United States ex rel. Hagerty v. Cyberonics, Inc., Civil No. 13–10214–FDS.

• Decision Date: 31 March 2015
• Docket Number: Civil No. 13–10214–FDS.
• Citation: 95 F.Supp.3d 240
• Parties: UNITED STATES of America et al. ex rel. Andrew HAGERTY, Plaintiffs, v. CYBERONICS, INC., Defendant.
• Court: U.S. District Court — District of Massachusetts

95 F.Supp.3d 240

UNITED STATES of America et al. ex rel. Andrew HAGERTY, Plaintiffs

v.CYBERONICS, INC., Defendant.

Civil No. 13–10214–FDS.

United States District Court, D. Massachusetts.

Signed March 31, 2015.

Abraham R. George, U.S. Attorney's Office, Robert M. Thomas, Jr., Thomas & Associates, Boston, MA, Christopher J. Trombetta, Law Office of Christopher J. Trombetta, Mansfield, MA, Suzanne E. Durrell, Durrell Law Office, Milton, MA, Christopher A. Klimmek, Joseph S. Hall, Silvija A. Strikis, Kellogg, Huber, Hansen, Todd, Evans & Figel P.L.L.C., Washington, DC, for Plaintiffs.

Timothy H. Madden, Donnelly, Conroy & Gelhaar, LLP, Boston, MA, J. Patrick Bredehoft, William M. Katz, Jr., Thompson & Knight, LLP, Dallas, TX, for Defendant.

MEMORANDUM AND ORDER ON MOTION TO DISMISS

SAYLOR, District Judge.

This is a qui tam action alleging the unlawful promotion of medically unnecessary replacements of devices in epilepsy

patients. Relator Andrew Hagerty has brought suit against defendant Cyberonics, Inc., a company that manufactures and sells the Vagus Nerve Stimulator Therapy (“VNS”) system, a medical device used to treat refractory epilepsy and treatment-resistant depression.

On May 19, 2014, Hagerty amended the complaint. The amended complaint alleges that defendant engaged in a fraudulent scheme to promote premature, medically unnecessary VNS replacements to individuals with epilepsy who were covered by government health-care programs. It alleges violations of the Federal False Claims Act (“FCA”), 31 U.S.C. § 3729(a) (Count 1); conspiracy to violate the FCA (Count 2); violations of various state analogues to the Federal FCA (Counts 3 through 30); retaliatory discharge of Hagerty in violation of 31 U.S.C. § 3730(h) (Count 31); breach of contract and breach of the implied covenant of good faith and fair dealing (Count 32); and wrongful termination and retaliation in violation of public policy and the Massachusetts False Claims Act, Mass. Gen. Laws ch. 12, § 5J (Count 33).

Defendant has moved to dismiss the amended complaint. For the following reasons, the motion will be granted in part and denied in part.

I. Background

A. Factual Background

The facts summarized below are set forth in the amended complaint unless otherwise noted.

1. The Parties

Cyberonics, Inc., is based in Houston, Texas. (Am. Compl. ¶ 16). It is publicly traded on NASDAQ under the ticker “CYBX.” (Id. ). Cyberonics sells the VNS system in markets worldwide, including the United States. (Id. ).

Andrew Hagerty is a resident of Massachusetts. (Id. ¶ 14). He was employed by Cyberonics as a sales representative from May 3, 2010, until he was terminated on January 9, 2012. (Id. ). He has more than twelve years of experience in the medical-device industry. (Id. ).

2. Government Health–Care Programs and the VNS

The VNS system is a medical device that is implanted into the chest and neck through surgery. (Id. ¶ 2). A wire runs from the device and is attached to the left vagus nerve in the neck.¹ (Id. ¶ 61). The system is programmed to stimulate the left vagus nerve by sending electrical signals at regular intervals. (Id. Exs. C, E). In 1997, the United States Food and Drug Administration approved the use of VNS to help treat certain types of epilepsy

. (Id. ).

Medicare is a health-insurance program administered by the United States Department of Health and Human Services. (Am. Compl. ¶ 17). Medicare provides for payment of, among other things, medical services and equipment to persons over 65 years of age and individuals who are 18 years of age or older and are eligible for disability benefits. (Id. ¶ 18). According to the complaint, it is a recommended practice for parents or guardians of individuals with refractory epilepsy to apply for disability benefits to qualify for Medicare and help cover living expenses. (Id. ). Medicare reimburses qualified individuals for the purchase of the VNS system and the surgical procedures necessary to implant, remove, or replace the device. (Id. ).

Medicaid is a health-insurance program administered by HHS jointly with agencies in each state. (Id. ¶ 20). It is designed to assist states in providing medical services, medical equipment, and prescription drugs for low-income persons who qualify for the program. (Id. ¶ 21). Like Medicare, Medicaid reimburses qualified individuals for the purchase of the VNS system and the surgical procedures necessary to implant, remove, or replace the device. (Id. ¶ 20). Families with children who have refractory epilepsy may qualify for Medicaid. (Id. ¶ 21). For example, a family below the poverty line can use Medicaid as its primary insurer. (Id. ). A family who is not below the poverty line but has a child with refractory epilepsy may be able to obtain Medicaid as a secondary insurer. (Id. ).

The Civilian Health and Medical Program of the United States, now known as TRICARE, provides benefits for health-care services furnished to members of the U.S. military and their family members. (Id. ¶ 22). TRICARE pays for medical devices and surgeries for its beneficiaries, including the VNS system. (See id. ). According to the complaint, substantial numbers of war veterans have developed post-traumatic epilepsy

resulting from traumatic brain injury. (Id. ).

The Federal Employee Health Benefits Program (“FEHB”) provides health-care benefits for qualified federal employees and their dependents. (Id. ¶ 23). It pays for medical devices and surgeries for its beneficiaries, including the VNS system.

(See id. ). Under the FEHB, federal employees are covered by a private health insurance policy that is subsidized in part by the federal government. (Id. ).

The federal government also provides medical devices and surgeries directly to patients treated at government-operated hospitals. (Id. ¶ 24). According to the complaint, because members of the military with traumatic brain injuries

frequently suffer from epilepsy, the government has established fifteen Epilepsy Centers of Excellence across the country. (Id. ).

3. Focus on Replacement Devices by Cyberonics

In 2004, Cyberonics began focusing on marketing the VNS system to treat patients with treatment-resistant depression. (Id. ¶ 24). Treatment-resistant depression is defined as chronic or recurring depression for patients 18 years of age or older who are experiencing a major depressive episode

and have not seen improvement with four or more antidepressant treatments. (Id. ). In July 2005, the FDA approved the VNS system for use in treating individuals with treatment-resistant depression. (Id. ). Within a month, Cyberonics hired a 300–person sales force to market the VNS system. (Id. ¶ 48).

By 2006, Cyberonics was seeking to have the Centers for Medicare and Medicaid Services (“CMS”) approve Medicare reimbursement for use of the VNS system to treat depression. (Id. ¶ 49). According to the complaint, Medicare coverage was critical to Cyberonics because Medicare is a large payor and because other health insurance providers often follow Medicare's lead in determining what products to cover. (Id. ). In July 2006, Cyberonics submitted its formal request to CMS for Medicare coverage of the use of the VNS system to treat depression. (Id. ).

In February 2007, CMS issued a proposed decision refusing Medicare reimbursement for the use of the VNS system to treat depression. (Id. ¶ 50). On May 4, 2007, CMS issued a final decision confirming its proposed decision. (Id. ). At the time, according to the complaint, Cyberonics was approximately $132.5 million in debt. (Id. ¶ 51).

The complaint alleges that because CMS decided not to cover the use of the VNS system to treat depression, Cyberonics determined that it needed a new short-term revenue source to meet its expected revenue targets. (Id. ). However, Cyberonics had already treated most of the willing epilepsy

patients in the market. (Id. ¶ 53). Device sales to new epilepsy patients would not deliver enough revenue to keep the company solvent. (Id. ). The company therefore allegedly focused on replacements of the VNS system in epilepsy patients as the key revenue generator. (Id. ¶ 54).

4. Pressure to Meet New Sales Quotas

On May 1, 2007, Daniel Moore became the new CEO of Cyberonics. (Id. ¶ 54). According to the complaint, he implemented a new incentive structure for the sales force that emphasized sales of replacement VNS devices. (Id. ¶ 55). Under the previous incentive structure, sales representatives only received commissions on sales of new devices, not replacement devices. (Id. ). Under the new structure, the company began paying commissions to its sales representatives for sales of replacement devices. (Id. ). No commissions were paid for sales of VNS devices to treat depression, although a salesperson could receive $500 for attending a VNS implant for depression at a hospital. (Id. ¶ 56). Sales quotas also allegedly reflected the emphasis on replacement devices. (Id. ¶ 57). For example, the quota for the Boston South Region in the first quarter of 2011 was a minimum of four new devices and ten replacement devices. (Id. ¶ 60).

According to the complaint, almost one-third of the sales representatives earned more than $360,000 per year, with more than 66 percent of that amount coming from commissions. (Id. ¶ 57). Cyberonics also created a President's Club, an annual award based on successful sales that was announced at the company's nationwide sales conference. (Id. ). Winners received awards such as an all-expenses-paid Alaskan cruise or a trip to Hawaii, Tahiti, or the Bahamas. (Id. ). For example, at the May 2010 national sales meeting, a senior Therapeutic Consultant (“TC”) received an award of $75,000. (Id. ¶ 58). At the May 2011 meeting, TC Travis Comstock was allegedly commended by management for replacing more than 60 devices in a single quarter. (Id. ).

The complaint further alleges that Cyberonics ignored fraudulent and improper conduct by its sales representatives. (Id. ¶ 63). For example, in 2012, sales representative ...