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Six New MiMedx Lawsuits (With a Twist)

Jessica Mehta • Mon, January 9th, 2017

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MiMedx Group, Inc.’s Chairman and CEO Parker H. “Pete” Petit  announced the firing of and company’s lawsuits against employees Jess Kruchoski and Luke Tornquist in a December 15, 2016 press release. Soon after lawsuits were filed against Kruchoski and Tornquist, MiMedx then sued sales employees Michael Fox and Harold Purdy. A sixth lawsuit was also filed against former sales employee Lex Harris, who'd left MiMedx two years ago.

According to Petit, Kruchoski and Tornquist were fired and sued for “breaches of common law and contractual obligations.” However, the specific details Petit mentions in the lawsuit against Fox and Purdy are “acts warranting termination of employment as well as other actions.” Petit also mentions “disciplinary action against a small number of other individuals.” All lawsuits and employment terminations target MiMedx sales employees.

MiMedx pioneered using amniotic tissues for wound healing and has been trying to break into orthopedics—so far largely unsuccessfully. Dental, ophthalmic, spine, sports medicine, surgical, and wound care practices are also MiMedx’s target niches. Headquartered in  Marietta, Georgia, MiMedx has employees around the country. Kruchoski is based in Wisconsin, Tornquist in Minnesota, and Petit in Georgia. To date, the company has supplied more than 700, 000 allografts to various healthcare providers, clinics, and hospitals.

MiMedx President and COO Bill Taylor states in the press release that “employment actions” were taken against a number of additional employees “based on the degree of transgression and willingness of these employees to cooperate in the Company’s investigation.” He stresses that no lawsuits have been filed against employees who have been “truthful” and “cooperated.”

According to Petit, the firings and lawsuits against Fox and Purdy had nothing to do with the employment terminations and lawsuits against Kruchoski and Tornquist. Petit says all investigations are managed by the Board of Directors and the MiMedx management team. Without  stating that any (or former) employee engaged in such behavior, Petit says, “When an employee violates the duty of loyalty and contractual obligations by selling competitive products or other products, employment actions must be taken.”

Petit says it’s disappointing when even a small number of employees “choose to follow self-serving financial motives.” Still, he points out, even with four employment terminations and five lawsuits in the past few weeks, it’s a small number compared to MiMedx’s 300+ sales employees.

Putting the “Mi” in MiMedx

MiMedx management has a long history in the medical industry and, as most experienced managements know, the territory comes more than its fair share of lawsuits, investigations, and regulatory challenges including, in MiMedx's case, an untitled letter from the FDA which has since been resolved.  But...again...comes with the territory.

According to the press release, MiMedx fired Lex Harris for similar breach of contract claims two years ago. MiMedx claims Harris used his employment at the company to recruit others in his “sales scheme” (whether those recruits include Kruchoski, Tornquist, Fox, and Purdy is unclear). In a massive lawsuit snowball, MiMedx also just filed a lawsuit against Harris on December 12, 2016.

However, the details of Harris’ employment and position in the press release don’t align with his self-managed online presence. Harris is currently listed on Zoominfo as the “Vice President, Surgical and Sports Medicine” of MiMedx. As expected, the majority of Harris’ online presence otherwise features stringent privacy settings.

Five lawsuits, or promises of lawsuits, by MiMedx in a single month is impressive. However, the lawsuits filed by MiMedx aren’t the first in this tangled litigation. Instead, these five lawsuits are actually threats of counter lawsuits.

The Lawsuit Details

Represented by Minneapolis-based law whistleblower firm Halunen Law’s managing partner and lead attorney Clayton Halunen, the lawsuit claims that MiMedx chronically inflated quarterly revenues for years. Allegedly, MiMedx “channel stuffs” or records product sales that never actually happened. Halunen Law filed a “whistleblower lawsuit” against both MiMedx and CEO Petit on December 15, 2016. Suspiciously, the filing date is the same day MiMedx unveiled their press release detailing the lawsuit against Kruchoski, Tornquist, and others. Halunen says any MiMedx allegations against Kruchoski and Tornquist are an illegal retaliation.

Halunen claims to have pursued legal action first. MiMedx points out that it filed its case on December 13, 016 while Kruchoski and Tornquist filed on December 15, 2016.  Halunen counters by alleging that MiMedx “retaliated in a punitive and illegal manner against our clients (Kruchoski and Tornquist) after they objected to the company’s illegal practice of booking phantom sales of one of its most lucrative product lines.” .

Halunen also alleges  that Kruchoski and Tornquist weren’t “just” MiMedx sales employees, but the “two top company sales people.” In the Halunen official complaint, it states “Mr. Kruchoski was a top-performing sales employee and offers the opinion that under Kruchoski’s leadership, Tornquist became MiMedx’s number one sales representative in the country.” Allegedly, when Kruchoski and Tornquist saw what seemed to be a scheme to dupe shareholders and the public, MiMedx executives including Petit used “threats, intimidation, and ultimately termination” to keep the supposed fraud under wraps. Again, these are the claims made by Halunen in his defense of his clients.  MiMedx is vigorously objecting to them.

Halunen’s lawsuit against MiMedx and Petit claim that the alleged scheme revolved around AvKARE, Inc., a distribution company based out of Tennessee. AvKARE collaborated with MiMedx and the Department of Veteran Affairs (VA hospitals), acting as a middleman. Per Kruchoski and Tornquist in the lawsuit they filed, MiMedx allegedly used AvKARE to record big product orders for VA hospitals. These orders, they say, were never really placed. On record, the VA hospitals were the end customer but had no knowledge of the orders or scheme. Instead, Halunen claims it was an arrangement solely between MiMedx/Petit and AvKARE. The majority of the alleged false orders were placed at the end of each quarter, right when quarterly profits needed to be made public.

Getting “Stuffed”

Halunen's case is alleging that MiMedx can’t effectively “channel stuff” without many working parts, including members of the sales team like Kruchoski and Tornquist. The Halunen lawsuit claims that MiMedx told sales personal to “stuff the shelves” of VA hospitals with the popular EpiFix product. Allegedly, Kruchoski spoke up against his manager(s) at MiMedx in December 2015, pointing out that it was illegal. Evidence of Kruchoski’s official complaints are on record. It’s alleged that even after Kruchoski protested, Petit himself demanded the sales team to “stuff the government shelves.”

MiMedx allegedly came up with a new, innovative way to “channel stuff” in March 2016. Using FedEx “shoebox-sized packages, ” MiMedx could ship 15 of the costliest EpiFix grafts to VA hospitals. Halunen estimates that in one month, MiMedx shipped $2.4 million of EpiFix products to various VA hospitals—hospitals that never made those orders.

Such expensive products aren’t overlooked, and by November 2016 a lot of the product was returned to MiMedx. Other “shoeboxes” remained unused in VA hospitals, backlogged and unpaid. In “at least one instance, ” excess EpiFix grafts were kept at an unnamed MiMedx representative’s home according to the Halunen lawsuit.

In November 2016, Kruchoski and Tornquist filed an official report to MiMedx corporate office detailing the channel stuffing tactics. Their complaint specifically states that illegal practices are a violation of the federal Sarbanes-Oxley Act (SOX) of 2002. Within one month, Kruchoski and Tornquist were threatened, fired, and MiMedx promised (publicly) to file a lawsuit against them for breach of contract.

Halunen claims that MiMedx’s treatment of Kruchoski and Tornquist don’t only violate the whistleblower protection within the SOX, but also the Minnesota Whistleblower Act, and Dodd Frank Wall Street Reform and Consumer Protection Act.

Stay Tuned

In total, MiMedx is tangled up with six new lawsuits going into the New Year, acting as the defendant in one and plaintiff in five—this isn’t new territory for the amniotic tissue company. In May 2016, MiMedx filed a lawsuit against competitor Osiris Therapeutics, Inc. for allegedly sharing clinical results in a “misleading manner.” In 2014, shareholders filed a consolidated complaint claiming MiMedx violated federal security laws by not fully disclosing information.

The allegations that Halunen is making on behalf of his clients are dramatic, but they are intended to be. And they are only allegations.  MiMedx, as we noted earlier, has the scars from many legal battles and knows how to respond. Over their history, MiMedx's managers have had their share of wins, losses, and dropped cases and settlements.

So, stay tuned.  We await the next twists in thos more than usual set of convoluted allegations and counter claims.

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