New Percentage-Based Commissions Ruling

Latest decision from California federal court conflicts with earlier EKRA ruling in Hawaii

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CEO SUMMARY: In denying a motion to dismiss certain charges against a clinical laboratory owner, a federal court in California has declared that the Eliminating Kickbacks in Recovery Act (EKRA) of 2018 applies to payments for marketing to physicians and other referral sources. This ruling diverges from a prior EKRA-based decision in a Hawaii court.

Robert-MazerDanielle-Sloane

CAN CLINICAL LABORATORIES PAY PERCENTAGE-BASED COMMISSIONS to marketing and sales employees of clinical laboratories? Since passage of the Eliminating Kickbacks in Recovery Act (EKRA) of 2018, conflicting language with that and another federal law has unsettled labs. Now, things have gotten even muddier with a new court ruling that conflicts with an earlier ruling. 

However, in response to the newest court ruling, advice from healthcare attorneys is simple: If labs are going to pay commissions, make sure the compliance infrastructure is strong. 

“There is some risk in paying commissions under EKRA, even for employees. If labs are going to use volume-based commissions, they should have good compliance training and compliance checks on what those sales and marketing reps are doing,” warned attorney Danielle Sloane, a member at law firm Bass, Berry and Sims in Nashville. 

“Ultimately, it is the bad behavior that garners attention from federal officials, so the best labs can do to reduce the risk is to maintain compliance processes that reduce the likelihood of aggressive and inappropriate sales tactics,” she added. 

The latest court decision arose from a case in California, United States vs. Mark Schena. Schena, who is president at Arrayit Corporation in Sunnyvale, Calif., was indicted on various charges of healthcare fraud. In part, the federal prosecutors alleged Schena and others paid one or more marketers to recruit physicians to order blood-based allergy testing from Arrayit for their patients. 

Motion to Dismiss Charges 

In February, Schena asked a judge to dismiss some of the charges against him based on an October ruling from a judge in Hawaii. That earlier ruling, a civil case, concluded that payments of percentage-based sales commissions to a laboratory sales employee did not violate EKRA. The U.S. Department of Justice (DOJ) opposed Schena’s motion to dismiss. (See the sidebar below for more details about both cases.) 

On May 28, U.S. District Court in the Northern District of California sided with the DOJ and denied Schena’s motion. “Schena tried the same argument in his motion to dismiss as the Hawaii case: that EKRA doesn’t apply to a situation where a lab pays people to market to doctors,” explained Robert Mazer, senior counsel at law firm Baker Donelson in Baltimore. “But the California court didn’t agree with the Hawaii ruling.”

EKRA is contentious for lab leaders. Originally it targeted sales practices at sober homes and substance abuse treatment centers. In a later draft passed by Congress, clinical laboratories were added to the list of providers named in the act. (See TDR, “New Opioid Law Hits Labs Paying Sales Commissions,” Dec. 3, 2018.) 

EKRA’s anti-kickback provisions cover all payers, while the Anti-Kickback Statute (AKS) applies just to federal healthcare programs, which creates conflicts. The conflict in the language to the two laws means that some conduct protected under the AKS is instead a criminal violation under EKRA. That includes the common lab practice of compensating sales employees on a commission-based formula related to any third-party-payer business they generate. 

Individual vs. Organization

The Hawaii decision made a distinction between a marketing employee receiving commission to refer an individual to a lab for testing versus receiving commission for getting client organizations to use a specific lab. But the California ruling did not agree with this logic within EKRA’s framework. 

“There is no requirement of ‘directness’ in the text of EKRA. Rather, by its terms, it applies to situations where someone ‘pays or offers any remuneration’ to ‘induce’ an individual into using laboratory or clinical services,” according to the Schena ruling. “Notably missing is any requirement of direct interaction between the marketer and the individual.”

The court also noted that EKRA fairly applies to the alleged conduct of Schena. “EKRA reaches the conduct at issue in the superseding indictment, namely defendant’s alleged scheme to influence marketers by paying them illegal kickbacks to induce the referral of patients to Arrayit,” the ruling stated. 

“It is irrelevant that some of the marketers caused the referral of patients by conveying defendant’s allegedly false representations about Arrayit to physicians, instead of to the patients directly,” the ruling continued. “The physicians referred the patients based on the misrepresentations, and the marketers received a kickback to ‘influence’ the physician’s referrals. This conduct squarely falls within the text of EKRA.”

Differences in the Two Cases

Sloane noted that the two cases are quite different, and that the California case is a better indicator of the likely interpretation in the context of enforcement actions.

“In the Hawaii case, a sales employee is trying to enforce his contract in a civil dispute with his former employer to get paid amounts he feels due,” she said. “There are no allegations of wrongdoing or impropriety in any way; rather, the employer is saying, ‘This arrangement doesn’t comply with EKRA, so I can’t pay you.’

“However, in the Schena case, if you read the indictment, there’s a litany of allegations of wrongdoing, and importantly, the DOJ weighs in on what it thinks the law means,” she added.

Wise clinical laboratory directors should not look at the California decision as a panacea to any questions about EKRA.

“The Schena ruling addresses only one threshold question about whether EKRA applies to payments for marketing to physicians and referral sources,” Mazer noted. 

“Clinical labs might mistakenly read more into it, such as what compensation arrangements are permissible under EKRA, but the ruling really didn’t touch on that,” he added. “So, to the extent that those issues were fuzzy before, they remain fuzzy now because only a very narrow issue was addressed by the court.”

Contact Robert Mazer at 410-862-1159 or rmazer@bakerdonelson.com; Danielle Sloane at 615-742-7763 or DSloane@bassberry.com.

In Different Federal Civil and Criminal Cases, the Scope of EKRA is Debated by the Courts

TO UNDERSTAND THE LATEST COURT RULING regarding the Eliminating Kickbacks in Recovery Act (EKRA) of 2018, it helps to look at two cases that have prominently raised questions about the law. 

The first case—S&G Labs Hawaii vs. Darren Graves—is a civil court matter that centers on an employment contract dispute. Defendant Graves was a sales account manager at S&G. Beyond his salary, he received percentages of monthly net profits generated by his client accounts and by the accounts of the sales reps whom he managed, according to court records. 

In early 2019, concerned that EKRA prohibited S&G from paying sales reps based on the number of tests performed for client accounts, the company’s CEO unsuccessfully tried to renegotiate Graves’ contract. In September of that year, the CEO fired him, at least partially because Graves had contacted a competing lab about working there and urged other S&G reps to also leave. 

S&G sued Graves in March 2020 for breach of contract. He filed a counterclaim against S&G for unlawful termination and for not paying his agreed upon compensation.

Surprising Decision

A hearing was held in July 2021 about the applicability of EKRA to the case. U.S. District Judge Leslie Kobayashi ruled in October that EKRA did not apply to Graves’ employment arrangement. 

“The commission-based compensation provisions of Graves’ employment contract with S&G did not violate EKRA, and therefore S&G’s failure to pay him according to those provisions constituted both a breach of contract and a violation of Hawaii [law],” Kobayashi concluded. 

That decision surprised many observers because it went against the general belief that volume-based sales commissions did not meet the intent of EKRA.

Motion to Dismiss

It didn’t take long for an unrelated case to jump on the Hawaii ruling.

On February 3, a lawyer for defendant Mark Schena filed a motion in U.S. District Court in the Northern District of California to have some counts against his client dismissed based on the Hawaii ruling. 

“Based upon the analysis in S&G Labs [and] the text of EKRA itself … this court should dismiss counts four through six of the superseding indictment because the conduct that is alleged in those counts is not cognizable as an offense under EKRA,” according to the motion to dismiss. 

Schena, president at Arrayit in Sunnyvale, Calif., was criminally charged by the U.S. Department of Justice (DOJ) for allegedly paying one or more marketers to recruit physicians to order blood-based allergy testing for patients from Arrayit.

In an original indictment filed in November 2020, Schena was charged with healthcare fraud for allegedly taking part in a scheme to submit $69 million in false claims for allergy and COVID-19 tests, according to the DOJ. A superseding indictment filed in May 2021 added new charges involving conspiracy to pay kickbacks. The alleged conspiracy centered on inducing orders of COVID-19 tests and bundling them with a medically unnecessary allergy test. Additionally, the government charged that the COVID-19 tests were not reliable in detecting SARS-CoV-2.

The California court ruled against the motion to dismiss on May 28, 2022, arguing the Hawaii decision was flawed and that EKRA did indeed apply to Schena’s case. He is set to go to trial on July 26.

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