The Department of Justice announced that it intervened and reached a settlement in the Medtronic Spine LLC, the corporate successor to Kyphon Inc., Medtronic Kyphon Qui Tam whistleblower lawsuit in which Medtronic Kyphon has agreed to pay a total of $75 million to settle allegations that it caused the submission of false claims to Medicare.

Kyphon designed, manufactured and marketed minimally invasive equipment to treat certain spinal conditions.

The government alleged that Kyphon caused the submission of fraudulent claims for its kyphoplasty procedure, which is a minimally-invasive surgery used to treat compression fractures of the spine caused by osteoporosis, cancer or benign lesions.

The allegations of the Medtronic Kyphon Qui Tam whistleblower lawsuit allege that:

1. Kyphon engaged in a seven-year marketing scheme that resulted in certain hospitals billing Medicare for certain kyphoplasties performed on an inpatient basis rather than less costly and clinically appropriate outpatient kyphoplasty treatment.
2. This conduct resulted in the Medicare program paying more for certain inpatient kyphoplasty procedures.
3. Medtronic Kyphon Qui Tam whistleblower lawsuit was filed in Buffalo, N.Y., by two former employees of Kyphon
4. In conjunction with the $75 million settlement, Kyphon has entered into a Corporate Integrity Agreement with the U.S. Department of Health and Human Services, Office of Inspector General. The Corporate Integrity Agreement contains measures to ensure compliance with Medicare regulations and policies in the future.
5. The private citizens in this action will receive a total of $14.9 million as their statutory share of the proceeds of this settlement.

Their action was filed under the qui tam provisions of the federal False Claims Act, which permits private citizens to bring lawsuits on behalf of the United States and receive a portion of the proceeds of a settlement or judgment awarded against a defendant.

In some additional news, the U.S. Tax Court has issued an opinion – medtronic kyphon whistleblower tax court – related to whether the $14.9 million share of the proceeds of this settlement is treated as ordinary income or capital gains.  In the U.S. Tax Court case, the case alleged:

1. Petitioner husband served as a reimbursement manager for Kyphon, Inc.  (Kyphon).
2. Kyphon designed, manufactured and marketed minimally invasive equipment to treat certain spinal conditions.
3. The equipment allowed for treatment by outpatient procedure.
4. Kyphon feared that medical providers would avoid purchasing the equipment because performing the procedure on an outpatient basis would no longer generate revenue from overnight hospital stays.
5. Kyphon therefore instructed its sales representatives to market the procedure as inpatient. Certain medical providers that purchased the equipment had patients admitted when undergoing the treatment.
6. Some medical providers billed this expense to the Government under Medicare.
7. Petitioner husband and another Kyphon employee, Charles Bates, believed that Kyphon’s practices violated Federal law.
8. Petitioner husband and Mr. Bates agreed to file a qui tam complaint and to split any relator’s award.
9. Petitioner husband had collected various documents he had helped create during his employment that demonstrated Kyphon’s practices.
10. Petitioner husband also kept some internal Kyphon documents and external marketing material.
11. The Government intervened after Kyphon agreed to the settlement.
12. Petitioner husband received a relator’s share of $5,979,282 in 2008 and $856,123 in 2009.
13. Petitioner contends that a qui tam award does not result from the sale or exchange of a capital asset, citing I.R.C. sec. 1222(1), (3).
14. Ps contend that under the FCA the relator sells information to the Government in exchange for a share of any recovery.
15. Ps further argue that the right to receive a share of the recovery and the information provided to the Government each constitute a capital asset.
16. Held: A qui tam award is not the result of a sale or exchange as required under I.R.C. sec. 1221(b)(3).
17. Held, further, a qui tam award is ordinary income and is therefore not a capital asset under I.R.C. sec. 1221(a).
18. Held, further, the information P-H provided to the Government was not his property and therefore was not a capital asset.

Thus, as far as this Tax Court case goes, a qui tam whistleblower award is treated as ordinary income and not a capital gain.

The False Claims Act (qui tam and whistleblower) also permits the government to investigate the allegations made in the relator’s complaint and to decide whether to intervene in the lawsuit, and to recover three times its damages plus civil penalties.

For more information on Qui Tam Whistleblower lawsuits, click here.

We are here to help you recover federal and state government money from those unscrupulous individuals or companies that defraud our government. If you have original information about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur you may be eligible to become a whistleblower.

We can help you submit this information anonymously so that your identity remains protected to the fullest extent possible. If you need help with providing whistleblower information anonymously (to the Department of Justice or The Office of the Whistleblower) about potential fraud (e.g., health care fraud, defense department contract fraud, securities fraud – governmental or non-governmental, contract fraud, investor fraud etc.), contact us.

The Program also prohibits retaliation by employers against employees who provide the DOJ with information about possible securities violations.

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