Order Denying Motion to Dismiss — United States v. Mark Schena (N.D. Cal., Dkt. 135, May 28, 2022)

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An Order Denying Motion to Dismiss in USA v. Mark Schena, Case No. 5:20-cr-00425-EJD-1, Case 5:20-cr-00425-EJD, Document 135, filed 05/28/22, in the U.S. District Court for the Northern District of California, San Jose Division (Re: Dkt. No. 98). The order states that Defendant Mark Schena is charged under a Superseding Indictment and moves to dismiss Counts 4–6 on the ground that the counts do not allege conduct prohibited by the Eliminating Kickbacks in Recovery Act. The court states that Count 4 charges conspiracy under 18 U.S.C. § 371 and Counts 5 and 6 charge substantive violations of that Act, 18 U.S.C. § 220, and reasons that the statute has no requirement of direct interaction between a marketer and an individual. The court denies the motion. The signature block names Edward J. Davila.

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“Order Denying Motion to Dismiss — United States v. Mark Schena (N.D. Cal., Dkt. 135, May 28, 2022).” Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/court-filing-n-d-cal-no-5-20-cr-00425-dkt-135-n-d-cal-9855a264e7/, SHA-256 a33757d043fb5cb91702772d7b2482e34d72ae43f0fe70f9fa4d8f1b6c442ea1.

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Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 1 of 7

4 UNITED STATES DISTRICT COURT

5 NORTHERN DISTRICT OF CALIFORNIA

6 SAN JOSE DIVISION

8 USA, Case No. 5:20-cr-00425-EJD-1
Plaintiff, ORDER DENYING MOTION TO
9
DISMISS
v.
10

11 MARK SCHENA, Re: Dkt. No. 98
Defendant.
12

United States District Court
13 Defendant Mark Schena is charged by indictment with conspiracy to commit health care

14 fraud and wire fraud in violation of 18 U.S.C. § 1349, health care fraud in violation of 18 U.S.C.

15 § 1347, conspiracy to pay illegal kickbacks in violation of 18 U.S.C. § 371, payment of illegal

Northern District of California
16 kickbacks in violation of 18 U.S.C. § 220 and securities fraud in violation of 15 U.S.C. §§ 78j &

17 78ff and 17 C.F.R. 240.10b-5. See Superseding Indictment (“SI”), Dkt. No. 53. Before the Court

18 is Defendant’s motion to dismiss Counts 4–6 of the Superseding Indictment on the grounds that

19 the counts do not allege conduct that is prohibited by the Eliminating Kickbacks in Recovery Act

20 (“EKRA”). Having considered the parties’ arguments and submissions, and for the reasons set

21 forth below, the Court DENIES the motion to dismiss.

22 I. BACKGROUND

23 Defendant served as the President of Arrayit Corporation (“Arrayit”). SI ¶ 1. Arrayit was

24 a publicly traded medical technology company incorporated in Nevada, and based in Sunnyvale,

25 California. SI ¶ 2. Arrayit described itself as a “world leader in microarray technology

26 empowering researchers and doctors in the life sciences, wellness and healthcare testing markets.”

27 SI ¶ 2. Arrayit was a participating provider in the Medicare, Medicaid, TRICARE, and other

28 Case No.: 5:20-cr-00425-EJD-1
ORDER DENYING MOTION TO DISMISS
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Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 2 of 7

1 health care benefit programs, and submitted or caused the submission of claims to Medicare,

2 Medicaid, TRICARE, and other health care benefit programs. SI ¶ 2.

3 Defendant is charged with a scheme to offer and pay illegal kickbacks and a scheme to

4 commit health care fraud and securities fraud. See SI ¶ 29. The government alleges that the

5 purpose of the kickback scheme was for Defendant to enrich himself by, among other things,

6 “submitting or causing the submission of false and fraudulent claims by interstate wire to

7 Medicare, Medicaid, TRICARE, and the Commercial Insurers for services that were (i) procured

8 by the payment of kickbacks and bribes.” SI ¶ 35.

9 Count 4 of the Superseding Indictment charges Defendant with conspiracy to violate 18

10 U.S.C. § 371, with the object of the conspiracy being to violate EKRA. SI ¶¶ 50–56. Counts 5

11 and 6 of the Superseding Indictment charge substantive violations of EKRA. SI ¶¶ 57–58.

12 Counts 4–6 incorporate the following allegations:

United States District Court
13 41. SCHENA and others paid and caused the offer and payment of illegal
kickbacks and bribes to other individuals and purported marketing companies
14 in exchange for blood samples collected from patients and orders for allergy
testing from health care providers, all of which were used to support false and
15 fraudulent claims that were submitted by Arrayit and others to Medicare,
Medicaid, TRICARE, and Commercial Insurers.

Northern District of California
16
42. SCHENA and others distributed false and fraudulent marketing material
17 and other documents that misrepresented the medical necessity of Arrayit’s
allergy test and Arrayit’s ability to provide accurate, fast, and reliable allergy
18 test results that would be medically necessary and reasonable in the treatment
of the patient.
19
....
20
45. SCHENA and others obtained fraudulent orders for allergy and COVID-
21 19 testing by making false and fraudulent statements, directly and indirectly,
to health care providers, patients, and others concerning Arrayit’s ability to
22 provide accurate, fast, and reliable COVID-19 testing in compliance with
applicable state and federal regulations, and the purported need to bundle the
23 COVID-19 test with Arrayit’s allergy test, while concealing that, at various
times, the Arrayit COVID-19 test had not been developed, validated,
24 produced, received the requisite regulatory authorization, or able to return
timely COVID-19 results as represented.
25
....
26
47. SCHENA and others caused Arrayit to submit approximately $69 million
27 in claims by interstate wire to Medicare, Medicaid, TRICARE, and the
28 Case No.: 5:20-cr-00425-EJD-1
ORDER DENYING MOTION TO DISMISS
2
Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 3 of 7

Commercial Insurers for allergy tests that were obtained through illegal
1 kickbacks and bribes, medically unnecessary, ineligible for reimbursement,
and/or not provided as represented.
2
Defendant moves to dismiss three counts in the Superseding Indictment on the ground that
3
EKRA does not reach the conduct alleged in the indictment. See Notice of Motion and Motion to
4
Dismiss Counts Four Through Six of Superseding Indictment (“Mot.”), Dkt. No. 98. On February
5
28, 2022, the Government filed an opposition, to which Defendant filed a reply brief. See United
6
States’ Opposition to Defendant’s Motion to Dismiss Counts Four Through Six of the Superseding
7
Indictment (“Opp.”), Dkt. No. 103; Reply Brief in Support of Motion to Dismiss Counts Four
8
Through Six of Superseding Indictment (“Reply”), Dkt. No. 106.
9
II. LEGAL STANDARD
10
Rule 12(b) of the Federal Rules of Criminal Procedure permits any defense “which is
11
capable of determination without the trial of the general issue” to be raised by pretrial motion.
12

United States District Court
The motion must be decided before trial “unless the court, for good cause, orders that it be
13
deferred for determination at the trial of the general issue or until after verdict, but no such
14
determination shall be deferred if a party’s right to appeal is adversely affected.” Fed. R. Crim. P.
15
12(e). Under this standard, the district court must decide the issue raised in the pretrial motion

Northern District of California
16
before trial if it is “entirely segregable” from the evidence to be presented at trial.” United States
17
v. Shortt Accountancy Corp., 785 F.2d 1448, 1452 (9th Cir. 1986) (quotation marks and citation
18
omitted).
19
III. DISCUSSION
20
Defendant is charged by indictment with violation of EKRA, which provides, in relevant
21
part:
22
(a) Offense.–Except as provided in subsection (b), whoever, with respect to
23 services covered by a health care benefit program, in or affecting interstate
or foreign commerce, knowingly and willfully–
24 (1) solicits or receives any remuneration (including any kickback,
bribe, or rebate) directly or indirectly, overtly or covertly, in cash or
25 in kind, in return for referring a patient or patronage to a recovery
home, clinical treatment facility, or laboratory; or
26 (2) pays or offers any remuneration (including any kickback, bribe,
or rebate) directly or indirectly, overtly or covertly, in cash or in kind–
27 (A) to induce a referral of an individual to a recovery home,
28 Case No.: 5:20-cr-00425-EJD-1
ORDER DENYING MOTION TO DISMISS
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Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 4 of 7

clinical treatment facility, or laboratory; or
1 (B) in exchange for an individual using the services of that
recovery home, clinical treatment facility, or laboratory, shall
2 be fined not more than $200,000, imprisoned not more than
10 years, or both, for each occurrence.
3
18 U.S.C. § 220(a).
4
For purposes of § 220, “laboratory” or “clinical laboratory” means a facility for the
5
“biological, microbiological, serological, chemical, immune-hematological, hematological,
6
biophysical, cytological, pathological, or other examination of materials derived from the human
7
body for purpose of providing information for the diagnosis, prevention, or treatment of any
8
disease or impairment of, or the assessment of the health of, human beings.” See 18 U.S.C.
9
§ 220(e)(4) (incorporating 42 U.S.C. § 263(a)’s definition of laboratory).
10
There is no dispute that Arrayit is a medical laboratory testing facility within the meaning
11
of § 220. Rather, the Parties dispute whether EKRA applies to situations where a marketer obtains
12

United States District Court
a referral of patients by securing them indirectly from physicians, rather than working with
13
individual patients directly. That is, whether EKRA requires the marketer to work directly with
14
individual patients. Defendant argues that it does and contends that because the Superseding
15
Indictment premises EKRA liability on Defendant’s use of marketers to indirectly recruit patients,

Northern District of California
16
Counts 4–6 must be dismissed. See Mot. at 4. As support for this position, Defendant relies on
17
S&G Labs Haw., LLC v. Graves, 2021 WL 4847430 (D. Haw. Oct. 18, 2021), a civil case. An
18
overview of the case is helpful.
19
S&G employed Darren Graves, a marketer, to oversee client accounts. S&G Labs, 2021
20
WL 4847430, at *2. Graves’s compensation included a base annual salary of $50,000, plus a 35%
21
“cut” of the monthly net profits generated by his client accounts and the client accounts handled
22
by the S&G employees who he managed. Id. Clients under the contracts were not patients but
23
were physicians or other organizations in need of having persons tested. Id. at 11. In early 2019,
24
S&G’s general counsel advised the laboratory director, Dr. Puana, that EKRA prevents a medical
25
testing company from compensating its employees based on the number of tests the company
26
performed. Id. Dr. Puana then informed the S&G account executives, including Graves, of her
27

28 Case No.: 5:20-cr-00425-EJD-1
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Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 5 of 7

1 intent to revise the compensation structure. Id. During the revision process, Dr. Puana and

2 Graves engaged in negotiations regarding the new employment agreement, but never entered into

3 a new agreement. Id. Subsequently, Graves was terminated for cause and litigation ensued. Id.

4 Graves argued that S&G breached his employment contract. In response, S&G argued that

5 Graves’s contract became illegal upon the passage of EKRA.

6 The court rejected S&G’s argument and determined that the relevant provisions of EKRA

7 were to be read in the context of the Anti-Kickback statute. Id. at *10. The court held that EKRA

8 did not apply because Graves was not compensated in a manner that considered the referral of

9 individual patients. While Graves’s “commission-based compensation structure induced him to

10 try to bring more business to S&G,” it did not implicate EKRA because “the ‘client accounts

11 [Graves] serviced were not individuals whose samples were tested at S&G.” Id. at *11. Because

12 Graves was not “working with individuals, the compensation that S&G paid him was not paid to

United States District Court
13 him to induce him to refer individuals to S&G.” Id. Thus, the court determined that EKRA did

14 not apply because there was no payment for the referral of an individual patient for laboratory

15 services. Id. at *11.

Northern District of California
16 The holding of S&G Labs rests on the incorporation of 42 U.S.C. § 1320a-7b(b), the Anti-

17 Kickback statute, to define EKRA’s use of “renumeration” and “individual.” 18 U.S.C. § 202

18 does not define either of these terms. Confusingly, EKRA specifically excludes its applicability to

19 “conduct that is prohibited under section 1128B of the Social Security Act (42 U.S.C. § 1320a-

20 7b).” 18 U.S.C. § 220(d)(1). Thus, the incorporation of 42 U.S.C. § 1320a-7b(b) appears

21 misplaced.

22 Further the Anti-Kickback statute does not define renumeration. Rather, it states

23 [w]henever under this chapter or any Act of Congress, or under the
law of any State, an employer is required or permitted to deduct any
24 amount from the remuneration of an employee and to pay the amount
deducted to the United States, a State, or any political subdivision
25 thereof, then for the purposes of this chapter the amount so deducted
shall be considered to have been paid to the employee at the time of
26 such deduction.
27 42 U.S.C. § 1301(c). The Court understands the S&G Labs court to use this to demonstrate that

28 Case No.: 5:20-cr-00425-EJD-1
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Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 6 of 7

1 Congress did not mean to criminalize “renumerations” paid by an employer to an employee. But

2 § 1301(c) does not support this analysis. Rather, it discusses situations where renumerations are

3 permissible or required, it does not blanketly authorize any type of renumeration paid by an

4 employer to an employee. See 18 U.S.C. § 220(b)(2) (EKRA’s safe harbor provision provides

5 statutory exceptions for certain renumerations, but not all employer-employee renumerations).

6 Likewise, the definition of “person” is unhelpful. 42 U.S.C. § 1301(a)(3) defines “person”

7 as “an individual, a trust or estate, a partnership, or a corporation.” This definition says nothing

8 about payment needing to be made based on the “direct” recruitment of an individual patient.

9 Indeed, it does not even define “individual” as used in 18 U.S.C. § 220, let alone impose a

10 requirement of directness.

11 Moreover, there is no requirement of “directness” in the text of EKRA. Rather, by its

12 terms, it applies to situations where someone “pays or offers any remuneration,” to “induce” an

United States District Court
13 individual into using laboratory or clinical services. 18 U.S.C. § 220(a). Notably missing is any

14 requirement of direct interaction between the marketer and the individual. See Az. State Bd. of

15 Charter Schs. v. U.S. Dep’t of Educ., 464 F.3d 1003, 1009–1010 (9th Cir. 2006) (“This

Northern District of California
16 interpretation would impute meaning not apparent from a natural reading of the text and

17 essentially rewrite the statute.”).

18 Under the rules of statutory construction, “[t]he plain meaning of the statute controls, and

19 courts will look no further, unless its application leads to unreasonable or impracticable results.”

20 United States v. Leyva, 282 F.3d 623, 625 (9th Cir. 2002). The plain meaning of “to induce a

21 referral of an individual” includes situations where a marketer causes an individual to obtain a

22 referral from a physician. See Induce, Black’s Law Dictionary (5th ed. 1979) (“To bring on or

23 about, to effect, cause, to influence an act or cause of conduct, lead by persuasion or reasoning,

24 incite by motives, prevail on.” (emphasis added)); see also Hanlester Network v. Shalala, 51 F.3d

25 1390, 1399 (9th Cir. 1995) (determining that “to induce” in the context of the Anti-Kickback

26 statute connotes “an intent to exercise influence over the reason or judgment of another in an effort

27 to cause the referral of program-related business”).

28 Case No.: 5:20-cr-00425-EJD-1
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Case 5:20-cr-00425-EJD Document 135 Filed 05/28/22 Page 7 of 7

1 EKRA reaches the conduct at issue in the Superseding Indictment, namely Defendant’s

2 alleged scheme to influence marketers by paying them illegal kickbacks to induce the referral of

3 patients to Arrayit. SI ¶¶ 41–42, 55–58. It is irrelevant that some of the marketers caused the

4 referral of patients by conveying Defendant’s allegedly false representations about Arrayit to

5 physicians, instead of to the patients directly. The physicians referred the patients based on the

6 misrepresentations, and the marketers received a kickback to “influence” the physician’s referrals.

7 This conduct squarely falls within the text of EKRA. Accordingly, Defendant’s motion to dismiss

8 Counts 4–6 is DENIED.1

9 IV. CONCLUSION

10 For the foregoing reasons, Defendant’s motion to dismiss is DENIED.

11 IT IS SO ORDERED.

12 Dated: May 28, 2022

United States District Court
13

14
EDWARD J. DAVILA
15 United States District Judge

Northern District of California
16

18
19

25 1
The Government suggests that it is improper to decide the issue presented at the motion to
26 dismiss phase given that an adequate evidentiary record has not been developed. The Government
requests that the Court convert the motion to a motion in limine. Given the Court’s ability to
27 resolve the legal issues based purely on the statutory text, the Court declines to convert the motion
into a motion in limine.
28 Case No.: 5:20-cr-00425-EJD-1
ORDER DENYING MOTION TO DISMISS
7

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