Medical Device Manufacturer and Its Former CEO Plead Guilty to Distributing FDA-Rejected Devices to Heath Care Providers

False Claims Act violations can arise when medical device manufacturers sidestep the FDA pre-marketing approval process. Evidence of such misdirection is especially compelling when manufacturers proceed with marketing plans after their applications for marketing clearance have been rejected by the FDA. According to a recent Justice Department press release, such evidence played a role in a December 2014 $80 million civil and criminal settlement, in which OtisMed Corporation and its chief executive officer (CEO) admitted to intentionally distributing its FDA-rejected cutting guides for knee replacement surgeries.

According to documents filed in this case, in October 2008, OtisMed submitted a pre-market notification to the FDA seeking clearance to market its OtisKnee device, to be used by surgeons during total knee arthroplasty (TKA), commonly known as knee replacement surgery. DOJ alleged that this was the company’s first efforts to obtain FDA clearance or approval and that between May 2006 and September 2009, OtisMed had sold more than 18,000 OtisKnee devices, generating revenue of approximately $27.1 million.

Then, in September 2009, the FDA sent OtisMed a notice from the FDA stating that its submission for clearance had been denied. The notice warned OtisMed that distribution of the OtisKnee prior to approval would be an FDCA violation, and indicated the FDA viewed the product as a “significant risk device system,” which is defined as presenting a potential for serious risk to the health, safety or welfare of a subject.

According to court documents, the company’s board of directors decided to stop further shipments of the device. Nonetheless, the CEO allegedly ordered additional shipments, for he was allegedly concerned that inconveniencing surgeons planning to use the OtisKnee in scheduled surgeries would exacerbate the negative impact of the FDA letter on the reputation of OtisMed and the device. The government claimed that the CEO even suggested ways for the employees to hide the shipments from FDA regulators.

In the separate civil settlement, OtisMed agreed to pay $40 million plus interest to resolve its liability under the federal False Claims Act. A former OtisMed employee will receive a multi-million whistleblower reward for stepping forward.