Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 1 of 27 Page ID #:989
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`UNITED STATES DISTRICT COURT
`CENTRAL DISTRICT OF CALIFORNIA
`
`
`Case No. 2:17-cv-01903-MCS-SS
`
`ORDER GRANTING IN PART AND
`DENYING IN PART MOTION TO
`DISMISS [67]
`
`
`UNITED STATES OF AMERICA,
`et al., ex rel. DR. KUO CHAO,
`
`
`Plaintiffs,
`
`
`
`v.
`
`
`MEDTRONIC PLC, MEDTRONIC
`VASCULAR, INC., MEDTRONIC
`USA, INC., COVIDIEN LP, AND
`COVIDIEN SALES LLC,
`
`
`Defendants.
`
`
`
`
`Defendants Medtronic PLC, Medtronic Vascular, Inc., Medtronic USA, Inc.,
`
`Covidien LP, and Covidien Sales LLC move to dismiss Plaintiff Relator Dr. Kuo Chao’s
`First Amended Complaint (FAC, ECF No. 59). (Mot., ECF No. 67.) The matter is fully
`briefed. (Opp’n, ECF No. 75, Reply ECF No. 77.) The Court deems this matter
`appropriate for decision without oral argument. See Fed. R. Civ. P. 78; C.D. Cal. L.R.
`7-15. For the following reasons, the motion is granted in part and denied in part.
`
`
`
`1
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`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 2 of 27 Page ID #:990
`
`
`BACKGROUND
`I.
`On March 9, 2017, Plaintiff Relator Dr. Kuo Chao (“Relator”), standing in the
`
`shoes of the United States of America, the District of Columbia, and several States1
`(collectively, the “Government”), filed a qui tam action against Defendants Medtronic
`PLC, Medtronic Vascular, Inc., Covidien LP, Covidien Sales LLC, EV3, Inc., and
`Micro Therapeutics, Inc. (Compl., ECF No. 1.) The Government declined to intervene
`on May 28, 2020. (Election, ECF No. 41.) By stipulation of the parties, on December
`4, 2020, Relator filed the operative First Amended Complaint (“FAC”). (FAC, ECF No.
`59.) The FAC asserts a claim for violation of the federal False Claims Act (“FCA”), 31
`U.S.C. § 3729 et seq., as well as analogous state claims, against Medtronic PLC,
`Medtronic Vascular, Inc., Medtronic USA, Inc., Covidien LP, and Covidien Sales LLC
`(collectively, “Defendants”). (Id.) Specifically, Relator alleges that Defendants
`promoted a medical device with an aggressive sales program that utilized illegal
`kickbacks and simultaneously caused to be submitted false claims for reimbursement
`from Medicaid, Medicare, or other federal and state health care programs.
`
`A.
`The Parties
`
`Dr. Kuo Chao is a physician specializing in neuroradiology and has experience
`with the treatment of aneurysms. (FAC ¶ 17.) Through his work, Relator learned the
`facts that form the basis of this action. (Id. ¶ 18.) Defendants Covidien LP and Covidien
`Sales LLC are organized under the laws of Delaware with principal place of business
`in Massachusetts. (Id. ¶¶ 19–20.) Both entities were subsidiaries of Covidien PLC until
`January 2015, at which time all Covidien entities were purchased by Medtronic PLC.
`
` The States are as follows: State of California, State of Colorado, State of
`Connecticut, State of Delaware, State of Florida, State of Georgia, State of Hawaii,
`State of Illinois, State of Indiana, State of Iowa, State of Louisiana, State of Maryland,
`Commonwealth of Massachusetts, State of Michigan, State of Minnesota, State of
`Montana, State of Nevada, 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, State of Vermont, Commonwealth of Virginia, and State of
`Washington.
`
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`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 3 of 27 Page ID #:991
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`(Id.) Defendant Medtronic PLC is a company organized under the laws of Ireland, with
`principal place of business in Dublin, Ireland, and a United States headquarters in
`Minnesota. (Id. ¶ 21.) Defendant Medtronic Vascular, Inc. is a corporation organized
`under the laws of Delaware, with principal place of business in Santa Rosa, California,
`and is a subsidiary of Medtronic PLC. (Id. ¶ 22.) Defendant Medtronic USA, Inc. is a
`corporation organized under the laws of Minnesota, with its principal place of business
`in Minneapolis, Minnesota, and is also a subsidiary of Medtronic PLC. (Id. ¶ 23.)
`
`B. Relevant Medical Information
`
`The backdrop of this action concerns aneurysms and one FDA approved method
`for their treatment, the “Pipeline.” “An aneurysm is a blood-filled bulge in the wall of
`a blood vessel” and “result[s] when the pressure of blood within the blood vessel causes
`a weak area of the vessel wall to expand and fill with blood.” (Id. ¶ 29.) “A Pipeline is
`a flexible mesh cylinder that expands to take on and reinforce the shape of the blood
`vessel in which it is placed,” which reduces risk of rupture and also decreases aneurysm
`size over time. (Id. ¶¶ 33, 36.) The FDA approved the first version of Pipelines promoted
`by Defendants in 2011, then approved an updated version in 2015. (Id. ¶ 38.)
`
`Under Medicare, reimbursement is available after hospitals submit claims for
`services delivered to beneficiaries on two forms, Form CMS-1450 and Form CMS-
`2552, and after doctors submit claims through Form CMS-1500. (Id. ¶ 44.) Medicare
`provides that “‘no payment may be made’ for a device that is not ‘reasonable and
`necessary’ for . . . treatment.” (Id. ¶ 49 (citing 42 U.S.C. § 1395y(a)(1)(A)).) Other
`health programs, such as Medicaid, TRICARE, and CHAMPVA similarly provide for
`reimbursement of medical expenses. (Id. ¶¶ 51–55.) Part and parcel to these
`reimbursements are an agreement to abide by all relevant legal strictures, including the
`Anti-Kickback Statute (“AKS”). (Id. ¶¶ 66–73.)
`C. Defendants’ Alleged Misconduct
`
`
`From sometime in 2011 through the filing of the FAC, Defendants allegedly gave
`kickbacks to doctors and induced the filing of false claims for “tens of millions of
`3
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`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 4 of 27 Page ID #:992
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`dollars.” (Id. ¶¶ 92–93.) These alleged kickbacks include proctoring fees, mini-
`vacations at lavish resorts, paid travel expenses without travel, investments in side
`businesses, excessive payments for data collection, funding awards to hospitals and
`doctors in the form of grants and fellowships, prominent research roles, and hiring
`doctor-owned companies to work on Defendants’ studies. (Id. ¶ 93.)
`
`
`1.
`The Kickback Schema
`
`
`
`a.
`Proctoring Program
`
`Relator alleges Defendants disguised kickbacks to doctors as compensation for
`their provision of proctoring services, such as overseeing Pipeline procedures or
`performing Pipeline research. (Id. ¶ 94.) The proctor program began in 2011 and
`approximately fifty-five doctors participated. (Id. ¶ 95.) To become a proctor, doctors
`had to perform at least ten operations using the Pipeline (resulting in approximately
`$224,000 worth of Pipeline sales for Defendants). (Id. ¶ 103.) Relator describes various
`payment structures, such as $4,000 to $5,000 per proctored operation, (id. ¶ 104), and
`$400 to $500 for every hour worked, (Id. ¶ 107). Relator alleges that “Defendants . . .
`habitually and systematically overpa[id] doctors for a full, eight-hour day of work
`regardless of how little time the proctor worked.” (Id. ¶ 108.) Defendants also paid
`proctors a travel stipend, up to $1,400, which Relator alleges was paid “even when the
`doctor worked at his or her home hospital and did not travel.” (Id. ¶ 109.)
`
`As a result, “Defendants routinely paid their proctors $4,600 per day . . . for work
`and travel – even when the doctor worked as little as one or two hours and did not travel
`at all.” (Id. ¶ 110.) To support that allegation, Relator points out that (according to public
`data) Defendants, between 2013 and 2015, had 266 exact payments for $4,600 out of a
`possible 8,484 payments and was “by far the most common dollar amount for payments
`from the Defendants to physicians” so long as one ignores “numerous payments
`reported as $10, apparently made for incidental expenses incurred while working or
`travelling.” (Id.) Relator further alleges that, in addition to these cash payments,
`Defendants also provided proctors “mini-vacations” disguised as trainings in “posh . . .
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`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 5 of 27 Page ID #:993
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`luxury resorts.” (Id. ¶¶ 100–01.) “Because of the cash payments, travel, and other
`kickbacks . . . physicians had strong incentives to become proctors.” (Id. ¶ 102.)
`
`
`
`b.
`Purchases of Companies
`
`Relator’s second alleged kickback scheme is Defendants’ targeted purchase of
`companies in which high-volume Pipeline usage doctors held financial interests. (Id. ¶
`126.) Relator points to three such acquisitions: Covidien’s purchase of Nfocus
`Neuromedical, Inc., in 2013, Medtronic’s purchase of Lazarus Effect in 2015, and
`Medtronic’s purchase of RIST Neurovascular in 2020. (Id. ¶¶ 127, 129, 131.) Relator
`alleges that after the acquisitions of Nfocus Neuromedical, Inc., and Lazarus Effect,
`Medtronic “essentially shelved” development of those companies’ products and
`technology. (Id. ¶¶ 128, 130.) As a result of these purchases, several doctors would have
`received payments. (Id. ¶ 129.)
`
`
`
`c.
`Data Collection Registries
`
`Relator’s third alleged kickback scheme is Defendants’ use of data collection
`programs to provide payments to participating doctors. (Id. ¶ 132.) Defendants would
`ask for “only a small amount of data” which “did not take a significant amount of a
`physician’s time” to gather and paid between $1,000 to $1,500 for such data. (Id. ¶¶
`132–33.) Relator alleges all the gathered information from doctors was already in
`Defendants’ possession, due to the presence of sales personnel at Pipeline procedures.
`(Id. ¶¶ 134–35.) These data were ostensibly related to two of Defendants’ studies,
`IntrePED and ASPIRe. (Id. ¶ 137.) Allegedly, Defendants never conducted preliminary
`studies to gauge the efficacy of these two studies. (Id. ¶ 139.) As such, they were
`“cover” for kickbacks. (Id.)
`
`
`
`d.
`Fellowships, Grants and Research
`
`Relator’s fourth alleged kickback scheme is Defendants’ distribution of funds
`through fellowships, grant money, and prominent research roles, based on their Pipeline
`usage, which in turn caused doctors to use more Pipelines. (Id. ¶ 140.) When awarding
`funding, Relator alleges “Defendants’ executives . . . would commonly ask Defendants’
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`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 6 of 27 Page ID #:994
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`sales personnel about the doctor’s or hospital’s use of the Defendants’ products.” (Id. ¶
`141.) These funding decisions were “supposed to be made by an independent body . . .
`called the NeuroVascular Medical Board.” (Id.) According to Relator, “additional
`training beyond standard medical school and residency is highly desirable to young
`doctors” wishing to practice in neurointerventional surgery, so they often seek
`fellowships. (Id. ¶ 145.) Allegedly, Defendants provided fellowship funding to
`institutions “based on the business the institutions could generate for the Defendants.”
`(Id. ¶ 146.) Defendants funded between 10 to 15 fellowships per year, for a total
`expenditure of between $1 million to $1.5 million every year. (Id. ¶ 147.) Relator alleges
`that, “[i]f a fellowship host . . . decreased its usage of Defendants’ Pipelines, the
`Defendants would decrease or decline to renew their funding.” (Id. ¶ 149.) The award
`of grants was also based on an institution’s Pipeline usage. (Id. ¶¶ 150–51.)
`
`
`
`e.
`Proctor-Affiliated Hospitals
`
`Relator’s fifth alleged kickback scheme is largely tied to its first, the proctoring
`program, but adds that “hospitals that are affiliated with Pipeline proctors were among
`the Defendants’ best customers.” (Id. ¶ 152.) Relator alleges that “a comparably large
`portion of all hospitals that purchased any Pipelines were affiliated with at least one
`proctor.” (Id.) “This close link . . . is further evidence that the proctor program operates
`as part of the Defendants’ sales operation.” (Id.)
`
`
`
`f.
`Payments to Dr. Woodward’s Companies
`
`Relator’s sixth and final alleged kickback scheme is Defendants’ payments to
`two companies owned by Pipeline proctor Dr. Woodward. (Id. ¶ 156.) Allegedly,
`Defendants paid Dr. Woodward substantial sums, both for his proctoring services and
`for his companies’ services. (Id. ¶ 158.) These payments “put[] him and Defendants in
`an ethically conflicted position” as one of Dr. Woodward’s company’s was hired to be
`an unbiased reviewer of a study’s results. (Id. ¶¶ 156, 158.) “The monetary payments to
`Dr. Woodward stemming from his cozy relationship . . . were such kickbacks that likely
`resulted in millions of dollars in FCA claims.” (Id. ¶ 170.)
`6
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`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 7 of 27 Page ID #:995
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`False Claims
`2.
`
`
`Due to the illegal kickbacks described above, Relator alleges Defendants
`
`knowingly caused thousands of false claims. (Id. ¶ 172.) All certifications of
`compliance made on forms, including Form CMS-855 and Form CMS-2552, are
`allegedly false records if they were completed “in connection with a use of Pipelines
`tainted by kickback payments.” (Id. ¶ 173.) Allegedly, approximately one quarter of
`Defendants’ Pipeline sales are paid through Medicaid, another quarter are paid through
`Medicare, and the remainder is paid privately or through other federal and state health
`care programs. (Id. ¶ 178.) Relator states that “[w]hile it is not feasible to describe all
`such false claims in detail in this Complaint . . . clear cut indicia . . . and representative
`examples of the claims illustrate the Defendants’ pattern of causing physicians and
`hospitals to make false claims and to submit false records.” (Id. ¶ 181.) Relator
`summarizes that doctors “(i) received large Pipeline related payments from the
`Defendants, (ii) very likely billed Pipeline related procedures to Medicare, and (iii)
`participated in Defendants’ proctor program.” (Id. ¶ 210.)
`II. LEGAL STANDARD
`
`Federal Rule of Civil Procedure 12(b)(6) allows an attack on the pleadings for
`“failure to state a claim upon which relief can be granted.” “To survive a motion to
`dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a
`claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
`(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial
`plausibility when the plaintiff pleads factual content that allows the court to draw the
`reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678.
`
`The determination of whether a complaint satisfies the plausibility standard is a
`“context-specific task that requires the reviewing court to draw on its judicial
`experience and common sense.” Id. at 679. Generally, a court must accept the factual
`allegations in the pleadings as true and view them in the light most favorable to the
`plaintiff. Park v. Thompson, 851 F.3d 910, 918 (9th Cir. 2017); Lee v. City of Los
`7
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`

`

`Case 2:17-cv-01903-MCS-SS Document 80 Filed 04/12/21 Page 8 of 27 Page ID #:996
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`Angeles, 250 F.3d 668, 679 (9th Cir. 2001). But a court is “not bound to accept as true
`a legal conclusion couched as a factual allegation.” Iqbal, 556 U.S. at 678 (2009)
`(quoting Twombly, 550 U.S. at 555).
`
`Averments of fraudulent conduct are subject to the heightened pleading standard
`of Rule 9(b). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003).
`Because an FCA claim alleges fraud, the Rule 9(b) heightened pleading standard
`applies. Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th
`Cir. 2011). To meet Rule 9(b), a plaintiff must “state with particularity the
`circumstances constituting fraud.” Fed. R. Civ. P. 9(b). The complaint must identify the
`“who, what, when, where, and how” of the fraudulent misconduct, “as well as what is
`false or misleading about” it, and “why it is false.” Cafasso, 637 F.3d at 1055 (internal
`quotation marks omitted). “[A]llegations of fraud must be ‘specific enough to give
`defendants notice of the particular misconduct which is alleged to constitute the fraud
`charged so that they can defend against the charge and not just deny that they have done
`anything wrong.’” United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1180
`(9th Cir. 2016) (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001)).
`
`As a general rule, leave to amend a complaint that has been dismissed should be
`freely granted unless it is clear the complaint could not be saved by any amendment.
`Fed. R. Civ. P. 15(a); Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025,
`1031 (9th Cir. 2008).
`III. DISCUSSION
`
`A. Requests for Judicial Notice
`
`Defendants request judicial notice of four documents. (First RJN, ECF No. 68.)
`Relator also requests judicial notice of four documents. (Second RJN, ECF No. 76.)
`Neither Defendants nor Relator opposed the request of the other. A court may take
`judicial notice of a fact not subject to reasonable dispute if it “(1) is generally known
`within the trial court’s territorial jurisdiction; or (2) can be accurately and readily
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`determined from sources whose accuracy cannot reasonably be questioned.” Fed. R.
`Evid. 201(b).
`
`All of the documents for which the parties seek judicial notice are on file with
`government agencies. Five documents are on file with the FDA, (First RJN, Exs. A–D;
`Second RJN, Ex. B), two documents are on file with the SEC, (Second RJN, Exs. A,
`D), and one document is on file with the DOJ, (Second RJN, Ex. C). The documents on
`file with the FDA are proper for judicial notice, as discussed in Stengel v. Medtronic
`Inc., “[b]ecause the accuracy of FDA records cannot reasonably be questioned.” 676
`F.3d 1159, 1167 (9th Cir. 2012), reh’g en banc granted on other grounds, 704 F.3d
`1224 (9th Cir. 2013). In similar fashion, the documents on file with the SEC and DOJ
`are also beyond dispute, as “publicly-available documents . . . produced by [government
`agencies], which [are] matters of public record directly relevant to the issue at hand.”
`Funk v. Stryker Corp., 631 F.3d 777, 783 (5th Cir. 2011) (citing Norris v. Hearst Trust,
`500 F.3d 454 461 n.9 (5th Cir. 2007)). As these documents’ are beyond dispute, and the
`parties do not introduce any argument to the contrary, the Court takes judicial notice of
`all eight documents.
`
`B.
`The FCA and the AKS
`
`The FCA makes it unlawful for any person who “knowingly presents, or causes
`to be presented, a false or fraudulent claim for payment or approval; knowingly makes,
`uses, or causes to be made or used, a false record or statement material to a false or
`fraudulent claim; [or] conspires to commit a[nother] violation of” section 3729(a)(1).
`31 U.S.C. § 3729(a)(1)(A)-(C). “Evidence of an actual false claim is ‘the sine qua non
`of a False Claims Act violation.’” United States ex rel. Aflatooni v. Kitsap Physicians
`Serv., 314 F.3d 995, 1002 (9th Cir. 2002) (quoting United States ex rel. Clausen v. Lab’y
`Corp. of Am., 290 F.3d 1301, 1311 (11th Cir. 2002)).
`
`The Ninth Circuit does not require a relator to identify specific, representative
`examples of false claims to sufficiently demonstrate evidence of a false claim. See Ebeid
`ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010). To satisfy Rule
`9
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`

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`9(b) pleading standards for an FCA claim, relators must allege “particular details of a
`scheme to submit false claims paired with reliable indicia that lead to a strong inference
`that claims were actually submitted.” See id. at 998–99 (quoting United States ex rel.
`Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009)). Allegations made “on
`‘information and belief’ must state the factual basis for the belief” in order to meet the
`governing heightened standard. See United States v. Ctr. for Diagnostic Imaging, Inc.,
`787 F. Supp. 2d 1213, 1221 (W.D. Wash. 2011) (citing Neubronner v. Milken, 6 F.3d
`666, 672 (9th Cir. 1993)).
`
`The AKS states that whoever knowingly and willfully solicits, receives, offers,
`or pays any remuneration in exchange for referral of an individual for the furnishing of
`any item or service for which payment may be made under a Federal health care
`program shall be guilty of a felony. See 42 U.S.C. § 1320a-7b(b)(1)-(2); Hanlester
`Network v. Shalala, 51 F.3d 1390, 1398 (9th Cir. 1995) (“Congress introduced the broad
`term ‘remuneration’ . . . to clarify the types of financial arrangements and conduct to be
`classified as illegal under Medicare and Medicaid. The phrase ‘any remuneration’ was
`intended to broaden the reach of the law which previously referred only to kickbacks,
`bribes, and rebates.” (citation omitted)). “[A] claim that includes items or services
`resulting from a violation of this section constitutes a false or fraudulent claim for the
`purposes of [the FCA].” 42 U.S.C. § 1320a-7b(g).
`
`Generally, the AKS does not require proof of a quid pro quo, or that any payment
`or referral was made. See Shalala, 51 F.3d at 1397. When a violation of the AKS forms
`the basis of an FCA claim, however, the claimant must establish a connection between
`the alleged kickback scheme and actual false claims submitted to the government. See
`United States v. Vista Hospice Care, Inc., No. 3:07-cv-00604-M, 2016 WL 3449833, at
`*24 (N.D. Tex. June 20, 2016) (“An FCA claim dependent on the AKS needs to meet
`all of the other elements of an FCA claim. In other words, Relator must show not only
`that Defendants paid, or offered to pay, remuneration in exchange for referrals, but also
`that payments led to false certifications or claims.”) (citations omitted).
`10
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`C. Defendants’ Motion to Dismiss
`
`Defendants argue that: (1) Relator’s proctoring allegations do not adequately
`
`allege an AKS violation; (2) Relator’s claims based on data collection for studies lack
`particularity and are contradicted by exhibits; (3) Relator’s claims based on Defendants’
`payments for lab services are speculation; (4) Relator’s kickback claims related to
`fellowships/grants, research roles, and acquisitions of companies are deficient; (5)
`Relator has failed to adequately plead causation; (6) Relator improperly relies on group
`pleading that does not satisfy Rule 9(b); and (7) Relator’s claims under analogous state
`false claim statutes fail for the above reasons. (See generally Mot.) The Court addresses
`each argument in turn.
`
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`1.
` Relator’s Proctoring Allegations
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`Defendants first contend that Relator’s proctoring-related allegations are
`conclusory and vague challenges, which do not adequately plead AKS violations, and
`instead represent ordinary and transparent relationships between Defendants and
`physicians. (Mot. 8.) To properly plead violation of the AKS, Relator must show the
`“knowing[] and willful[] offer[] or pay[ment] [of] any remuneration . . . to any person
`to induce such person[] . . . to purchase . . . any good, . . . service, or item for which
`payment may be made in whole or in part under a Federal health care program.” 42
`U.S.C. § 1320a-7b(b)(2)(B). This provision “is violated if ‘one purpose of the payment
`was to induce . . . even if the payments were also intended to compensate for
`professional services.’” United States v. Kats, 871 F.2d 105, 108 (9th Cir. 1989)
`(quoting United States v. Greber, 760 F.2d 68, 69, 72 (3d Cir. 1985)). Not all payments
`violate the AKS however, as there are numerous “safe harbor” payments that are not
`AKS violations. See 42 U.S.C. § 1320a-7b(b)(3); 42 C.F.R. § 1001.952(d) (2020). One
`such safe harbor is where payments “do not exceed those which are reasonably
`necessary to accomplish the commercially reasonable business purpose of the services.”
`42 C.F.R. § 1001.952(d)(7). Due to these statutory safe harbors, Relator must
`sufficiently allege facts showing payments fall outside protected categories in order to
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`state a plausible claim for relief.2 United States v. Corinthian Colls., 655 F.3d 984, 993–
`95 (9th Cir. 2011).
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` There is a dispute between the parties as to whether the safe harbor exceptions may
`properly be considered under a Motion to Dismiss. Citing generally to Columbia
`Pictures Industries, Inc. v. Fung as support, Relator contends the safe harbor provides
`Defendants with an affirmative defense that does not apply when a complaint
`sufficiently alleges claims on its face. 710 F.3d 1020 (9th Cir. 2013). “And ‘[o]rdinarily,
`affirmative defenses . . . may not be raised on a motion to dismiss.’” U.S. Commodity
`Futures Trading Comm’n v. Monex Credit Co., 931 F.3d 966, 973 (9th Cir. 2019)
`(quoting Lusnak v. Bank of Am., N.A., 883 F.3d 1185, 1194 n.6 (9th Cir. 2018)).
`Notably, the Ninth Circuit’s Fung decision concerned whether the safe harbor
`provisions of the Digital Millennium Copyright Act was an affirmative defense, not an
`AKS violation. Id. at 1030. As such, there is no mention in Fung about whether the
`AKS safe harbor provisions constitute an affirmative defense. See generally id. The
`Ninth Circuit has not, as yet, ruled that the AKS safe harbor provisions are an
`affirmative defense. See United States v. Ekwebelem, No. CR-12-01170-MWF, 2014
`WL 12633529, at *1–2 (C.D. Cal. Sept. 9, 2014).
`In Corinthian Colleges, the Ninth Circuit analyzed whether a complaint
`sufficiently alleged an FCA claim to survive a 12(b)(6) motion to dismiss, and expressly
`considered safe harbor provisions in the Higher Education Act in completing that
`analysis instead of treating them as an affirmative defense. United States v. Corinthian
`Colls., 655 F.3d 984, 993–94 (9th Cir. 2011). To this Court, the Corinthian Colleges
`decision is on point, and the Court must properly consider whether Relator’s claims
`sufficiently allege that the safe harbor provisions do not apply in establishing their FCA
`claim.
`
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`Defendants argue the FAC provides only “legal conclusion[s] couched as []
`
`factual allegation[s]” to support any plausibility of the proctoring program falling
`outside the AKS safe harbors. (Mot. 9 (quoting Twombly, 555 U.S. at 555).)
`Specifically, Defendant points to statements that the proctor program was a “pyramid
`scheme” with “lucrative cash kickback payments,” and had payments “significantly
`higher than their competitors’ paid.’” (FAC ¶¶ 104, 109, 111.) Similarly, there are
`statements that “Defendants did not pay physicians consistent with fair market value”
`and “Defendants did not engage physicians for commercially reasonable business
`purposes.” (Id. ¶ 65.) Relator colors Defendants’ proctoring program as having
`“unnecessary and excessive . . . fees . . . when such training was not reasonable or
`necessary.” (Id. ¶ 93.) Relator also alleges that “Defendants’ practice of making such
`excessive payments exposed the true nature of these payments as a form of revenue
`sharing . . . rather than being reasonable compensation.” (Id. ¶ 123.) These are the sort
`of legal conclusions couched as factual allegations that the Court need not accept as
`true. See Iqbal, 556 U.S. at 678 (“[T]he tenet that a court must accept as true all of the
`allegations contained in a complaint is inapplicable to legal conclusions.”).
`
`The FAC does include many factual allegations about the alleged kickback
`scheme of the proctoring program, even if there is some euphemistic labeling at play.
`The generalized proctoring kickback scheme, outlined above, contains facts related to
`proctor compensation and travel stipends that this Court must accept as true. There are
`also specific factual allegations related to certain proctors that are properly pleaded. The
`FAC discusses Dr. Moran, who served as a proctor and traveled at Defendants’ expense,
`allegedly earning over $500,000. (Id. ¶¶ 98–99, 101.) These travels took Dr. Moran far
`afield, from prominent United States cities to locations in Argentina, France, and Spain.
`(Id. ¶ 101.) Apparently, Dr. Moran “regularly called” for additional proctoring
`assignments and Defendants “increased his proctoring assignments” as a result. (Id. ¶
`113.) Relator alleges a conversation in which one of Defendants’ sales employees,
`Annie Joseph, told Relator that “Defendants paid Dr. Moran to proctor for doctors who
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`didn’t need proctoring, including proctoring assignments in Europe.” (Id. ¶ 121.)
`Similar allegations point to another proctor, Dr. Coon, who is identified as traveling
`cross-country to proctor Pipeline operations for another doctor already certified in
`Pipeline usage. (Id. ¶¶ 115–16.) In another alleged conversation between Ms. Joseph
`and Relator, Ms. Joseph stated “Pipeline proctoring assignments rewarded doctors for
`using Pipelines and other Defendant products such as Axium coils.” (Id. ¶ 106.) These
`allegations can be grouped into three related but distinct proctoring kickback
`arguments: kickbacks in the form of overpayment for services performed, kickbacks
`where services were not performed and travel was not taken, and kickbacks for
`unnecessary services.
`
`The first proctoring kickback scheme, overpayment for services rendered, lacks
`the necessary facts to state a cognizable claim. The FAC is missing allegations of any
`fair market rates for proctoring services. “Without alleging the fair market value of
`those services, [Relator] ha[s] failed to plausibly allege . . . remuneration.” Ctr. for
`Diagnostic Imaging, Inc., 787 F. Supp. 2d at 1223; see also United States ex rel. Gough
`v. Eastwestproto, Inc., No. CV 14-465 DMG (SHx), 2018 WL 6929332, at *8 (C.D.
`Cal. Oct. 24, 2018) (“One significant deficiency in the FAC is the absence of facts to
`support . . . discounted transport services because no comparative ambulance rates are
`alleged.”). Relator’s many allegations of overpayment are conclusory and, without an
`alleged point of fair market value for reference, the Court cannot find those allegations
`supported by fact. Cf. United States ex rel. STF, LLC v. Vibrant Am., LLC, No. 16-cv-
`02487-JCS, 2020 WL 4818706, at *2 (N.D. Cal. Aug. 19, 2020) (holding that
`allegations a laboratory charged a draw fee many multiples higher than Medicare, where
`specific allegation of Medicare paying a $3 draw fee compared to the laboratory paying
`a $15 draw fee, were “sufficient to support an inference that the fee paid by [the
`laboratory] exceeds the fair market value of the services provided”).
`
`The importance of establishing fair market value is also established in guidelines
`set forth by the Office of the Inspector Genera