Get the 4-1-1 on your 1099s: 5th and 7th Circuits Permit Paying Volume-Based Compensation to Independent Sales Agents
May 7, 2025There has been increased enforcement against medical device companies that engage in the pervasive practice of paying third party sales agents based on their volume of sales. This scrutiny was enhanced after the Fourth Circuit’s ruling in United States v. Mallory, 988 F.3d 730 (4th Cir. 2021), reh’g denied, as well as in recent settlements (see, e.g., here), that all such arrangements violated the federal Anti-Kickback Statute (AKS). Two recent cases from the Fifth and Seventh Circuits, however, support the legality of these arrangements in the absence of the government proving certain circumstances.
On April 14, 2025, the Seventh Circuit overturned the criminal conviction of Mark Sorensen, the owner of a durable medical equipment (DME) distributor, who had been found guilty of violating the AKS. The Seventh Circuit took a more lenient approach than the Fourth Circuit, focusing its rationale on whether an independent contractor had improper influence over a healthcare provider’s independent healthcare decisions. Sorenson follows the Fifth Circuit’s decision last year in United States v. Marchetti, 96 F.4th 818, which likewise held that volume-based compensation is not a per se violation of the AKS, and must instead be based on an evaluation of whether the sales agents had undue or improper influence over healthcare providers.
Though Sorensen and Marchetti can provide support against allegations that such arrangements are per se violations of the AKS, companies should evaluate and, if necessary, take steps to de-risk their marketing organization, which could include limiting the use of independent contractors for such roles.
Regulatory Framework
The AKS makes it a criminal felony to knowingly and willfully offer or pay any remuneration, directly or indirectly, to induce a person to order or refer patients for medical care that is reimbursable under a federal healthcare program (e.g., Medicare or Medicaid). Recognizing that this broad prohibition could encompass many common and non-abusive practices, the Office of the Inspector General of the U.S. Department of Health and Human Services (OIG) has promulgated a number of safe harbor regulations describing activities protected from prosecution. Of relevance here is the “employees” safe harbor, which protects, inter alia, volume-based commissions paid by a pharmaceutical or device company to employee sales representatives, even though the commissions are intended to induce the representative to recommend the purchase of the company’s products. However, commissions paid to sales representatives who are independent contractors, as opposed to bona fide employees, are not protected under the safe harbor.
Still, the failure of an arrangement to meet the conditions of a safe harbor does not mean that the arrangement is necessarily unlawful, only that it does not have guaranteed protection. OIG reviews non-safe harbored arrangements on a case-by-case basis. Regarding commissions-based compensation structures for marketing agents, OIG has issued several instructive advisory opinions: AO 98-1 (adverse); AO 98-10 (favorable); AO 99-3 (favorable); and AO 99-8 (favorable). Although commissions-based compensation to marketing agents is not protected under any safe harbor, OIG’s multiple favorable opinions about such arrangements indicate that they are not per se violations of the AKS.
Per its advisory opinions on the subject, OIG evaluates the following factors to determine whether a sales agent arrangement is abusive:
- compensation based on percentage of sales;
- direct billing of a Federal health care program by the Seller for the item or service sold by the sales agent;
- direct contact between the sales agent and physicians in a position to order items or services that are then paid for by a Federal health care program;
- direct contact between the sales agent and Federal health care program beneficiaries;
- use of sales agents who are health care professionals or persons in a similar position to exert undue influence on purchasers or patients; or
- marketing of items or services that are separately reimbursable by a Federal health care program (e.g., items or services not bundled with other items or services covered by a DRG payment), whether on the basis of charges or costs.
The primary factor in the advisory opinions, apart from the commission-based payment, is whether the sales agents have undue influence over purchasers. The case law on commission-based marketing agents—including the Sorensen decision—follow in a similar vein.
Seventh Circuit ruling in Sorensen
In Sorensen, the government alleged, and the District Court agreed, that Sorensen paid illegal kickbacks to marketing firms based on the number of leads generated and a DME manufacturer based on the percentage of funds collected from Medicare. The Seventh Circuit unanimously reversed Sorensen’s criminal AKS conviction, finding there was insufficient evidence that any of the commissions-based marketing entities “leveraged any sort of informal power and influence over healthcare decisions.” Rather, the sales agents Sorensen paid had received consent from patients before faxing unsigned prescriptions to their physicians for review; more often than not, those physicians declined to prescribe the device.
The Court explained that the unsigned prescriptions sent to physicians “are best understood as proposals for care, not as referrals.” In contrast to its decision in United States v. Polin, 194 F.3d 863 (7th Cir. 1999), in which the sales agent was considered a decisionmaker because his referrals had never been overturned by a provider during the 14 years he worked in that role, here, even if the unsigned prescriptions are considered “recommendations” to providers, they were frequently overruled. Physicians had “ultimate control” and exercised “independent judgment” over their patients’ healthcare decisions. As such, neither Sorensen nor the entities he paid “had any authority to act on behalf of a physician” or “unduly influence[d] the doctors’ decisions.”
Distinguishing between “payments to individuals who take advantage of their existing relationships with patients or other health care providers” from mere “aggressive advertising efforts,” the Court found no evidence suggesting that Sorensen or anyone he paid “had any special relationship with or influence over patients’ physicians so as to subject them to improper influence.” In the absence of such evidence, the Court held that Sorensen’s volume-based (i.e., percentage-based or per-lead) compensation structures did not violate the AKS.
Fifth Circuit Case Law
The Seventh Circuit favorably cited the Fifth Circuit’s recent decision in United States v. Marchetti, 96 F.4th 818 (5th Cir. 2024), which affirmed Marchetti’s conviction for receiving illegal kickbacks but determined that most of his actions did not violate the AKS. In that decision, a medical laboratory paid Marchetti percentage-based compensation for successful referrals of Medicare patients to the laboratory. The government asserted that Marchetti had “relationships with, access to, and influence over” doctors, but failed to show that Marchetti exercised any impermissible influence on them. The Fifth Circuit ultimately affirmed Marchetti’s conviction based on his separate work for two competing laboratories, where he decided which laboratory received patient samples and received payments intended to induce his referrals.
It is worth noting that Marchetti follows a string of Fifth Circuit decisions on this topic, the holdings for which were based on similar grounds. In U.S. v. Miles, 360 F.3d 472 (5th Cir. 2004), the court distinguished between violative arrangements in which the sales agent has authority to select a provider and thereby earn compensation, and permissible ones in which a sales agent (in that case, agents promoting a home health agency to physicians) had no authority to select the provider. In a subsequent case, the Fifth Circuit describes Miles as standing for the proposition that where a purchasing choice is made by the health care provider and “there is no evidence that the advertiser ‘unduly influence[s]’ or ‘act[s] on behalf of’ the purchaser, the mere fact that the [seller] compensates the advertiser following each purchase is insufficient to support” a violation. U.S. v. Shoemaker, 746 F.3d 614, 627-28 (5th Cir. 2014).
In Practice
Volume-based compensation arrangements for independent contractor sales agents and marketers have long been a concern for HHS OIG. Sorensen and Marchetti provide additional support for defending against allegations that such arrangements are per se violations of the AKS, at least outside the Fourth Circuit. In evaluating non-safe harbored, commission-based marketing agents (e.g., independent contractors), undue influence is a key determinant of whether an arrangement is violative under OIG advisory opinions and the case law from the Seventh and Fifth Circuits.
To that end, businesses should carefully review their marketing practices, including the nature of their relationships with, and the compensation structures for, physicians and others in a position to influence referrals. Even if the use of commission-based independent contractors may not be a per se violation of the AKS, it nevertheless provides an attractive target for the government, and we are aware of several companies that decided to de-risk their marketing practices by ending such arrangements or that considered the risk associated with these arrangements in their valuation of a merger or acquisition.