OtisMed Agrees to Settle False Claims Act Allegations

According to the Justice Department, OtisMed Corporation (“OtisMed”) has agreed to pay over $80 million to resolve criminal and civil allegations by a whistleblower in a qui tam suit that it and one of its former executives violated the False Claims Act and Food, Drug and Cosmetic Act (“FDCA”).

According to the Stryker Corporation’s website, OtisMed is a biotechnology firm based in Alameda, California that focuses on customized products to assist orthopedic surgeons. OtisMed was founded in 2005. Stryker acquired OtisMed in November 2009.

According to the Justice Department, the allegations relate to OtisMed’s distribution, with the intention to defraud and mislead, of adulterated medical devices in violation of the FDCA. Specifically, OtisMed and one of its founders and former chief executive officer, Charlie Chi, were criminally charged with marketing and selling the OtisKnee Orthopedic Cutting Guide (“OtisKnee”) to surgeons throughout the U.S. after the product had been rejected by the Food and Drug Administration (“FDA”). The OtisKnee was intended to be used in total knee replacement surgeries as a cutting guide for surgeons to assist them in making accurate bone cuts relative to the patient’s specific anatomy.

In October 2009, just before OtisMed’s acquisition by Stryker, whistleblower Richard Adrian filed a qui tam action under the False Claims Act alleging that between January 2006 and September 2009, OtisMed and Chi sold over 18,000 of the OtisKnee cutting guides without approval by the FDA for the product and falsely represented to purchasers that the product was exempt from FDA pre-market approval.

The Justice Department announced that OtisMed and Chi pleaded guilty in Newark, New Jersey federal court to violating the FDCA. OtisMed was fined $34.4 million and ordered to $5.16 million in criminal forfeiture. Chi is scheduled to be sentenced in March 2015.

OtisMed agreed to pay $41.2 million, plus interest, to Medicare, TRICARE (the military’s insurance program), Federal Employee Health Benefits, and Medicaid, to settle the civil allegations raised in the whistleblower’s qui tam lawsuit. Because the Medicaid program is jointly funded by the states and the federal government, the participating Medicaid states will share in $376,700 of the settlement amount. The whistleblower will receive approximately $7 million of the settlement as his reward under the qui tam provisions of the False Claims Act.