Federal Judges: Paying Commissions Violates AKS

Federal appeals court ruling affirms finding by the lower court that defendants violated AKS

CEO SUMMARY: Health Diagnostic Laboratory and its marketing partner, BlueWave Consultants, were back in the news recently after a three-judge panel of a federal appeals court denied a challenge from the former principals of those companies to an earlier court ruling that required them to pay more than $100 million for violating the False Claims Act. The appeals court judges affirmed that the Anti-Kickback Statute does not allow labs to pay sales commissions to contractors.

PAYING SALES COMMISSIONS TO INDEPENDENT CONTRACTORS working as sales professionals for clinical laboratories and anatomic pathology groups continues to be illegal and in violation of the federal Anti-Kickback Statute (AKS). This was affirmed by a recent federal appeals court ruling. 

The ruling itself describes how the federal appeals court judges reviewed issues considered by the lower court. For that reason, it is a document that pathologists and clinical laboratory managers may want to review with their legal advisors as part of their laboratory’s ongoing compliance program. 

Appeals Court Ruling

In particular, one aspect of the trial court’s verdict and the appeal court’s ruling that may be useful and relevant for other lab organizations is centered around how the defendants disregarded legal advice regarding the legality of sales compensation arrangements. 

This element of the appeals court decision describes how the lab company and its officers and principals received advice from different attorneys about their sales program. On this point, having assessed the government’s charge that the defendants “‘knowingly and willfully’ violated the Anti-Kickback Statute,” and the defendant’s response, the appeals court found that the defendant’s arguments lacked merit.

The ruling was issued by the U.S. Court of Appeals for the Fourth Circuit in Richmond, Va., and upheld an earlier decision in which a federal district court awarded more than $100 million in damages against the owners of a lab company and its marketing partner consultants. The names of the defendants in these federal cases are likely to be familiar to readers of The Dark Report. 

Last December, a three-judge panel heard arguments in the Fourth Circuit case, and the judges issued their ruling on Feb. 22. 

The earlier trial court verdict and the federal appeals court ruling in February went against the defendants, including former CEO LaTonya Mallory of Health Diagnostic Laboratories (HDL) and two executives (Floyd Calhoun Dent III and Robert Bradford Johnson). The appeals court’s decision indicates that Dent and Johnson’s marketing company (BlueWave Healthcare Consultants) had received a percentage of lab revenue for their services, according to Robert E. Mazer, a health law attorney and senior counsel with the national law firm of Baker Donaldson in Baltimore. 

HDL’s Bankruptcy in 2015 

HDL had operated as an independent clinical lab company in Richmond, Va., until it filed for bankruptcy protection in 2015 and its assets were sold to another lab company, True Health Diagnostics. (See “Insights from Jury Verdict in HDL, Bluewave Case,” TDR, Feb. 12, 2018.) 

“What started as a False Claim Act (FCA) suit focused on payment of ‘process and handling fees’ to referring physicians has resulted in an appellate decision confirming that payment of sales commissions to independent contractor marketing agents violates the Anti-Kickback Statute (AKS),” Mazer wrote in a story on his LinkedIn page.

“It is useful to note that the appeals court ruling didn’t offer much in the way of any new analysis of the Anti-Kickback Statute,” said Mazer in an exclusive interview with The Dark Report. “I thought the appeals court decision was consistent with the Office of the Inspector General’s (OIG) general view that the Anti-Kickback Statute doesn’t allow a provider, like a clinical laboratory, to pay commission to an independent contractor selling that provider’s services.”

Mallory, Dent, Johnson 

It was in January 2018, when a jury in the U.S. District Court in Charleston, S.C., found Mallory, Dent, and Johnson violated the False Claims Act that covers Medicare and other federally-funded healthcare programs. Four months later—in connection with the false claims—a federal judge in South Carolina imposed civil damages and penalties totaling more than $114 million against the same three defendants.

The verdict and judgment were the results of three separate whistleblower or qui tam cases. One of those whistleblower-litigants was Michael Mayes, MD, a physician in Hilton Head, S.C., who testified in the South Carolina case. Other whistleblowers in the case were Scarlett Lutz, Chris Riedel, and Kayla Webster. 

Riedel is well known among lab professionals as a whistleblower and former president of Hunter Laboratories in Campbell, Calif. (See “National Group Names Riedel ‘Whistleblower of the Year,’ ” TDR, Sept. 26, 2011.) 

He’s also the author of the book, “Blood Money—One man’s bare-knuckle fight to protect taxpayers from medical lab fraud,” which was published last fall. 

Sustaining Jury’s Finding 

“In sustaining the South Carolina jury’s finding that the parties had violated the FCA, the appeals court rejected the defendants’ principal argument that the government had not proven that they ‘knowingly and willfully’ violated the Anti-Kickback Statute (AKS),” Mazer wrote.

In fact, the appeals court found that the defendants had numerous warnings from their attorneys that the payment arrangements that HDL and BlueWave had made regarding sales compensation violated the AKS or was legally risky, he explained. 

In the appeals court case, the appellants [defendants Mallory, Dent, and Johnson] argued that the sales commissions [paid by HDL to BlueWave] did not violate the AKS, that the AKS statute was ambiguous, and that attorneys had helped prepare the marketing contracts, Mazer added. The appeals court rejected these arguments.

But then Mazer went further in explaining the nature of the Anti-Kickback Statute violations. 

“According to the court, previous court decisions had held that commission-based payments to independent contractors violated the AKS, the AKS safe harbor permitting commission-based payments applied only to employees, and while sales representatives may not make direct referrals, they unlawfully receive compensation for ‘recommending’ health care services,” he wrote. 

‘Knowingly Violated AKS’

“The court stated that a reasonable jury could conclude that Defendants willfully paid commissions to independent contractors and, accordingly, that they knowingly violated the Anti-Kickback Statute,” Mazer added.

Now that the appeals court case has been decided, Mazer speculated that it is possible the appellants could take the case to the U.S. Supreme Court. 

When crafting compliance programs for their own labs, lab executives should take note of several important facts about this case. First, the Department of Justice was successful in bringing Mallory, Johnson, and Dent into federal court and winning decisions that require them to repay more than $100 million. This shows the risk of a lab executive violating AKS and later facing federal court action when the federal government seeks to recover those funds. 

Second, the appeals court ruling has important insights into how the defendants were advised by attorneys as to the compliance of their sales program. These elements in the court ruling can help labs and their lawyers develop appropriate compliance policies.

Anti-Kickback Statute and EKRA: How They Differ in Ways Labs Can Pay Sales Commissions

CLINICAL LABORATORIES AND ANATOMIC PATHOLOGY GROUPS must review their sales and marketing programs for compliance with two federal laws. One is the Anti-Kickback Statute (AKS), first passed in 1972 and updated with revised safe harbor rules that took effect this January. The other is the Eliminating Kickbacks in Recovery Act (EKRA) that was passed in 2018. 

There are significant differences in how each law defines acceptable sales compensation and whether providers, including clinical labs, may pay commissions to employee sales agents or independent contractor sales agents. The table below provides a basic overview of each law’s requirements. 

Attorneys knowledgeable about AKS and EKRA speculate as to whether the Department of Justice would view all arrangements that might be said to violate either law as the same, or whether it might more favorably view some long-standing arrangements that were legally compliant until EKRA’s enactment, particularly if there were no known abuses. 

Anti-Kickback Statute


Laboratory uses a bona fide employee as a sales agent and can pay commissions based on the volume of specimens, volume of tests, or amount of revenue generated. 


Under the recent revision of the AKS rule, the payment method must be set in advance, reflect fair market value, and take into account the volume of value of referrals of business generated between the two parties. Conventional thinking is that revised AKS safe harbor effectively continues to forbid the payment of commissions to non-employees of the lab. 

Note: Anti-Kickback Statute only applies to government health programs, such as Medicare, Medicaid, TriCare. 

EKRA Law (Eliminating Kickbacks in Recovery Act of 2018)


EKRA allows the employer to pay a fixed salary to an employee working as a sales agent or using any other method that is not prohibited by the statute, as outlined below. 

EKRA exception for payment to an employee prohibits payments that reflect: the number of individuals referred to lab, the number of tests or procedures performed, or related amounts billed or received by the laboratory.


EKRA treats an independent contractor sales agent the same as an employee sales agent. 

EKRA exception for payment to an independent contractor prohibits payments that reflect: the number of individuals referred to lab, the number of tests or procedures performed, or related amounts billed or received by the laboratory. 

Note: It is important to understand that EKRA applies to government health programs and to all types of private health insurance plans.

Lawyer Offers Insight on Prohibitions Defined by Anti-Kickback Statute and EKRA Law

BEFORE 2018, CLINICAL LABORATORIES AND ANATOMIC PATHOLOGY GROUPS could be relatively confident about how to compensate sales professionals without violating the Anti-Kickback Statute (AKS), according to Robert E. Mazer, Senior Counsel with Baker Donaldson, a national law firm. 

In an interview with The Dark Report, Mazer noted that, until three years ago, clinical laboratories and AP groups that wanted to use commission-based payments to compensate sales and marketing staff would need to employ the individuals providing those services. But as of 2018, this would no longer result in compliance with federal law, he noted.

“In 2018, the Eliminating Kickbacks in Recovery Act (EKRA) became law and generally extended federal kickback prohibitions to clinical laboratory services covered under a private insurance plan or contract,” Mazer explained. “In addition, those prohibitions apply to public plans as well, such as Medicare and Medicaid.”

For clinical lab directors and AP groups, it is important to understand that EKRA is much different from the Anti-Kickback Statute in significant ways, he noted. 

“EKRA’s exception for payments to employees prohibited compensation based on the number of individuals referred to the laboratory, the number of tests performed, or related amounts billed or received for laboratory services,” Mazer wrote in a story posted on his LinkedIn page. “Therefore, absent any statutory amendment, EKRA appears to prohibit longstanding commission-based payment arrangements between independent laboratories and employed sales representatives that have been permitted under the AKS.” 

That said, EKRA does not necessarily prohibit labs or pathology groups from paying all individuals employed as sales representatives on a fixed annual salary or any other basis that does not violate one of EKRA’s three prohibited payment methods.

Contact Robert E. Mazer at 410-862-1159 or rmazer@bakerdonelson.com.



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