Former Executive Facing Time for Shipping Adulterated Device

A federal judge in New Jersey has sentenced Charlie Chi, the former CEO of device startup OtisMed, to two years in prison for intentionally distributing a medical device whose marketing application had been rejected by the U.S. FDA.

Chi, 46, pleaded guilty to three counts of distributing an adulterated device in violation of the FD&C Act. In addition to the jail time, U.S. District Judge Claire Cecchi slapped Chi with a $75,000 fine and a year of supervised release. He had faced up to a year in jail and a fine of up to $100,000 for each count.

“With everything else people have to deal with when they are facing surgery, they shouldn’t have to worry whether their doctor is using equipment that has been approved for use,” U.S. Attorney for the District of New Jersey Paul Fishman said.

The government’s case, United States of America vs. Charlie Chi, revolved around the distribution of the OtisKnee, a cutting guide for use in total knee replacements. Despite lacking FDA approval to market the device, the company sold about 18,000 units between May 2006 and September 2009, resulting in revenue of about $27.1 million.

According to the government, the company had falsely informed physicians and purchasers that the device was exempt from premarket requirements.

OtisMed finally sought clearance in October 2008, and the FDA denied the company’s marketing submission in 2009, determining the company had failed to demonstrate its product was as safe and effective as other products already on the market.

In the wake of the FDA’s decision, legal and regulatory counsel advised the company to stop shipping the product — a stance the board of directors unanimously endorsed. Chi feared the reputation of his young company would take a hit.

Further, Stryker had offered as much as $100 million to buy the company on the condition the FDA cleared OtisKnee prior to the acquisition’s close. Hiding news of the FDA’s rejection from Stryker, he decided to ship 218 guides.

Chi then asked an employee to take steps to hide shipments, including using Chi’s personal Federal Express account and a temporary employee to handwrite airbills. As he left, he intimated to the employee that “this conversation did not happen,” according to court documents filed in the U.S. District Court for the District of New Jersey. He later informed the employee the shipment would occur the following day.

The adulterated devices were sent to surgeons across the U.S., including six in New Jersey. The employees who shipped the items didn’t use the surreptitious methods Chi had suggested.

Last December, Stryker and OtisMed agreed to pay more than $80 million to resolve criminal and civil liability related to the distribution of OtisKnee. Stryker also agreed to establish a compliance program to ensure all marketed products have the necessary approvals (IDDM, Dec. 15, 2014). — Elizabeth Hollis