December 9, 2014  

A federal criminal investigation against Stryker subsidiary OtisMed Corp. over sales of an unapproved surgical product concluded Dec. 8 with guilty pleas from the company and its former CEO, along with their agreement to financial penalties that, together with the settlement of a related qui tam action, amount to more than $80 million.

The devices, OtisKnee guides, were used in knee-replacement procedures to assist surgeons in making accurate bone cuts.

OtisMed, an Alameda, Calif.-based biotechnology company, began selling the guides in 2006 and sought marketing clearance from the Food and Drug Administration in 2008, according to court documents.

Appearing in court before U.S. District Judge Claire Cecchi of the District of New Jersey in Newark, the company admitted that in September 2009, one week after the FDA denied its application, it distributed hundreds of the guides—characterized as “adulterated medical devices”—into interstate commerce with the intent to defraud and mislead, according to a press release by the U.S. Attorney’s Office for the District of New Jersey. Charlie Chi of San Francisco, the founder and CEO of OtisMed before it was acquired by Stryker in November 2009, entered his own plea to three counts of introducing adulterated medical devices into interstate commerce before U.S. Magistrate Judge Mark Falk, who also sits in Newark.

Chi and OtisMed admitted that he ordered the shipment of approximately 218 guides to surgeons throughout the United States, including 16 in New Jersey, after the FDA denial, the press release said. Chi, represented by former New Jersey Attorney General Peter Harvey, who is now with Patterson Belknap Webb & Tyler in New York, is scheduled to be sentenced by Cecchi on March 18 and faces a maximum of one year in prison and a $100,000 penalty on each count. On Dec. 8, Cecchi fined OtisMed $34.4 million and ordered it to pay a $5.16 million criminal forfeiture.

The accompanying civil settlement, announced by the U.S. Attorney’s Office the same day as the pleas, concludes a False Claims Act lawsuit brought in the district by Stryker employee Richard Adrian, U.S. ex rel. Adrian v. OtisMed.

Adrian identified himself in the complaint, which was filed in October 2009 but has since been sealed, as a New Jersey resident and a Stryker employee since 1994 who has served in varying positions, including branch sales manager for different geographic areas, area director of sales and senior director of sales.

Adrian alleged in the complaint that OtisMed, Stryker and Howmedica Osteonics of Mahwah, N.J., another Stryker subsidiary, engaged in a scheme to defraud patients and government health-care programs by marketing and causing to be used the unapproved cutting guide and billing the government millions of dollars for knee replacements that utilized it and the MRIs used to customize the guides for each knee patient.

The companies also withheld from the FDA unfavorable information and gave others the incorrect impression that the guides were approved, Adrian alleged. He further claimed that before acquiring OtisMed, Stryker worked with it to market the cutting guides because they worked well with its own knee-replacement products, even though it was allegedly aware it was promoting an unapproved device.

Under the settlement, OtisMed is to pay about $41.2 million to resolve allegations that it submitted false claims to Medicare, Medicaid and other federal programs. About $7 million is set to go to Adrian as the relator in the suit.

According to the U.S. Attorney’s Office press release, Stryker was not aware of the improper shipments, which occurred two months before it acquired OtisMed, and the company, based in Kalamazoo, Mich., cooperated with the government in the investigation of OtisMed’s conduct.

On top of the other penalties, OtisMed agreed to be excluded from participation in all federal health-care programs for 20 years, while Stryker consented to a number of compliance measures intended to prevent future misconduct.

Those measures are laid out in a 40-page side agreement which states that the United States will not prosecute Stryker, contingent on OtisMed fulfilling its obligations, which must be done within 90 days of the sentencing.

Among other required actions, Stryker must keep working on and enforcing policies and procedures designed to prevent violation of the laws on the sale and marketing of medical devices and must conduct certain audits and report on the results. For example, within 180 days of the side agreement’s effective date, the company must audit records of clinical investigations regarding Orthopedics Group Reconstruction Division devices to ascertain compliance with the law and, within 60 days after that, provide the government with a written report of the results.

In addition, the company’s board of directors must establish compliance oversight procedures for a governance committee, which will have to include two independent members, and oversee compliance with the law. 

Stryker also has 10 days from the effective date to inform its “Knee Business Unit” employees about OtisMed’s guilty plea and provide them with a copy of the criminal charges, statement of facts and side agreement.

“Americans must be able to trust that they are treated with medical devices that have been shown to be safe and effective,” Deputy Assistant Attorney General Jonathan Olin, of the Department of Justice, said in the press release.

Assistant U.S. Attorney Jacob Elberg, chief of the Health Care and Government Fraud Unit in the New Jersey office, was the lead prosecutor in the case.

Chi’s lawyer, Harvey, stated that what was “essentially a regulatory violation involving a product that posed no danger to the public” was transformed into a criminal case. He claimed Chi shipped the guides after the FDA denial only so that patients whose surgeries were imminent “were not left hanging.”

“What is extraordinary about this felony plea is that the government has not penalized any current executive of Stryker Orthopedics, which owns OtisMed and ... has accepted a plea from a Stryker subsidiary which has not had any employees, assets or revenues for the past three years,” Harvey said.

If you've been injured and would like to speak with a NJ Personal Injury attorney, call today for your free consultation 800-709-1131.