Friday, December 18, 2009

Self-Insured Employer May Sue Medical Device Maker for False Ads, Deception

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

A self-insured employer (Kinetic Co.) had standing to sue a medical device manufacturer (Medtronic, Inc.) under Minnesota false advertising, deceptive practices, and consumer fraud laws, the federal district court in Minneapolis has ruled.

Kinetic filed a class action, seeking to represent third-party payors for medical services, alleging that Medtronic continued to sell implantable cardiac defibrillators after it knew of the risk of potentially catastrophic battery failure. After recalling the product, Medtronic allegedly agreed to provide a free replacement device for a Kinetic employee but declined to reimburse Kinetic for the second implantation surgery.

Employer-Provided Health Care

This nation has adopted a health care regime under which employers provide, either from their own funds, or through insurance, for their employees’ medical needs, the court observed.

The fact that Medtronic never sold its defibrillators to Kinetic or other third-party payors did not defeat standing. Medtronic was wrong to assert that the third-party payors—which ultimately reimbursed the physicians or hospitals which held the device in inventory—were barred from any recovery. Medtronic was not protected by marketing its products through intermediaries, according to the court.

Particularity in Pleading, Public Benefit

Kinetic met the requirement of pleading fraud with particularity, under Rule 9(b) of the Federal Rules of Civil Procedure and satisfied the requirement under Minnesota law that private suits for false advertising and consumer fraud must benefit the public.

The class action complaint alleged that 87,000 defibrillators were implanted after Medtronic knew of potentially lethal defects before it decided to inform consumers. The alleged misrepresentations and failures to disclose were made to the public at large and lulled third-party payors and medical providers into underestimating the true risks of using its products.

When setting their insurance rates and premiums, third-party payors attempt to predict upcoming costs, the court said. But they could not predict or easily account for acts of intentional concealment and fraud, as alleged here.

Medtronic’s decision to deny third-party payors recompense was an effort to pass off the cost and expense it caused to innocent employers or insurers who, as a result, either charged the public more to cover the cost of health care, or absorb the cost themselves, according to the court. Kinetic’s effort to place this cost where it allegedly ought to be borne might well provide a public benefit.

Kinetic Co. failed to state claims under consumer fraud laws of states other than Minnesota. The court granted leave to replead with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.

The December 4 opinion in Kinetic Co. v. Medtronic, Inc. will be reported at CCH Advertising Law Guide ¶63,682.

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