments were made at fair market value.”

In assessing AKS compliance, this ruling provides a reminder that a fair market value assessment alone may not insulate entities from AKS liability.