Government Contracts & Investigations

Biopharmaceutical Company Agrees to Pay $6.5 Million to Resolve False Claims Act Allegations of False Commercial Pricing Disclosures in Government Contracts

By | April 9, 2020

On Monday, April 6, the U.S. Department of Justice (DOJ) announced that MiMedx Group Inc. (MiMedx or the company), an advanced wound care and biologics company, agreed to pay $6.5 million to resolve allegations that it overcharged the U.S. Department of Veterans Affairs (VA) by knowingly submitting false statements and disclosures regarding inflated prices for thousands of human tissue grafts used in VA medical facilities in Iowa, Michigan, Minnesota, Nebraska, North Dakota, Texas, and Wisconsin.

Pursuant to FAR § 8.402(a), the VA solicits, negotiates, awards, and administers Multiple Award Contracts to procure medical supplies under the VA Federal Supply Schedules program, also known as the Multiple Award Schedule (MAS). The VA MAS program also allows the Government to obtain commercial supplies and services at prices associated with volume buying. 41 U.S.C § 259(b)(3); FAR § 8.402(a). The MAS program negotiates firm-fixed pricing based on a commercial “most favored customer” (MFC) pricing concept, including an option for economic price adjustments. The General Services Acquisition Manual (GSAM) clause, § 552.212-70(c)(1), requires contractors to disclose their accurate commercial sales pricing regarding all of the products they offer to their commercial customers. This clause typically results in a contractor identifying customers or a class of customers that the contractor and the Government agree are to be used as a basis for determining pricing, sales and discounts. Failure to afford the same pricing, sales and discounts it provides those customers to the government customers may be determined to violate the MFC clause and prompt an action to recoup funds paid under the Price Reductions clause, GSAM § 552.238-75(f).

In the MiMedx case, the relators alleged that, in its commercial sales pricing disclosures, MiMedx lied to the Government about purported commercial sales of its 16-mm EpiFix disk at the list price of $995.00, because MiMedx did not sell the 16-mm disk to its commercial customers at all. MiMedx offered smaller and larger EpiFix disks at significantly lower prices to its commercial customers, according to relators. The relators alleged further that in response to commercial health care providers’ unwillingness to pay for a particular AmnioFix allograft product offered to all MiMedx customers, including the Government, MiMedx developed a cheaper alternative that it only offered to its commercial customers. The relators alleged that MiMedx did not inform the Government of this additional, cheaper but equivalent product offering. The relators concluded that because of MiMedx’s materially false and misleading statements and omissions, the Government overpaid by millions of dollars for MiMedx products sold under MiMedx’s MAS contracts.

The lawsuit arose under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private parties, also known as “relators,” to sue on behalf of the Government for false claims and to receive a share of any recovery. Jess Kruchoski and Luke Tornquist, former MiMedx sales representatives who were terminated by the company after they raised alarms about the commercial pricing practices, filed this action under seal in the U.S. District Court for the District of Minnesota in January 2017. In May 2019, at the conclusion of its own investigation, the DOJ declined to intervene in the action, but the relators proceeded with the lawsuit. The relators’ continued pursuit of the litigation ultimately resulted in the DOJ reentering the litigation and partially intervening for purposes of settlement.

Interestingly, MiMedx self-disclosed the error regarding its commercial sales practices to the VA Office of Inspector General (VA-OIG) in November 2018, prior to its knowledge of the qui tam suit or Government investigation. The DOJ acknowledged MiMedx’s self-disclosure and cooperation with the Government’s investigation, which undoubtedly reduced MiMedx’s damages and overall settlement number.

The qui tam case is captioned United States of America ex rel. Jess Kruchoski and Luke Tornquist v. MiMedx Group, Inc., 17-cv-00187 (D. Minn.). As part of this settlement, the relators will receive $1,625,000 as their share of the Government’s recovery.

The case stands for the proposition that it is critical for government contractors to maintain and provide true and accurate information in their dealings with the Government. As government contractors are well aware, federal, state, and local procurement processes require a heightened level of compliance, and with the fast-tracked procurement that will take place as a result of the implementation of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), it is even more important that contractors pay attention to their compliance requirements and maintain accurate and complete records documenting their compliance, should a problem arise in the future.

Now is a good time for contractors to review and assess their compliance programs and activities, including ethics policies, procedures and processes, against their contractual requirements to ensure that their programs are effective and being followed.

Due to the dynamic nature and rapidly changing circumstances, Stinson’s Government Contracts and Investigations team will continue to monitor government contracting-related fraud enforcement and provide periodic updates, and we welcome your questions. This team includes leaders who are alumni of many of the sections of the DOJ and other federal agencies.

For more information on the DOJ’s heightened fraud enforcement in relation to the Coronavirus and government contracting matters, please contact Habib Ilahi, Susan Warshaw Ebner, Elsa Manzanares, Joel Schwartz, Roddy Stieger, Eric Whytsell, Judith Araujo or the Stinson LLP contact with whom you regularly work.

Contact Habib Ilahi for more information.