Lab Executives Lose Big in Federal Jury Trial

RATHER THAN ENTER INTO A NEGOTIATED SETTLEMENT with federal prosecutors, the former executives of Health Diagnostic Laboratory (HDL) and BlueWave Healthcare Consultants decided to take their case to a jury in a federal court in South Carolina. The outcome has notable lessons for all lab managers and pathologists, as well as the attorneys who advise them.

As you will read on pages 3-7, the jury verdict was that former HDL CEO Tonya Mallory and BlueWave executives Floyd Calhoun Dent III and Robert Bradford Johnson were guilty of violating the federal False Claims Act. The three defendants were ordered to pay $16.6 million, which, under the penalty provisions of federal law, will be tripled to about $54 million.

Of course, there will be post-trial motions and negotiations, and the defendants may choose to appeal the verdict. So, the final outcome of this case might turn out differently. In the meantime, however, the verdict in this jury trial sends clear messages to the clinical lab profession and lawyers who advise them.

The first message is the increased risk of federal enforcement against the owners and managers of lab companies, if their lab operations and their sales and marketing programs to physicians are found to violate the federal False Claims Act or other statutes, particularly if the sales reps induced physicians with payments or other goods in exchange for the lab test referrals of Medicare patients.

The second message is that at least one federal judge and jury is ready to consider the quality of legal advice given to lab owners and managers about federal and state compliance issues. One question the court considered was the actual advice and opinions lawyers provided to HDL and BlueWave’s executives. Did it come from credible attorneys with experience in healthcare litigation? Was it advice that might reasonably be viewed as imperfect or flawed?

The other question the court considered was how the defendants responded to the legal advice provided to them. This included advice from outside lawyers who questioned the legality of some of HDL and BlueWave’s practices. Did the defendants ignore legal opinions that did not support their strategies that were generating millions in profit? The outcome of this trial should give all lab owners and managers—and their lawyers—a good reason to review their lab’s compliance with federal and state law.