Page 3
Ninth Circuit Affirms Conviction in COVID-19 Kickback Case
Opinion Says 2018 Law Criminalizing Paying for Referral of Patients to Laboratories Applies to Former Technology Executive Who Paid Recruiters to Push Bundled Blood Test to Doctors
By Kimber Cooley, associate editor
The Ninth U.S. Circuit Court of Appeals on Friday upheld the conviction of a Silicon Valley executive—who paid a team of marketers to pitch to “naïve” doctors a bundled blood test for allergies and COVID-19 offered by his company—under a 2018 law banning the payment of “renumeration…to induce a referral of an individual to a…laboratory.”
In Friday’s opinion, authored by Circuit Judge Daniel Aaron Bress, the court analyzed the Eliminating Kickbacks in Recovery Act (“EKRA”), found at 18 U.S.C. §220, for the first time and determined that the defendant’s actions—involving a commission payment scheme to recruiters rather than directly to doctors—is covered by the law.
Challenging his conviction was Mark Schena, the president of the Sunnyvale-based company Arrayit Corporation, who, in 2018, began paying recruiters to persuade doctors—specifically targeting chiropractors and naturopaths while avoiding allergists—to recommend to patients a blood screening test for 120 potential allergens. The so-called “marketers” were compensated solely based on a percentage of the revenue they were able to generate for the company.
Recruiters misleadingly told the practitioners that the test was “highly accurate” and “far superior” to skin examinations, even though the blood analysis could not distinguish between an actual allergy or simple exposure. Evidence presented at trial also established that, for most patients, screening for the full 120 allergens was not medically warranted.
However, the broad testing enabled Schena to bill each patient’s insurance company up to $10,000. One marketer, Marc Jablonski, who pled guilty on charges relating to his involvement with the scheme, testified that Arrayit’s recruiters “controlled” which lab was selected for the blood analysis.
COVID-19 Testing
In 2020, Schena transitioned to COVID-19 testing, marketing his screening tool as equal or superior to the nasal PCR swab, even though the test was only able to detect antibodies as opposed to active infections.
Recruiters were instructed to bundle the COVID-19 tests with the more lucrative allergy screening, and the marketers falsely told doctors that public health officials encouraged joint analysis.
Arrayit’s Medicare billings showed that the company billed an average of $5,200 per patient, more than any other laboratory in the country. Between October 2018 and June 2020, Arrayit invoiced public and private insurers for more than $77 million, but the companies paid only around $2.7 million, as many claims were denied or reduced.
He also marketed Arrayit, a publicly traded company, as the only one in the world that offers purportedly revolutionary technology that allows for the testing of COVID-19 and allergies based on a simple finger-prick. He also told potential investors that he was on a “shortlist” for the Nobel Prize and falsely represented that the company could be valued at $4.5 billion.
Schena was charged with multiple counts relating to healthcare and securities fraud, as well as two violations of §220, based on payments made to Jablonski. He moved to dismiss the EKRA counts, arguing that the statute only criminalizes kickbacks to doctors.
Senior District Court Judge Edward J. Davila of the Northern District of California denied the motion, and a jury found him guilty of all nine charged offenses. Davila sentenced him to right years in prison and ordered him to pay more than $24 million in restitution.
Friday’s opinion, joined in by and Circuit Judge Ana de Alba and Senior Circuit Judge Sidney R. Thomas, affirms his convictions under EKRA. In an accompanying memorandum decision, the panel affirmed the remaining convictions, but vacated part of the restitution order.
Undisputed Points
Bress noted that “several points are not in dispute,” and declared that “Arrayit is a ‘laboratory’ within the meaning of the statute,” “Schena paid remuneration to the marketers,” and the payments varied based on the number of tests or procedures such that a safe harbor provision for salaried or hourly payments did not apply. The jurist explained:
“The disagreement between Schena and the government rests on two other aspects of § 220(a)(2)(A): (1) whether EKRA applies to payments made to marketing intermediaries, as opposed to the referring doctors or persons who otherwise interact directly with patients, and, (2) if payments to marketing intermediaries are covered, what it means to ‘induce a referral’ in the context of that type of payment relationship.”
Rejecting Schena’s contention that the provision only applies to payments made by those who make the actual patient referrals, he opined:
“The basic rejoinder to Schena’s position is that the statute does not create the limitation he seeks…. Nothing in this provision, including the term ‘kickback,’ limits its reach to payments made specifically to persons who have the authority to refer patients or who directly interact with patients. One could ‘induce a referral’ by paying someone who could in turn effect a referral, even if the person who received the payment did not himself have the ability to order a laboratory test or refer a patient to a treatment facility.”
District Court Decision
Noting that “another district court in our circuit reached a different conclusion on this point,” he cited the 2021 decision by the U.S. District Court for the District of Hawaii in S&G Labs Hawaii, LLC v. Graves—for which the appeal was argued before the panel in coordination with the present case.
In the S&G case, Senior District Court Judge Leslie E. Kobayashi concluded that payments to marketing representatives did not qualify because they did not induce the referral of any “individual” to the laboratory.
Finding this analysis lacking, Bress remarked:
“S&G’s interpretation was incorrect because the phrase ‘to induce a referral of an individual’ means merely that the ultimate object of the inducement must be a natural person to whom covered medical services would be provided. It does not follow…that 18 U.S.C. § 220(a)(2)(A) is limited to payments made to persons who are ‘working with’ such individual patients.”
Saying that public policy considerations support the court’s interpretation, he opined:
“[P]roblems would arise in the EKRA context under Schena’s proposed reading. To evade EKRA, the recipient of unlawful payments from a provider would need only to enlist a subordinate or other agent to pressure a patient into using the provider’s services….We…conclude that the reference to ‘an individual’ in §220…requires that the renumeration generally contemplate the referral of a patient for an EKRA-covered service. But the statute imposes no requirement that the recipient of the renumeration directly interact with an ‘individual’ patient….”
‘Induce’ Referral
Turning to what it means to “induce” a referral, he pointed out that the term, in criminal contexts, generally means the “intentional encouragement of an unlawful act.” Based on that interpretation, he wrote:
“We conclude that a percentage-based compensation structure for marketing agents, without more, does not violate 18 U.S.C. § 220(a)(2)(A).”
However, he said:
“But the evidence is sufficient to show wrongful inducement when, as here, the defendant pays remuneration to a marketing agent to have him unduly influence doctors’ referrals through false or fraudulent representations about the covered medical services.”
Bress added:
“Future cases will be needed to give content to the specific circumstances in which payments to a marketing agent reflect a wrongful effort to unduly influence the decisions of doctors and medical professionals making referrals. Given that reality, and although fraudulent conduct risks implicating other criminal statutes, companies and marketing agents seeking to steer clear of EKRA may consider whether it is preferable to structure their compensation arrangements in accordance with the statute’s safe harbor.”
In the concurrently filed memorandum decision, the judges said that “[w]e vacate the restitution order to the extent of the $21,562,300 allegedly attributable to the securities fraud violations,” concluding that Davila wrongly based the award to defrauded investors for a timeframe that spanned 2015 to April 2020 when the charged counts related to three misleading statements made on individual dates in 2018, 2019, and 2020.
The matter was remanded for a calculation based on the specific conduct underlying the charged offenses. The jurists affirmed the $2.7 million award relating to restitution for healthcare fraud.
The case is U.S. v. Schena, 23-2989.
Copyright 2025, Metropolitan News Company