New Threat to 1099 Distributors Emerges in Lawsuit

A lawsuit alleging that Zimmer’s independent contractor (aka:1099s) compensation structure violates the Anti-Kickback Statutes and False Claims Act has survived Zimmer’s motion to dismiss and could actually go to trial.

Zimmer’s motion to dismiss this potential threat to the system of 1099 independent contractors who sell and distribute medical devices was based on two important arguments:

1. The whistleblower (the Relator’s) complaint failed to state a claim for violation of the Anti-Kickback Statute, and
2. The Relator’s complaint is precluded by the public disclosure bar.

Judge Patti B. Saris of the United States District Court for the District of Massachusetts was not persuaded. The trial is on.

Interestingly, the U.S. Attorney declined to intervene, even though it was a whistleblower case but it did submit supplemental authority to the Court which identified case law where commission-based independent contractors were held to violate the Anti-Kickback Statute.

Medical device trade group, AdvaMed (The Advanced Medical Technology Association) filed an amicus brief in support of Zimmer’s motion to dismiss. AdvaMed argued that the practice of “employing independent sales agents to market and facilitate the sale of its medical devices” is a “practice that is widespread within, and vital to, the medical device industry and the patients it serves.”

AdvaMed went on to say that this entire case is a “fundamental misunderstanding of the Anti-Kickback Statute, as well as the relevant guidance from the United States Department of Health and Human Services Office of Inspector General.”

Judge Saris, ruled that the Relator’s allegations were plausible “given the breadth of the Anti-Kickback Statute and the characteristics of the independent contractor arrangement alleged here” and therefore constituted a claim for violating the Anti-Kickback Statute.

Judge Saris agreed with Zimmer’s second argument and found that “the essential elements of Relator’s complaint were publicly disclosed, thus triggering the public disclosure bar.” But, the Relator’s counter argument overcame Zimmer Biomet’s logic thanks to an “escape hatch” which demonstrated that the Relator “has knowledge that is independent from public disclosures.”

The lawsuit was filed by a former employee of Zimmer. The former employee worked for about ten years as a senior sales associate supporting sales of orthopedic medical devices.

The Relator claims that the violations began in June 2015 when Zimmer Holdings, Inc. acquired Biomet, Inc. After the acquisition, the Relator claims that the merged company adopted the independent contractor model for all of its sales reps.

This case could have implications for medical device companies relying on sales-based commissions for their independent contractors. OTW will monitor the litigation.