DOJ Settles with Five Hip and Knee Replacement Companies

October 2, 2007

On September 27, 2007, the U.S. Attorney’s Office for the District of New Jersey announced settlements with five companies (Biomet, Inc., Depuy Orthopaedics, Smith & Nephew, Inc., Zimmer, Inc., and Stryker Orthopedics, Inc.) resolving anti-kickback allegations.

The allegation common to all five cases is that each of the companies entered into consulting agreements with orthopedic surgeons under which the companies paid to induce the surgeons to use that company’s hip and knee replacement products.

Resolution for the first four companies listed above was through a deferred prosecution agreement (“DPA”), civil settlement, and corporate integrity agreement (“CIA”).  Stryker Orthopedics, Inc., which according to the press release “cooperated with the U.S. Attorney’s Office before any other company,” entered into a non-prosecution agreement (“NPA”), but did not enter into any civil settlement agreement or CIA, and therefore, did not get a release from civil or administrative liability.

All five companies have agreed to the appointment of federal monitors, who include former Attorney General John Ashcroft, and Debra Yang, the former U.S. Attorney for the Central District of California, whose investigation of Representative Jerry Lewis (R-CA), and somewhat abrupt departure from Gibson, Dunn & Crutcher LLP (the law firm representing Rep. Lewis), made headlines in connection with the U.S. Attorney firings earlier this spring.

The criminal complaints, filed in connection with each of the four cases in which there is a DPA, allege conspiracy to violate the criminal anti-kickback statute, 42 U.S.C. § 1320a-7b(b)(2), in violation of the general criminal conspiracy statute, 18 U.S.C. § 371.  It appears that the alleged conspiracy was between each company and surgeons as co-conspirators.  There does not seem to be any allegation of inter-company conspiracy.

The press release states that the civil releases resolve "claims under the anti-kickback statute and civil federal False Claims Act."  The settlement agreement summarily states that the "United States contends that certain of these financial arrangements were improper, that the remuneration paid thereunder was improper and/or unlawful, and that these arrangements caused hospitals and physicians to submit false and fraudulent claims. . . ."  Thus, it appears that the False Claims Act theory behind these settlements follows those cases in which the government has alleged that anti-kickback allegations necessarily give rise to false claims, a theory that is not tested in a settlement. 

In a post-McNulty Memorandum footnote on the controversy over the U.S. department of Justice requesting waivers of the attorney-client privilege, each of the DPAs and the NPA is clear that the companies are not waiving attorney-client privilege or attorney work-product protection, which contrasts with a pre-McNulty Memorandum DPA from that Office.

If last week’s activity from Senator Charles Grassley (R-IA), Ranking Member of the U.S. Senate Finance Committee, and False Claims Act champion, are any indication, resolution with the N.J. U.S. Attorney’s office may not put this matter behind these companies.  Senator Grassley sent a letter to Medtronic, which settled similar allegations in July of last year for $40M.  Senator Grassley nevertheless appears to want additional information from the company.


By James P. Ellison

Categories: Enforcement