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Stryker Subsidiary, Ex-CEO Plead Guilty, Pay $79 Million For Illegal Device Marketing


NEWARK, N.J. — (Mealey’s) Stryker Corp. subsidiary OtisMed Corp. and the former OtisMed chief executive officer on Dec. 8 pleaded guilty to marketing the unapproved OtisKnee Orthopedic Cutting Guide medical device after the Food and Drug Administration denied clearance for the device (United States of American v. OtisMed Corporation, No. 14-cr-688, United States, ex rel. Richard Adrian v. OtisMed Corp., et al., No. 09-cv-5083, D. N.J.). 

(OtisMed criminal information available.  Document #28-141218-001F.  OtisMed guilty plea and attachments available.  Document #28-141218-002X.  Stryker side agreement available.  Document #28-141218-003X.  Chi criminal information available.  Document #28-141218-005F.  Chi guilty plea available.  Document #28-141218-006X.

OtisMed and Stryker also agreed to pay $79 million in criminal fines, criminal forfeiture and a False Claims Act settlement.  The pleas and settlement occurred in the U.S. District Court for the District of New Jersey. 

(OtisMed civil settlement available.  Document #28-141218-004X.

According to the U.S. Attorney’s Office for the District of New Jersey, Charlie Chi, 45, of San Francisco, was one of the founders of OtisMed in 2005 and served as the company’s president, CEO and chairman of the board until 2009 when the company was bought by Stryker.  OtisMed made the OtisKnee guide that was used to help surgeons make accurate cuts to bone ends during knee replacement surgery. 

The OtisKnee used individual patient measurements taken during magnetic resonance imaging (MRI) studies before surgery. 

Sold Without Approval

According to the U.S. Attorney’s Office, between May 2006 and September 2009, OtisMed sold more than 18,000 OtisKnee guides for about $27.1 million.  The prosecutor’s office said it was not until October 2008 that OtisMed submitted an application to the FDA for premarket approval (PMA) of the OtisKnee. 

The government said that before the PMA application, OtisMed falsely represented to physicians that the OtisKnee was exempt from FDA premarket requirements. 

In 2009, the FDA denied the PMA application, saying OtisMed failed to demonstrate that the OtisKnee was safe and effective, the U.S. Attorney’s Office said.  In addition, it said the FDA warned OtisMed that the OtisKnee was a significant risk device and that distributing it without FDA clearance would be a violation of the Food, Drug and Cosmetic Act (FDCA).

 The government said that although legal and regulatory counsel advised OtisMed that it would be unlawful to continue distributing the OtisKnee guide, and although the company’s directors unanimously decided to stop distribution of the device, Chi and others in the company were concerned about the impact on surgeons if the device were no longer distributed.  The government said Chi directed employees to organize a mass shipment of all OtisKnee devices on hand and suggested that company employees hide the distribution from the FDA. 

218 Devices Shipped

The government said that at Chi’s direction, OtisMed shipped about 218 OtisKnee devices throughout the United States.  

In 2010, Stryker reported that it had received a U.S. Justice Department subpoena concerning sales of unapproved medical devices.  The company subsequently indicated that it was cooperating with the government and was in settlement negotiations. 

The government filed a criminal complaint on Dec. 8 against OtisMed for one count of distribution of an adulterated medical device in violation of the FDCA.  According to the U.S. Attorney’s Office, Chi pleaded guilty to three counts of the same charge. 

OtisMed was fined $34.4 million and ordered to pay $5.16 million in criminal forfeiture.  The government said Chi will be sentenced March 18 and faces a maximum of one year in federal prison and a fine of up to $100,000 or twice the gain or loss from the offense for each count. 

False Claims Settlement

In a separate civil settlement, the U.S. Attorney’s Office said OtisMed agreed to pay $41.2 million plus interest to resolve claims under the False Claims Act.  The government said those allegations stem from a 2009 whistle-blower lawsuit, United States ex rel. Richard Adrian v. OtisMed Corp., et al. (No. 09-cv-5083, D. N.J.), which alleges that OtisMed’s illegal distribution resulted in the filing of false claims to federal health insurance programs such as Medicare and Medicaid. 

The government said Stryker was unaware of the illegal distribution of the OtisKnee when it bought OtisMed in 2009.  It said Stryker has cooperated with the investigation. 

In addition to the criminal plea and civil settlement, the government said OtisMed agreed to be excluded from participating in all federal health care programs for 20 years.  It says Stryker has agreed to enact compliance measures to prevent future misconduct. 

The government said that about $41 million of the civil settlement will be paid to the federal government and about $376,000 will be paid to state programs.  Relator Richard Adrian will receive about $7 million as his statutory share of the false claims recovery, the government said. 

Parent Will Review, Audit

Finally, the government said Stryker agree to conduct a review and audit regarding whether other marketed devices have the appropriate FDA approvals and to share the result with the federal government.  Stryker also agreed to annual certifications by its officers regarding the effectiveness of its compliance program. 

The total criminal and civil penalties are more than twice what Stryker offered the government in 2012.  According to Stryker’s Form 8-K at that time, the company offered the Justice Department $33 million.  More recently, the company told stockholders that it had reserved $80 million for the investigation. 

The federal government is represented by U.S. Attorney Paul J. Fishman, Jacob T. Elberg, Thomas J. Eicher and Charles Grawbow of the U.S. Attorney’s Office in Newark, Ross S. Goldstein and Charles J. Biro of the U.S. Justice Department in Washington, D.C., Robert K. Deconti of the Office of Inspector General in Washington and Paul J. Hutter of the U.S. Department of Defense. 

Stryker and OtisMed are represented by Brien T. O’Connor and Joshua S. Levy of Ropes & Gray in Boston.  Chi is represented by Peter C. Harvey of Patterson, Belknap, Webb & Tyler in New York. 

Adrian is represented by Joseph M. Callow Jr. of Keating, Muething & Klekamp in Cincinnati. 

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