Second Federal Court Case Interprets EKRA – Reaches Opposite Result

EKRA has an exception that permits certain types of compensation arrangements for some bona fide employment and independent contractor arrangements. This exception, however, prohibits compensation determined by or varying with (1) referrals to the laboratory, (2) the number of tests or procedures performed, or (3) the amount billed or received from payors. Accordingly, many observers had concluded that paying sales commissions to laboratory sales agents could violate EKRA.

In the earlier Graves decision, the federal court in Hawaii adopted a narrower reading of EKRA, concluding that laboratory sales agents are not typically paid for “referring a patient or patronage” to a laboratory, because they do not typically solicit or refer individual patients for testing.  Instead, they generally are paid to convince those who do make referrals to a laboratory, e.g., physicians, clinics, etc., that they should be sending their referrals and patronage to the laboratory for whom the sales agent is working:

Undoubtedly, Graves’s commission-based compensation structure induced him to try to bring more business to S&G, either directly through the accounts he serviced himself, or through the accounts of the personnel under his management. However, the ‘client’ accounts they serviced were not individuals whose samples were tested at S&G. Their ‘clients’ were ‘the physicians, substance abuse counseling centers, or other organizations in need of having persons tested.’ … Because Graves was not working with individuals, the compensation that S&G paid him was not paid to induce him to refer individuals to S&G.

S&G Labs Hawaii, LLC v. Graves, D. Haw., 19-00310 LEK-WRP (Oct. 18, 2021).

The recent Schena decision explicitly rejects this interpretation by the Graves court, and asserts that the marketer in Schena was paid to induce referrals of individuals, albeit indirectly, because a marketer is paid to try to persuade others, e.g., physicians and others in position to refer, that their referrals should be directed to the laboratory employing the marketer.  The Schena court points out that the statute does not explicitly require any direct interaction between the marketer and the patient in order for a violation to occur.

On the other hand, Graves may be the better reasoned decision, given the Schena court arguably stretches for its result.  EKRA prohibits remuneration “to induce a referral” and, while it is true that there is no requirement of direct interaction between the marketer and the individual, the text of the statute also does not suggest that an indirect referral could result in a violation.  EKRA uses the phrasing “directly or indirectly” in only two instances, both of which modify only the meaning of remuneration.  The Schena court asserts that its decision follows the plain meaning of the statute, but its holding rests on the assumption that the meaning of “to induce a referral” under EKRA implicitly includes indirect referrals even though the statute otherwise explicitly states when it reaches both direct and indirect conduct.

For now, we have two EKRA decisions, in Hawaii, and in the Northern California district.  It remains to be seen how other federal courts might view the reasoning of these two conflicting decisions, if presented with similar situations.  In the meantime, those seeking to understand the precise scope of EKRA may be left to struggle with these two seemingly irreconcilable decisions.  If you have questions about EKRA or its application to specific arrangements, please contact Charles Oppenheim, Robert Miller, Paul Garcia or Stephanie Gross, or the attorney at Hooper Lundy & Bookman, P.C. who normally handles your matters.