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United States ex rel. D'Agostino v. EV3, Inc.

United States District Court, D. Massachusetts

December 30, 2015

UNITED STATES OF AMERICA ex rel. JEFFREY D'AGOSTINO; STATES OF CALIFORNIA, CONNECTICUT, DELAWARE, FLORIDA, GEORGIA, HAWAII, ILLINOIS, INDIANA, LOUISIANA, MARYLAND, MICHIGAN, MINNESOTA, MONTANA, NEVADA, NEW HAMPSHIRE, NEW JERSEY, NEW MEXICO, NEW YORK, NORTH CAROLINA, OKLAHOMA, RHODE ISLAND, TENNESSEE, TEXAS and WISCONSIN; COMMONWEALTHS OF MASSACHUSETTS and VIRGINIA; and the DISTRICT OF COLUMBIA
v.
EV3, INC.; MICRO THERAPEUTICS, INC.; JOHN HARDIN; and BRETT WALL

          For United States of America, ex. rel. Jeffrey D'Agostino and John Doe, Plaintiff: Gregg D. Shapiro, LEAD ATTORNEY, Office of the United States Attorney, Boston, MA; Shannon Kelley, United States Attorneys Office, Boston, MA.

         For Jeffrey D'Agostino, Relator, Plaintiff: Daniel R. Miller, LEAD ATTORNEY, PRO HAC VICE, Berger & Montague, Philadelphia, PA; Jonathan Shapiro, Lynn G. Weissberg, Stern, Shapiro, Weissberg & Garin, Boston, MA.

         For John Doe, Relator, State of California, State of California, State of Delaware, District of Columbia, State of Florida, State of Georgia, State of Hawaii, State of Illinois, State of Indiana, State of Louisiana, State of Maryland, Commonwealth of Massachusetts, State of Michigan, State of Montana, State of Nevada, State of New Hampshire, State of New Jersey, State of New Mexico, State of New York, State of North Carolina, State of Oklahoma, State of Rhode Island, State of Tennessee, State of Texas, Commonwealth of Virginia, State of Wisconsin, Plaintiffs: Jonathan Shapiro, Lynn G. Weissberg, Stern, Shapiro, Weissberg & Garin, Boston, MA.

         For ev3, Inc., Defendant: Joshua S. Levy, LEAD ATTORNEY, Ropes & Gray LLP, Boston, MA; Bryan A. Pennington, Jeremy E. Kanarek, Mitchell D. Stromberg, Ropes & Gray - MA, Boston, MA.

         For John Hardin, Microtherapeutics, Inc., Defendants: Stephen G. Huggard, LEAD ATTORNEY, Locke Lord LLP, Boston, MA; Elizabeth H. Kelly, Hilary B. Dudley, Edwards Wildman Palmer LLP - MA, Boston, MA; Joshua S. Levy, Ropes & Gray LLP, Boston, MA.

         For Brett Wall, Defendant: Martin F Murphy, LEAD ATTORNEY, Amanda S. Hainsworth, Shoshana D. Gray, Foley Hoag LLP, Boston, MA; Joshua S. Levy, Ropes & Gray LLP, Boston, MA.

         MEMORANDUM OF DECISION AND ORDER ON RELATOR'S MOTION TO AMEND THE COMPLAINT

         Richard G. Stearns, UNITED STATES DISTRICT JUDGE.

         This case was remanded by the Court of Appeals for reconsideration of the court's refusal to grant leave to plaintiff/relator Jeffrey D'Agostino to file a fifth iteration of his qui tam Complaint. In its opinion, the Circuit Court did not delve into this court's substantive discussion of the merits of the collective defendants' motion to dismiss. See United States ex rel. D'Agostino v. EV3, Inc., 802 F.3d 188, 191 (1st Cir. 2015) (" First, [plaintiff/relator] contends that the district court improperly thwarted his efforts to amend his complaint. Second, he challenges the court's dismissal of his complaint and the subsidiary legal determinations undergirding that dismissal. We start -- and end -- with the first claim." ). For that reason, the court believes that the most efficacious way to proceed is by adopting and adapting its previous discussion of the merits of the case, and analyzing any new allegations for their effect on the court's thinking.

         D'Agostino, a former employee of defendant EV3, Inc., filed the prototype of this action under seal on October 26, 2010. At the time, EV3 was the sole defendant. On February 3, 2011, D'Agostino amended the original Complaint to add three defendants, among them John Hardin, the Vice President of Sales and Global Marketing at EV3 for the Onyx device. D'Agostino sought and received permission to amend the Complaint two additional times, the first on August 28, 2012, and the second on May 17, 2013, while the case remained under seal. On October 1, 2013, the United States filed a notice of non-intervention, followed on December 19, 2013, by twenty-five named states and the District of Columbia.[1] On December 26, 2013, the court unsealed the case.[2] D'Agostino received permission to amend the Complaint yet again on April 28, 2014, adding Microtherapeutics, Inc. (the company that developed the Onyx and Axium devices before merging with EV3), and Brett Wall (a former marketing executive at EV3) as defendants.

         On August 1, 2014, on completion of the briefing of the motion to dismiss, D'Agostino sought to amend his Complaint for a fifth time.[3] The court denied leave to amend pursuant to Fed.R.Civ.P. 16(b)(4), which requires a showing of " good cause," and on September 30, 2014, dismissed the Third Amended Complaint (TAC) with prejudice.

         On September 30, 2015, the Court of Appeals remanded with the instruction that the court consider D'Agostino's request to amend under the more lenient standard of Fed.R.Civ.P. 15(a)(2), which permits an amendment only with leave of the court, but also stipulates that leave is to be granted freely " when justice so requires." Nonetheless, as the Court of Appeals noted, while leave is to be freely granted, a court may deny leave to amend under Rule 15(a)(2) for essentially the same reasons as under Rule 16(b)(4), including " undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). See D'Agostino, 802 F.3d at 195 (" Let us be perfectly clear. We do not suggest that the district court will be compelled to grant the motion to amend on remand." ).

         On November 9, 2015, D'Agostino filed a new motion to amend, attaching a superseding Proposed Complaint (Dkt. # 128-1). Defendants now oppose this motion, arguing inter alia that it would cause undue delay, undue prejudice, that D'Agostino has repeatedly tried and failed to cure deficiencies in the Complaint, and that any further attempt to amend would be futile.

         The defendants focus the bulk of their briefs on the " futility" exception. " [A] judge may deny leave if amending the pleading would be futile -- that is, if the pined-for amendment does not plead enough to make out a plausible claim for relief." HSBC Realty Credit Corp. (USA) v. O'Neill, 745 F.3d 564, 578 (1st Cir. 2014). " Futility of the amendment constitutes an adequate reason to deny the motion to amend." Todisco v. Verizon Commc'ns, Inc., 497 F.3d 95, 98 (1st Cir. 2007). While " plaintiff typically will not be precluded from amending a defective complaint in order to state a claim on which relief can be granted . . . several courts have held that if a complaint as amended could not withstand a motion to dismiss or summary judgment, then the amendment should be denied as futile." 6 Charles Alan Wright & Arthur R. Miller, Fed. Prac. & Proc. Civ. § 1487 (3d ed.); cf. Hatch v. Dep't for Children, Youth & Their Families, 274 F.3d 12, 19 (1st Cir. 2001) (" If leave to amend is sought before discovery is complete and neither party has moved for summary judgment, the accuracy of the 'futility' label is gauged by reference to the liberal criteria of Federal Rule of Civil Procedure 12(b)(6)." ).

         THE AMENDED DECISION [4]

         In this now five-year-old qui tam action, plaintiff/relator Jeffrey D'Agostino, a former medical device salesman for defendant EV3, Inc., alleges that EV3, Micro Therapeutics, Inc. (MTI), John Hardin, and Brett Wall violated the federal False Claims Act (FCA), 31 U.S.C. § 3729 et seq., as well as the False Claims Acts of twenty-six states and the District of Columbia. According to the Proposed Complaint, defendants knowingly caused the submission of false claims for reimbursement in violation of FCA § 3729(a)(1)(A) (Count I), and knowingly made, or caused to be made, false records or statements that were material to the false reimbursement claims in violation of FCA § 3729(a)(1)(B) (Count II), and made, used or caused to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the government, or knowingly concealed, avoided or decreased such obligation, in violation of 31 U.S.C. § 3729(a)(1)(G) (Count III),[5] all the while conspiring to commit these acts in violation of FCA § 3729(a)(1)(C) (Count IV). The Proposed Complaint makes parallel allegations under the various state and District of Columbia analogs to the FCA (Counts V-XXXI).[6] For reasons to be explained, D'Agostino's motion under Rule 15(a)(2) to amend his complaint once more will be denied.

         BACKGROUND

         EV3 manufactures the two medical devices implicated in the Proposed Complaint, the Onyx Liquid Embolic System (Onyx) and the Axium Detachable Coil System (Axium). Both Onyx and Axium were developed by MTI (which later merged with EV3).[7] Defendant Brett Wall held executive sales and marketing positions at EV3, MTI, Boston Scientific, and Covidien (the current parent company of EV3). Wall was actively involved in the marketing of Onyx and Axium. Defendant John Hardin was the Vice President of Sales and Global Marketing for Onyx at EV3.[8] D'Agostino served as the Territory Sales Manager for EV3 in the eastern United States between 2005 and 2010.

         A. Onyx

         Onyx is a synthetic liquid that, when introduced by a catheter, forms a solid mass (embolus) inside a patient blocking the flow of blood. The FDA approved Onyx in July of 2005 for use in the presurgical treatment of a vascular defect in the brain known as brain arteriovenous malformation (BAVM). The market for the on-label use of Onyx is very small; there are only an estimated 3,000 cases of BAVM treated annually in the United States.

         1. Misleading the FDA in the Onyx Approval Process

         In broad terms, D'Agostino alleges that MTI misled the FDA during the Onyx approval process by proposing an overly narrow indication for its use, while concealing the true scope of its marketing strategy, and failing to report relevant safety information. D'Agostino alleges that, but for MTI's fraud, Onyx would not have been approved for any use by the FDA.[9]

         The factual allegations, distilled from the legal conclusions in which they are embedded, are as follows.[10] According to the Proposed Complaint, the FDA advisory panel appointed to review the safety and efficacy of Onyx expressed concern that the device (despite MTI's assurances) might be marketed for the off-label treatment of other types of vascular disease, or might be left permanently embedded in a BAVM patient if follow-up surgery was not performed.[11] In response to the panel's reservations, the Proposed Complaint alleges that MTI gave false assurances that it would institute a program to train surgeons in the proper use of Onyx.[12] The FDA subsequently approved Onyx for sale and use, subject to the conditions listed on its label.[13] The Proposed Complaint alleges that when EV3 later sought to expand the scope of the FDA's approval to include the use of Onyx in the treatment of vascular defects in the " the periphery" (that is, in the vasculature outside the brain or below the neck), the FDA denied the request because of insufficient supporting medical evidence. Prop. Compl. ¶ 59. Notwithstanding the FDA's refusal, MTI (and EV3) continued to promote the use of Onyx for peripheral indications and neurointerventional indications other than the presurgical treatment of BAVM.[14]

         At some point, MTI licensed the right to fabricate the liquid material from which Onyx is manufactured to Enteric Medical Technologies, Inc., another medical devices company. After acquiring Enteric, Boston Scientific used the material to manufacture Enteryx, which was approved by the FDA in April of 2003 for the treatment of gastroesophageal reflux disease. Enteryx is injected into the musculature below the esophagus where it solidifies to create a partial barrier preventing the reflux of stomach acid. According to the Proposed Complaint, in some cases physicians injecting Enteryx missed the esophageal musculature, risking potentially fatal complications.[15] D'Agostino argues that because of the intimate corporate collaboration among EV3, Enteric, Boston Scientific, MTI, and Covidien (fostered by the hiring of senior executives by one company from another), EV3 bears responsibility for failing to alert the FDA during the Onyx approval process to problems being encountered by physicians using Enteryx: EV3 " was representing to the FDA that Onyx was safe, [while] the same molecule, in the form of Enteryx, was killing people." Prop. Compl. ¶ 81. D'Agostino alleges that EV3, during the Onyx approval process, failed to adequately warn the FDA about the dangers of Enteryx, and that " [h]ad the FDA known what MTI was planning, it probably would not have granted the approval." Prop. Compl. ¶ 176.[16]

         2. Training Program Used to Drive Off-Label Sales

         The Proposed Complaint describes a surgical training program in which, after a physician was trained in the use of Onyx, EV3 would supply Onyx to any hospital facility at which the physician had admitting privileges. These included facilities that had no surgeons on staff with practices requiring the on-label use of Onyx. The Proposed Complaint further alleges that EV3 paid physicians to conduct Onyx training for other physicians, which sometimes included training in off-label uses. Prop. Compl. ¶ 132. Because vascular " holes" in areas below the neck (the periphery) are typically much larger than those in the brain, more Onyx is required to plug them, thus making off-label uses more lucrative for EV3. This recognition, according to the Proposed Complaint, led EV3 to ramp up the dissemination to physicians of information promoting Onyx's off-label use. An example given by the Proposed Complaint is a 2008 EV3 national sales meeting at which National Marketing Manager (and former defendant) Vitas Sipelis discussed case reports involving the use of Onyx in peripheral vasculature surgical interventions, while at the same time urging sales staff to " [g]et users to think about additional [off-label] applications (i.e., [dural arteriovenous fistulas] DAVFs)." Prop. Compl. ¶ 117.[17]

         3. Filing of False Claims

         Inpatient and outpatient hospital treatment procedures for eligible patients are paid by Medicare subject to the condition that the treatment is certified to be medically reasonable and necessary.[18] Reimbursement is at the rates established by the Diagnosis Related Group (DRG) or the Ambulatory Payment Classification, as appropriate. Although the cost of a medical device is not billed directly to Medicare, the hospital ultimately recovers the cost of the device indirectly by way of the fixed aggregate reimbursement rates. Where the actual cost of a particular procedure exceeds the fixed limit, the hospital is permitted to bill Medicare for the additional cost (a so-called " outlier payment" ).

         D'Agostino originally maintained that all off-label uses of Onyx were " affirmatively unsafe, ineffective, and hazardous to patient health," [19] and that consequently, all " claims which fall into this category were false under the FCA." TAC ¶ 181. In the Proposed Complaint, D'Agostino repeats this allegation in slightly altered language: " All claims submitted by hospitals and doctor to government healthcare programs for procedures involving Onyx were fraudulent under the FCA. " Prop. Compl. ¶ 186 n.19. While Medicare is prohibited from reimbursing hospitals or physicians for unapproved devices (unless they are part of an FDA-authorized clinical trial), see 42 C.F.R. § 411.15(o), D'Agostino acknowledges that Onyx was FDA-approved (and therefore eligible for Medicare reimbursement). Nonetheless, D'Agostino argues that because defendants fraudulently induced the FDA to grant the initial approval for Onyx, all off-label reimbursement claims were tainted as a result.[20]

         B. Axium

         Axium is an embolization coil attached to a delivery pusher equipped with a manual detacher. A surgeon threads the coil into the position at which he or she wishes to promote the formation of an embolus, and then detaches the coil and removes the pusher. First marketed in 2007, Axium was developed with the intent of embolizing intracranial aneurysms and other neurovascular anomalies.

         1. Axium Defects

         The Proposed Complaint alleges that EV3 unnecessarily hurried the development of Axium, resulting in the launching of a product that " was not adequately designed, was not properly manufactured, and was not safe for use." Prop. Compl. ¶ 208. During the first year following the launch, the device was modified " more than a half dozen times" to correct problems encountered during surgeries. Id. According to the Proposed Complaint, EV3 actively explored ways of minimizing losses on the recall of earlier iterations of Axium. As an example, the Proposed Complaint cites an internal EV3 email from National Manager Fred Gunderman to EV3 executives, written after generation 1E of Axium was marketed.[21] See Prop. Compl. ¶ 224. The email, in discussing the need to withdraw the earlier generations 1 through 1B from the market, suggested trading out generations 1C and 1D< 7mm for the more expensive version 1E to recoup losses on the recalled units. Id. The email also discussed the possibility of selling the superannuated prior generations into the peripheral market.[22] Id.

         The Proposed Complaint notes that Dr. Stephen Ohki at Hartford Hospital in Connecticut reported an Axium coil detachment failure in late 2008 that " led to a negative outcome for the patient." Prop. Compl. ¶ 245. In October 2009, Dr. Ohki reported a similar problem with another Axium coil. When D'Agostino was asked by Hartford Hospital's legal department for an internal report on the failures, he contacted EV3's engineering department. D'Agostino was told that coils were failing to detach properly because of a manufacturing error (over welding), caused by a laser welder being set " too hot." Id. ¶ 247. The Proposed Complaint lists eleven additional instances of alleged Axium failures supplementing the two failures (reported by Dr. Ohki) that were also listed in the TAC.

         The Proposed Complaint recites the previously alleged manufacturing defects in other versions of Axium, including instances of a malformed retainer ring caused by worn manufacturing equipment, and a welding error that resulted in an improper coupling of the detachment wire to the inner wall of the coil. Id. ¶¶ 245-249. While detachment failures can be remedied by secondary detachment methods (such as tugging on the device with a forceps), these also entail risks to patients.[23] D'Agostino, however, omits from the Proposed Complaint the misbranding and adulteration claims related to Axium alleged in the TAC.

         2. Axium Adverse Event Reporting

         The Proposed Complaint alleges that EV3's investigations into adverse events involving Axium were " often bogus, blaming the problem on everything but the defective product." Prop. Compl. ¶ 268.[24] By minimizing Axium's role in causing " hundreds" of adverse events, D'Agostino argues that EV3 avoided its obligation to file Medical Device Reports with the FDA, and had the FDA been aware of EV3's misfeasance, " it could have recalled the devices, or greatly restricted the instructions for [their] use." Id. ¶ 277. As with Onyx, D'Agostino maintains that, in the case of Axium, defendants induced " hospitals and physicians to certify . . . that the medical products . . . provided to patients were in compliance with applicable statutes [and] regulations," and that such certifications " were false [] because EV3 was not in statutory or regulatory compliance." Id. ¶ 278. In other words, EV3 was marketing medical devices that were eligible for Medicare reimbursement only because the government did not know " the truth about these products." Id. ¶ 277.

         DISCUSSION

         " FCA liability attaches to any individual who 'knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,' 31 U.S.C. § 3729(a)(1)(A), or 'knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,' § 3729(a)(1)(B)." United States ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377, 380 n.3 (1st Cir. 2011).

For purposes of both subsections, " [a] person acts 'knowingly' if he or she '(1) had actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information.'"

United States ex rel. Dyer v. Raytheon Co., 2011 WL 3294489, at *6 (D. Mass. July 29, 2011), quoting Hutcheson, 647 F.3d at 380; see alsoAllison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 672-673, 128 S.Ct. 2123, 170 L.Ed.2d 1030 (2008) (the elements of an FCA claim require proof that a defendant knew, as a " natural, ordinary and reasonable consequence[]" of its acts, that false claims would be submitted to the government for payment). The statute further prohibits " conspir[acies] to defraud the Government by getting a false or fraudulent claim allowed or paid." United States ex. rel. Gagne v. City of Worcester, 565 F.3d 40, 42 (1st Cir. 2009); Allison Engine, 553 U.S. at 672. Persons who violate the FCA are liable for civil ...


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