New Federal Court Ruling On EKRA And Commission-Based Compensation With Sales Agents

Case law defining the application and scope of the Eliminating Kickbacks in Recovery Act ("EKRA)," 18 U.S.C. §220, has continued to grow since its passage in 2018. Over the past several months, the United States District Court for the Northern District of California, San Jose Division, issued rulings in relation to EKRA in the matter of United States v. Schena (Case No. 5:20-cr-00425-EJD-1).

The Schena matter entails a laundry list of alleged wrongful actions by Arrayit Corporation, a California-based biomedical company that advertised microarray-based testing claims, and subsequent inability to substantiate such claims. Among the allegations were that Arrayit had orchestrated a kickback scheme by paying kickbacks and bribes to its recruiters based on the number of patient referrals they secured for Arrayit. Arrayit moved to dismiss the EKRA claims, relying on S&G Labs Haw., LLC v. Graves, 2021 WL 4847430 (D. Haw. Oct. 18, 2021) to argue that EKRA did not apply as there was no direct interactions between its marketers and the individual patients.

In S&G Labs, the U.S. District Court for the District of Hawaii held that a commission-based lab employee did not violate EKRA because the lab employees did not refer individual patients, but instead, solicited physicians to refer patients to the lab. However, the Schena court rejected the S&G Labs analysis, finding that "EKRA's safe harbors did not extend to all employer-employee remunerations." Specifically, highlighting the vague definitions of "remuneration" and "individual" under both EKRA and the Anti-Kickback Statute, the Schena court held that EKRA lacked any directness requirement regarding interactions with individuals, thereby bringing Arrayit's indirect interactions between its recruiters and patients under EKRA's purview.

The Schena court's rejection of Arrayit's S&G Labs-based defense emphasizes the potential liability risks under ERKA for recovery homes, clinical treatment facilities, and clinical laboratories that pay their marketers based on productivity.

Originally published October 28, 2022

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