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Justice News

Department of Justice
U.S. Attorney’s Office
District of New Jersey

FOR IMMEDIATE RELEASE
Monday, December 8, 2014

Otismed Corporation And Former CEO Plead Guilty To Distributing FDA-Rejected Cutting Guides For Knee Replacement Surgeries

Corporation to Pay More than $80 Million to Resolve Criminal and Civil Investigations

NEWARK, N.J. – OtisMed Corp. and its former chief executive officer admitted today to intentionally distributing knee replacement surgery cutting guides after their application for marketing clearance had been rejected by the Food and Drug Administration (FDA), and the corporation agreed to pay more than $80 million to resolve its related criminal and civil liability, the Justice Department announced today.

OtisMed and its CEO, Charlie Chi, 45, of San Francisco, pleaded guilty in Newark federal court. OtisMed pleaded guilty before U.S. District Judge Claire C. Cecchi to an information charging it with distributing, with the intent to defraud and mislead, adulterated medical devices into interstate commerce in violation of the Food, Drug, and Cosmetic Act (FDCA). Judge Cecchi also sentenced the company today, fining OtisMed $34.4 million and ordering $5.16 million in criminal forfeiture. In a separate civil settlement, OtisMed agreed to pay $40 million plus interest to resolve its civil liability. Chi pleaded guilty before U.S. Magistrate Judge Mark Falk to three counts of introducing adulterated medical devices in interstate commerce. Chi will be sentenced by Judge Cecchi on March 18, 2015.

 “It is vital that products like the OtisKnee are subjected to the appropriate level of scrutiny,” U.S. Attorney Paul J. Fishman said. “Patients seeking medical care are vulnerable; they are often afraid, and in pain. They should be able to trust their doctors. And they should be entitled to trust that the devices their doctors are using are safe, effective, tested, and approved. OtisMed and Charlie Chi betrayed that trust.”

“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 for the Justice Department’s Civil Division said  “The Department of Justice will not tolerate companies and individuals that cut corners when it comes to the public’s health.”

The civil settlement resolves claims filed under the whistleblower provisions of the False Claims Act, which permit private parties to file suit on behalf of the United States and obtain a portion of the government’s recovery. The civil lawsuit was filed in the District of New Jersey and is captioned U.S. ex rel. Adrian v. OtisMed Corp., et al.

OtisMed was a privately held company when OtisMed and Chi committed the criminal conduct, and was later acquired by Stryker Corp., a medical technology company based in Michigan, in November 2009. At the time the shipments were made in September 2009, Stryker executives were not aware that OtisMed and Chi had shipped cutting guides after the FDA had rejected the company’s application for marketing clearance for the device. Stryker, OtisMed’s parent corporation, cooperated with the government with regard to Otismed’s pre-acquisition conduct throughout the investigation. In addition to the criminal pleas and civil resolution, OtisMed also agreed to be excluded from participating in all federal health care programs for a period of 20 years and Stryker separately agreed to a series of compliance measures aimed at preventing future misconduct.

According to documents filed in this case and statements made in court:

Chi was among the founders of OtisMed in August 2005, and conceived of the OtisKnee orthopedic cutting guide, its primary product. Chi acted as OtisMed’s president, chief executive officer and board of directors’ chairman until OtisMed was acquired by Stryker in November 2009. The OtisKnee was used by surgeons during total knee arthroplasty (TKA), commonly known as knee replacement surgery. The surgical procedure requires a surgeon to remove the ends of the leg bones and to reshape the remaining bone to accommodate the implantation of an artificial knee prosthesis. The cuts to the bone must be made at precise angles because they are critical to the clinical result; failure to achieve the correct angle in TKA procedures can result in failure of the bones and/or the implanted prosthetic joint.

OtisMed marketed the OtisKnee cutting guide as a tool to assist surgeons in making accurate bone cuts specific to individual patients’ anatomy based on magnetic resonance imaging (MRI) performed prior to surgery. None of OtisMed’s claims regarding the OtisKnee device were evaluated by the FDA before the company used them in advertisements and promotional material.

Between May 2006 and September 2009, OtisMed sold more than 18,000 OtisKnee devices, generating revenue of approximately $27.1 million.

On Oct. 2, 2008, OtisMed submitted a pre-market notification to the FDA seeking clearance to market the OtisKnee. The company had not previously sought the FDA’s clearance or approval and had been falsely representing to physicians and other potential purchasers that the product was exempt from such pre-market requirements.

On Sept. 2, 2009, the FDA sent OtisMed a notice that its submission had been denied, noting that the company had failed to demonstrate that the OtisKnee was as safe and effective as other legally marketed devices. The letter 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. Chi and others at OtisMed received advice from legal and regulatory counsel confirming it would be unlawful for OtisMed to continue distributing the OtisKnee.

Though the board of directors unanimously decided to stop further shipments of the devices, Chi and others at OtisMed were 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. Chi directed OtisMed employees to organize a mass shipment of all OtisKnee devices that had been manufactured but had not yet been shipped and suggested ways for the employees to hide the shipments from FDA regulators.

At Chi’s direction, OtisMed shipped approximately 218 OtisKnee guides from California to surgeons throughout the United States, including 16 to surgeons in New Jersey. Both Chi and OtisMed admitted that Chi ordered the distribution a week after the FDA denied OtisMed’s request for clearance.

“Companies and individuals put the public health at risk by not complying with FDA regulatory requirements for the pre-market review of medical devices,” said Acting Director Philip J. Walsky for the FDA’s Office of Criminal Investigations. “We will continue to assure consumer confidence in FDA-regulated products by investigating and bringing to justice those who endanger patient safety by distributing unapproved surgical devices.”

“When OtisMed and its CEO, Charlie Chi, distributed medical devices that were not FDA-approved, they violated the trust that patients extend to health care professionals. This outrageous behavior triggered our agency to exclude OtisMed from participating in Medicare and Medicaid for 20 years,” Special Agent in Charge Thomas O’Donnell of the New York Regional Office of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) said. “We will continue to work with our law enforcement partners to protect federally funded health care programs and the patients who rely on those programs.”

The civil settlement resolves allegations arising from the marketing and distribution of the OtisKnee without receiving approval or clearance from the FDA for the device. Specifically, the settlement alleged that in May 2006, OtisMed, through co-promotion activities with Stryker Corporation, began commercially distributing the OtisKnee without having received clearance or approval from the FDA for the device. OtisMed continued to distribute the device while its application was pending and even after the FDA informed OtisMed that the product could not be lawfully distributed until FDA approved the device.

The settlement also alleged that OtisMed encouraged health care providers to submit claims for MRIs that were not reimbursable because they were not performed for diagnostic use, but rather solely to provide data for the creation of the OtisKnee. Except as admitted in the plea agreement, the claims settled by the civil settlement agreement are allegations only, and there has been no determination of liability as to those claims.

The company will pay approximately $41.2 million, including interest, to resolve its civil liability for submitting false claims to the Medicare, TRICARE, Federal Employees Health Benefits and Medicaid programs. Of that amount, approximately $41 million will be paid to the federal government. Medicaid is funded jointly by the states and the federal government and participating Medicaid states will receive approximately $376,700 of the settlement amount. As part of today’s resolution, the relator will receive approximately $7 million.

In addition to agreeing to continue to cooperate with the government’s investigation and maintain a compliance program, Stryker agreed to conduct a review and audit regarding whether other marketed devices have the appropriate FDA approvals and share the results of that audit with the government. Stryker also agreed to annual certifications from the president of Stryker’s orthopedics group and from Stryker’s board of directors regarding the effectiveness of the compliance program.

Chi faces a statutory maximum sentence of one year in prison and a $100,000 fine, or twice the gain or loss from the offense, for each of the three counts of introducing adulterated medical devices in interstate commerce.

The guilty pleas and civil settlement are the culmination of a long-term investigation conducted jointly by the FDA’s Office of Criminal Investigations, under the direction of Special Agent in Charge Antoinette V. Henry, and HHS-OIG, under the direction of Special Agent in Charge O’Donnell. Counsel to the HHS-OIG and FDA’s Office of Chief Counsel to the FDA also assisted. The National Association of Medicaid Fraud Control Units, along with the Medicaid Fraud Control Unit of the Massachusetts Attorney General’s Office, assisted in coordinating the settlements with the various states.

Additional assistance was provided by the Defense Health Agency and the Office of Personnel Management–Office of the Inspector General.

This resolution illustrates the government’s emphasis on combating health care fraud and marks another achievement for the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, which was announced in May 2009 by the Attorney General and the Secretary of Health and Human Services. The partnership between the two departments has focused efforts to reduce and prevent Medicare and Medicaid financial fraud through enhanced cooperation. One of the most powerful tools in this effort is the False Claims Act. Since January 2009, the Justice Department has recovered a total of more than $23.2 billion through False Claims Act cases, with more than $14.9 billion of that amount recovered in cases involving fraud against federal health care programs.

The government is represented in the criminal case by Jacob T. Elberg, chief of the U.S. Attorney’s Office Health Care and Government Fraud Unit and Trial Attorney Ross S. Goldstein of the Justice Department’s Consumer Protection Branch, and in the civil settlement by Assistant U.S. Attorney Charles Graybow of the District of New Jersey’s Health Care and Government Fraud Unit, and Trial Attorney Charles Biro of the Justice Department’s Civil Division.

U.S. Attorney Fishman reorganized the health care fraud practice at the U.S. Attorney’s Office for the District of New Jersey shortly after taking office, including creating the stand-alone Health Care and Government Fraud Unit to handle both criminal and civil investigations and prosecutions of health care fraud offenses. Since 2010, the office has recovered more than $620 million in health care fraud and government fraud settlements, judgments, fines, restitution and forfeiture under the False Claims Act, the FDCA and other statutes.

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Defense counsel:

OtisMed: Brien O’Connor Esq.; Joshua Levy Esq., Boston
Charlie Chi: Peter Harvey Esq., New York

Counsel for Relator Richard Adrian:  Joseph Callow Esq., Cincinnati, Ohio; Joel Hesch Esq., Lynchburg, Virginia

OtisMed Documents

Updated August 20, 2015