1037-00003 · Solstice Biomedical Devices Ltd · Analyses & Memos

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Declan Harrington, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.

CC: Siobhán Mulcahy, Head of Global Compliance, Solstice Biomedical Devices Ltd.; Joel Strauss, Partner, Calderwood & Harkness LLP; Sean Morrissey, Associate, Calderwood & Harkness LLP

FROM: Amy Whitfield, Lead Associate, Calderwood & Harkness LLP

DATE: June 25, 2024

RE: Compliance Review of Distribution Agreement Between Solstice Biomedical Devices Ltd. and Ascendant Distribution Solutions LLC (Ref. SBD-ADS-2024-0315)

Matter No.: 1037-00003

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I. Executive Summary

This memorandum sets forth the findings and recommendations of Calderwood & Harkness LLP ("Calderwood & Harkness") arising from our comprehensive compliance review of the Distribution Agreement dated March 15, 2024 (the "ADS Distribution Agreement," Ref. SBD-ADS-2024-0315) between Solstice Biomedical Devices Ltd. ("Solstice" or "SBD") and Ascendant Distribution Solutions LLC ("ADS" or "Ascendant"). The ADS Distribution Agreement governs the exclusive United States distribution of the Pulsar™ Cardiac Rhythm Monitoring System (the "Pulsar™ CRM System"), a Class II medical device that received 510(k) clearance from the U.S. Food and Drug Administration ("FDA") on February 9, 2024 (No. K232847).

This review was conducted within the context of Solstice's first commercial launch in the United States, presently scheduled for October 1, 2024. The US market represents a critical expansion milestone for Solstice, with projected Year-1 net US sales of $26 million, generating an anticipated ADS commission of approximately $4.68 million (calculated at the contractual rate of 18% of net US sales).

Our analysis has been framed principally against the following regulatory and legal authorities: the Federal Anti-Kickback Statute ("AKS") (42 U.S.C. § 1320a-7b(b)) and its implementing safe harbor regulations (42 C.F.R. § 1001.952); the Federal False Claims Act ("FCA") (31 U.S.C. §§ 3729–3733); the Physician Payments Sunshine Act (42 U.S.C. § 1320a-7h) and the Centers for Medicare & Medicaid Services ("CMS") Open Payments program; and applicable state marketing compliance laws across the twelve jurisdictions surveyed separately.

Overall Assessment. The ADS Distribution Agreement provides a sound commercial framework for the US distribution of the Pulsar™ CRM System. The agreement reflects a commercially reasonable business arrangement between a medical device manufacturer and a well-established US distribution partner. However, our review has identified several areas in which the agreement requires targeted compliance amendments to reduce federal and state enforcement risk, ensure Sunshine Act data-collection compliance, and establish robust sub-distributor oversight mechanisms.

Summary of Key Findings. Our principal findings are as follows:

(a) Commission Structure. The 18% commission structure falls within the fair market value range for exclusive medical device distribution arrangements in the cardiac rhythm management and cardiac monitoring space, based on available industry benchmarking data. However, the agreement lacks contemporaneous fair market value documentation, which is essential for qualification under the Personal Services and Management Contracts safe harbor (42 C.F.R. § 1001.952(d)) and is strongly recommended by the Office of Inspector General ("OIG") of the U.S. Department of Health and Human Services ("HHS").

(b) Sub-Distributor Protocols. The sub-distributor approval protocols, while requiring Solstice's prior written approval and execution of a Compliance Certification, lack sufficient compliance certification specificity and fail to include adequate flow-down provisions covering AKS compliance, Sunshine Act data collection, exclusion list screening, and audit rights.

(c) Audit Rights. The audit rights set forth in Section 12 of the ADS Distribution Agreement are adequate in frequency (twice per calendar year) but materially limited in scope. The term "compliance records" is undefined, no for-cause audit mechanism exists, sub-distributors are not covered, and the agreement does not address record retention obligations or consequences of adverse findings.

(d) Sunshine Act Compliance. The agreement contains no provisions whatsoever addressing Sunshine Act data-collection or reporting obligations—a significant gap given that Solstice Biomedical Inc., as an "applicable manufacturer," will bear the legal obligation to report all transfers of value to covered recipients, including those made by or through ADS and its sub-distributors.

(e) Compliance Training. The agreement contains no requirements for compliance training of ADS personnel involved in the sale, marketing, or clinical support of the Pulsar™ CRM System. This gap is particularly notable given the scope of ADS's field-level interactions with healthcare professionals.

Recommended amendments to Sections 7 (Compliance) and 12 (Audit Rights) are attached as proposed redlines in Appendix A. A proposed form of Sub-Distributor Compliance Addendum is attached as Appendix B. A proposed Sunshine Act Monthly Reporting Template is attached as Appendix C.

We recommend that Solstice transmit the proposed amendments to ADS's counsel during the week of July 1, 2024, with a target completion date for final negotiation and execution of August 15, 2024—well in advance of the October 1, 2024 commercial launch date.

II. Background

A. The Parties

Solstice Biomedical Devices Ltd. Solstice is a private limited company incorporated and organized under the laws of Ireland, with its registered office at Unit 14, Clarion Business Park, Sandyford, Dublin D18 X4F2, Ireland. Solstice is a medical device company specializing in the development and commercialization of cardiac rhythm management systems, including implantable cardiac monitors and associated remote telemetry platforms. Solstice closed its Series C financing round in November 2023, bringing its total capital raised to date to approximately €187 million, at a post-money valuation of approximately €640 million. The lead investor in the Series C round was Alder Peak Ventures, LP, which holds approximately 22.6% of Solstice's fully diluted equity. Solstice's fiscal year 2023 revenue was €38.4 million, derived entirely from sales in the European Union and the United Kingdom. To date, Solstice has generated no revenue in the United States.

Solstice Biomedical Inc. In anticipation of the US commercial launch, Solstice formed Solstice Biomedical Inc., a corporation organized under the laws of the State of Delaware on January 22, 2024 (Delaware File No. 7924813; Employer Identification Number 93-4718206). Solstice Biomedical Inc. maintains its principal offices at 200 Harborview Drive, Suite 1100, Boston, Massachusetts 02210. The US subsidiary serves as the operating entity through which the US commercial launch of the Pulsar™ CRM System will occur, including the engagement with ADS and the marketing and distribution of the device throughout the United States. For purposes of the Physician Payments Sunshine Act and the CMS Open Payments program, Solstice Biomedical Inc. will constitute the "applicable manufacturer" upon commencement of commercial operations in the United States.

Ascendant Distribution Solutions LLC. ADS is a limited liability company organized under the laws of the State of Delaware (Employer Identification Number 84-3291054), with its principal offices located at 6700 Lakeshore Boulevard, Suite 400, Cleveland, Ohio 44114. ADS is a national medical device distribution company with a significant presence in the cardiovascular and cardiac electrophysiology markets. ADS reported annual revenue of approximately $214 million for fiscal year 2023 and maintains distribution and logistics operations in multiple locations across the United States. ADS's Chief Executive Officer is Robert "Rob" Kessler. Dawn Hitchens serves as Vice President, Compliance & Legal. ADS's outside legal counsel for purposes of the ADS Distribution Agreement is Hadley, Ostrander & Paige LLP, with the lead attorney being Gregory Paige, located at 1301 East Ninth Street, Suite 3500, Cleveland, Ohio 44114.

B. The ADS Distribution Agreement

The ADS Distribution Agreement was executed on March 15, 2024, bearing reference number SBD-ADS-2024-0315. Pursuant to the agreement, Solstice granted ADS exclusive distribution rights for the Pulsar™ CRM System throughout all 50 United States and US territories. The product portfolio covered by the agreement includes the implantable cardiac monitor component (US list price of $4,950 per unit) and the associated remote telemetry transmitter (US list price of $1,200 per unit).

The initial term of the agreement is five years, commencing March 15, 2024, and expiring March 14, 2029. The agreement provides for two optional two-year renewal periods, each exercisable by mutual written consent.

The agreement provides for a commission payable to ADS at a rate of 18% of net US sales. Based on Solstice's internal projections for Year-1 net US sales of $26 million, the anticipated Year-1 commission payable to ADS is approximately $4.68 million (18% × $26 million). Net US sales are defined in Section 2.4 of the agreement to mean gross invoiced sales less returns, allowances, trade discounts, and rebates, consistent with standard industry practice.

Under Section 5.3 of the agreement, ADS is authorized to engage up to five authorized sub-distributors to assist in the distribution and sale of Pulsar™ products. Each sub-distributor engagement requires Solstice's prior written approval and the execution of a Compliance Certification by the sub-distributor, in the form attached as Exhibit D to the ADS Distribution Agreement.

Section 12 of the agreement establishes Solstice's audit rights. Solstice may audit ADS's compliance records upon 30 days' written notice, up to two times per calendar year.

C. The Product

The Pulsar™ CRM System is a subcutaneous implantable cardiac monitor integrated with a proprietary cloud-based remote telemetry platform. The system is designed to provide continuous, long-term monitoring of cardiac rhythm in adult patients with suspected or documented cardiac arrhythmias. The implantable monitor is inserted subcutaneously via a minimally invasive procedure and continuously records electrocardiographic data, which is transmitted via the remote telemetry transmitter to the Pulsar™ cloud platform for analysis by the patient's treating physician.

The Pulsar™ CRM System received FDA 510(k) clearance on February 9, 2024, under 510(k) No. K232847. The predicate device relied upon in the 510(k) submission was the CardioStar™ SC-200 manufactured by Vantage Medical Technologies Inc. (510(k) No. K201156). The Pulsar™ CRM System is classified as a Class II medical device under FDA Product Code MHX (Electrocardiograph, Telephone).

The intended use of the device, as stated in the cleared labeling, is "continuous cardiac rhythm monitoring in adult patients with suspected or documented cardiac arrhythmias." This cleared indication for use defines the permissible scope of promotional claims by Solstice, ADS, and any sub-distributors, and serves as the baseline against which any promotional activity must be measured for FDA compliance purposes.

Solstice's planned US commercial launch date for the Pulsar™ CRM System is October 1, 2024.

D. Scope of This Review

This engagement was opened on April 8, 2024, under Calderwood & Harkness LLP Matter No. 1037-00003, pursuant to an engagement letter dated April 5, 2024, executed between Calderwood & Harkness and Solstice Biomedical Devices Ltd.

This memorandum constitutes one component of the broader US sales-and-marketing compliance review being conducted by Calderwood & Harkness in connection with Solstice's US market entry. Companion deliverables under this engagement include a detailed Anti-Kickback Statute and False Claims Act analysis memorandum, a Sunshine Act compliance framework memorandum, and a twelve-state marketing compliance survey. This memorandum is intended to be read in conjunction with those companion deliverables.

Our analysis has been coordinated with Meridian Consulting Group LLC, which has been separately retained by Solstice to design and implement the US compliance program structure. The Meridian engagement is led by Dr. Lena Voss, Managing Partner, and James Cho, Senior Director, Life Sciences Compliance. Meridian's work product has informed certain of the recommendations contained herein, particularly those relating to compliance training, compliance program design, and Sunshine Act data-collection infrastructure.

All analysis and opinions expressed in this memorandum are subject to the qualifications and limitations set forth in our engagement letter and are rendered as of the date of this memorandum based on the laws, regulations, and regulatory guidance currently in effect.

III. Legal Framework

This Section provides an overview of the principal federal and state legal authorities relevant to our compliance review. The analysis that follows in subsequent sections is grounded in this framework.

A. Federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b))

The Federal Anti-Kickback Statute is the primary federal law governing financial relationships between entities that furnish, order, or refer items or services reimbursable under federal healthcare programs, including Medicare and Medicaid. The AKS prohibits the knowing and willful offering, paying, soliciting, or receiving of any remuneration (whether directly or indirectly, in cash or in kind) to induce or reward: (i) the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program; or (ii) the purchasing, leasing, ordering, or arranging for or recommending the purchasing, leasing, or ordering of any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program.

Criminal Penalties. A violation of the AKS is a federal felony offense, punishable by a fine of up to $100,000, imprisonment for up to 10 years, or both, per violation. In addition, a person convicted of a violation of the AKS is subject to mandatory exclusion from participation in all federal healthcare programs under 42 U.S.C. § 1320a-7(a).

Civil Monetary Penalties. The OIG may also impose civil monetary penalties ("CMPs") of up to $100,000 per violation, plus an assessment of up to three times the total amount of the remuneration at issue, under the authority of the Civil Monetary Penalties Law (42 U.S.C. § 1320a-7a).

Intent Standard. Following the enactment of the Affordable Care Act ("ACA") in 2010, the intent standard for AKS violations was clarified. Under Section 6402(f) of the ACA (codified at 42 U.S.C. § 1320a-7b(h)), a person need not have actual knowledge of the AKS or specific intent to commit a violation. Moreover, the statute was amended to make clear that "a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of" the False Claims Act. This is sometimes referred to as the "one purpose" test: it is sufficient that one purpose of the remuneration is to induce referrals, even if the remuneration also serves other legitimate purposes.

Relevance to Distributor Arrangements. Commissions and other compensation paid to distributors for the sale of medical devices that are reimbursed by Medicare, Medicaid, or other federal healthcare programs directly implicate the AKS. This is because such payments constitute "remuneration" within the meaning of the statute, and the distribution activities may involve interactions with healthcare providers who are in a position to order, prescribe, or recommend the purchase of the distributed products. The Pulsar™ CRM System is expected to be reimbursed under Medicare Part B (as a durable medical equipment or physician service, depending on the site of implantation and monitoring), making AKS compliance a critical concern for the ADS Distribution Agreement.

B. Applicable AKS Safe Harbors

Congress recognized that many legitimate business arrangements in the healthcare industry involve the exchange of remuneration and directed the OIG to promulgate regulatory safe harbors that, if fully satisfied, protect such arrangements from prosecution under the AKS. The safe harbors are codified at 42 C.F.R. § 1001.952. It is important to note that failure to satisfy a safe harbor does not mean that an arrangement necessarily violates the AKS; rather, it means that the arrangement will be evaluated under the totality of the circumstances to determine whether it presents an unacceptable risk of abuse.

Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d)). This safe harbor is the most commonly invoked protection for distributor commission arrangements. To qualify, the following requirements must all be met:

(1) The arrangement must be set out in writing and signed by the parties;

(2) The writing must cover all of the services to be provided by the contractor;

(3) If the arrangement is intended to provide for services on a periodic, sporadic, or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement must specify exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;

(4) The term of the agreement must be for not less than one year;

(5) The aggregate compensation paid to the contractor over the term of the agreement must be set in advance, must be consistent with fair market value in arm's-length transactions, and must not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under a federal healthcare program; and

(6) The services performed under the agreement must not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.

discount Safe Harbor (42 C.F.R. § 1001.952(h)). This safe harbor protects discounts offered by sellers to buyers in connection with the purchase of goods or services, provided that specific conditions are met regarding disclosure and reporting of the discount. The discount safe harbor may be relevant to the extent that the pricing structure between Solstice and ADS involves discounts off list price rather than (or in addition to) commissions. Our analysis focuses primarily on the Personal Services safe harbor, as the commission-based structure of the ADS arrangement more naturally fits within that framework.

The analysis of which safe harbor(s) apply, and the extent to which the ADS commission arrangement satisfies the applicable requirements, is set forth in detail in Section IV below.

C. False Claims Act (31 U.S.C. §§ 3729–3733)

The Federal False Claims Act imposes civil liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the federal government, or who knowingly makes, uses, or causes to be made or used a false record or statement material to a false or fraudulent claim.

AKS-Tainted Claims Theory. As noted above, the ACA expressly provides that claims resulting from AKS violations constitute false or fraudulent claims under the FCA. This linkage means that an AKS violation in connection with the distribution of the Pulsar™ CRM System could expose Solstice and ADS to FCA liability for every claim submitted to Medicare or Medicaid that was tainted by the unlawful arrangement.

Damages and Penalties. The FCA provides for treble damages (three times the amount of the government's loss) plus per-claim penalties. For violations occurring after January 30, 2023, the per-claim penalty range is $13,946 to $27,894, as adjusted for inflation. In the context of a national distribution arrangement for a medical device with projected Year-1 sales of $26 million, the potential FCA exposure is substantial.

Qui Tam Provisions and Whistleblower Risks. The FCA includes robust qui tam provisions that allow private persons (known as "relators") to bring suit on behalf of the United States government. Relators may receive between 15% and 30% of any recovery, depending on the government's level of participation in the case. This creates a significant financial incentive for whistleblowers, including current and former employees of distributors, to report suspected AKS and FCA violations. In the distributor context, this risk is particularly acute because distributor sales representatives and compliance personnel are well-positioned to observe conduct that could give rise to allegations of improper remuneration. The absence of robust compliance controls can itself become evidence of scienter in an FCA qui tam action.

D. Physician Payments Sunshine Act (42 U.S.C. § 1320a-7h) / Open Payments

The Physician Payments Sunshine Act, enacted as Section 6002 of the ACA, requires "applicable manufacturers" and "applicable group purchasing organizations" to report annually to CMS certain payments or other transfers of value made to "covered recipients," which include physicians (broadly defined to include medical doctors, doctors of osteopathy, dentists, podiatrists, optometrists, and chiropractors) and teaching hospitals.

Applicable Manufacturer Status. Solstice Biomedical Inc. will constitute an "applicable manufacturer" under the Sunshine Act as of the date it commences commercial activities in the United States—that is, upon the planned US commercial launch of the Pulsar™ CRM System on October 1, 2024. Solstice has submitted its CMS Manufacturer Identification application in June 2024, which is currently pending.

Reporting Thresholds. For calendar year 2024, the de minimis reporting thresholds are $12.49 per individual payment or transfer of value and $100 in aggregate per covered recipient per calendar year. Any transfer of value to a covered recipient that meets or exceeds these thresholds must be reported, unless an applicable exclusion applies.

Reporting Deadline. Data regarding transfers of value made during calendar year 2024 must be submitted to CMS by March 31, 2025.

Distributor Pass-Through Reporting. A critical feature of the Sunshine Act for purposes of this review is that applicable manufacturers are responsible for reporting transfers of value made not only directly by the manufacturer but also by entities acting on behalf of the manufacturer—including distributors. CMS has made clear in its rulemaking and FAQs that manufacturers cannot avoid reporting obligations by routing transfers of value through distributors. Accordingly, Solstice Biomedical Inc. must have contractual mechanisms in place to capture data regarding all transfers of value made by ADS and its sub-distributors to covered recipients in connection with the Pulsar™ CRM System.

Estimated Year-1 Reportable Transfers. Based on Solstice's preliminary US commercial plan and budgets reviewed by our team, we estimate that aggregate Year-1 reportable transfers of value across all programs—including consulting fees, speaker honoraria, meals, travel, educational grants, and other categories—will be approximately $650,000. The absence of contractual data-collection provisions in the current ADS Distribution Agreement represents a significant compliance gap that must be remedied before the October 1, 2024 launch.

E. OIG Compliance Guidance

The OIG has issued a series of compliance program guidance documents that, while not binding, reflect the OIG's expectations regarding effective compliance programs and are widely treated as the standard of care in the industry.

General Compliance Program Guidance (November 2023). In November 2023, the OIG released updated General Compliance Program Guidance applicable across the healthcare industry. The guidance emphasizes the importance of tailored compliance programs that address the specific risks of the entity's business model, including risks arising from third-party arrangements such as distributor relationships. The guidance identifies seven essential elements of an effective compliance program, which are discussed in greater detail in Section VII below.

Compliance Program Guidance for Pharmaceutical Manufacturers (April 2003). Although directed at pharmaceutical manufacturers, the OIG's 2003 guidance for pharmaceutical manufacturers has been widely adapted and applied by medical device companies. The guidance specifically identifies sales and marketing relationships, including arrangements with distributors and sales representatives, as a significant compliance risk area. The OIG emphasizes the need for written agreements that set forth services to be provided, compensation that reflects fair market value, and monitoring mechanisms to detect and prevent abusive practices.

Distributor Arrangements as a Risk Area. Both the 2023 and 2003 guidance documents, as well as numerous OIG Advisory Opinions and enforcement actions, underscore that distributor arrangements present heightened compliance risk. The OIG has consistently stated that arrangements involving percentage-based compensation to distributors who have relationships with referring physicians or purchasing decision-makers warrant careful structuring, documentation, and ongoing monitoring.

F. AdvaMed Code of Ethics (2020 Revision)

The Advanced Medical Technology Association ("AdvaMed") Code of Ethics on Interactions with U.S. Health Care Professionals (2020 Revision) is a voluntary industry code that establishes standards for medical device company interactions with healthcare professionals. Solstice has adopted the AdvaMed Code as the baseline for its US interactions with healthcare professionals, a commitment that is referenced in Solstice's Board-approved US Compliance Framework Resolution dated February 2024.

The AdvaMed Code is relevant to the ADS Distribution Agreement because ADS personnel will be interacting with healthcare professionals on behalf of Solstice in connection with the sale and clinical support of the Pulsar™ CRM System. Under the AdvaMed Code, meals provided in connection with informational presentations or product demonstrations are subject to a per-person cap of $150 per attendee per event. The Code also addresses gifts, entertainment, consulting arrangements, speaker programs, and other interactions with healthcare professionals.

The current ADS Distribution Agreement does not require ADS to comply with the AdvaMed Code. This gap should be addressed in the proposed amendments, as discussed in Section VII below.

G. State Marketing Compliance Laws

A separate twelve-state marketing compliance survey has been conducted under this engagement, covering the following jurisdictions: California, Colorado, Connecticut, Louisiana, Maine, Massachusetts, Minnesota, Nevada, New Jersey, Oregon, Vermont, and Washington, D.C. The survey findings are set forth in a companion memorandum and are referenced here only in summary.

Several states impose requirements that directly affect distributor activities on behalf of medical device manufacturers, including:

• Aggregate spend reporting requirements in states such as Minnesota (annual reporting of payments to healthcare practitioners) and Vermont (annual disclosure of manufacturer marketing costs);

• Gift bans in states such as Massachusetts (comprehensive ban on gifts to prescribers), Vermont, and the District of Columbia;

• Marketing code adoption requirements, including Massachusetts's requirement that manufacturers attest to compliance with an industry marketing code of conduct; and

• Registration and fee requirements, including Vermont's requirement for annual registration with the Office of the Attorney General ($500/year), Massachusetts's annual registration requirement ($2,000/year plus PhRMA/AdvaMed Code attestation), and Minnesota's annual reporting obligations.

ADS currently maintains operations in states with specific registration and fee requirements. The proposed compliance amendments should require ADS to comply with all applicable state marketing compliance laws and to cooperate with Solstice in meeting state-specific registration, reporting, and attestation requirements.

IV. Analysis of ADS Commission Structure Under the Anti-Kickback Statute

A. Commission Rate Assessment

The ADS Distribution Agreement provides for a commission payable to ADS at a rate of 18% of net US sales. Based on Solstice's projected Year-1 net US sales of $26 million, the anticipated Year-1 commission is approximately $4.68 million.

We have evaluated the 18% commission rate against available industry benchmarks for exclusive medical device distribution arrangements, with particular focus on the cardiac rhythm management and cardiac monitoring segment. Based on publicly available data, industry publications (including the AdvaMed/HIDA distribution survey data), and our experience with comparable engagements, exclusive distribution commissions for Class II implantable cardiac devices typically range from 12% to 22% of net sales, depending on the scope of services provided, the exclusivity of the arrangement, the stage of market development (launch vs. established product), and the level of clinical and logistics support required. The 18% rate falls within this range, although it is positioned in the upper half, which reflects the fact that this is a US market launch of a new product requiring significant investment by ADS in field clinical support, customer education, logistics infrastructure, and inventory management.

The projected Year-1 commission of $4.68 million represents approximately 2.2% of ADS's reported FY2023 revenue of $214 million. When considered in relation to the services that ADS is contractually obligated to provide under the agreement—including warehousing, logistics, field clinical support, customer service, complaint handling, and returns management—the commission amount appears commercially reasonable. However, commercial reasonableness alone is not sufficient to insulate the arrangement from AKS scrutiny.

The current agreement references "commercial reasonableness" in Section 3.1(c) as a basis for the commission rate but does not include or reference an independent fair market value assessment. The absence of a contemporaneous FMV opinion is a material gap. The OIG has consistently emphasized the importance of independent FMV documentation as a hallmark of legitimate compensation arrangements that reduce the risk of AKS exposure. In multiple advisory opinions and enforcement contexts, the OIG has treated the absence of FMV support as a factor weighing against the legitimacy of a compensation arrangement.

Recommendation. We strongly recommend that Solstice retain a qualified independent valuation firm to prepare a written FMV opinion documenting that the 18% commission rate reflects arm's-length, market-rate compensation for the distribution services specified in the ADS Distribution Agreement. The valuation should be completed prior to the October 1, 2024 launch date and should be referenced in the proposed amendments to the agreement. We can provide recommendations for appropriate valuation firms upon request; firms that are commonly engaged for this purpose include Harborview Management Consulting, Sundial Management Consulting, and Pinnacle Healthcare Consulting.

B. Safe Harbor Qualification Analysis

We have assessed the ADS commission arrangement against the requirements of the Personal Services and Management Contracts safe harbor at 42 C.F.R. § 1001.952(d). Our analysis of each element is as follows:

Written Agreement Signed by the Parties. The ADS Distribution Agreement is in writing and has been duly executed by authorized representatives of both parties. This element is satisfied.

Term of at Least One Year. The agreement provides for an initial term of five years (March 15, 2024 through March 14, 2029). This element is satisfied.

Specification of Services. The agreement describes the distribution services to be provided by ADS in Section 4 (Distribution Services), including warehousing and logistics, order processing, customer service, field clinical support, complaint handling, and returns management. While the general scope of services is described, the agreement would benefit from greater granularity regarding the specific service obligations, performance standards, and deliverables expected of ADS. For example, the agreement does not specify the minimum number of field clinical support personnel to be dedicated to the Pulsar™ product line, the geographic coverage requirements, or the response time standards for customer service and complaint handling. This element is therefore only partially satisfied.

Aggregate Compensation Set in Advance, Consistent with Fair Market Value, and Not Determined in a Manner Reflecting Volume or Value of Referrals. This element presents the most significant analytical issue. The 18% commission is structured as a percentage of net US sales. By its nature, percentage-based compensation means that the aggregate amount payable to ADS over the term of the agreement is not fixed in advance but varies directly with the volume of sales. The safe harbor requires that aggregate compensation be "set in advance" and "not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties."

The OIG has recognized in multiple advisory opinions and guidance documents that percentage-based compensation arrangements in bona fide distribution agreements are common and may be commercially reasonable. The OIG has not categorically excluded percentage-based arrangements from safe harbor protection, but it has cautioned that such arrangements warrant heightened scrutiny because the total compensation paid is inherently tied to the volume of business. In OIG Advisory Opinion No. 09-09, for example, the OIG noted that while percentage-based compensation is not per se illegal, the arrangement must be carefully structured to ensure that the percentage rate itself reflects fair market value for the services rendered and was not set at a level intended to induce referrals.

The practical challenge with applying the Personal Services safe harbor to percentage-based distribution commissions is that the "set in advance" requirement is difficult to satisfy when the aggregate payment amount depends on future sales volumes that are not known at the time of contracting. Some practitioners and the OIG have interpreted this requirement to be satisfied when the methodology for calculating compensation (i.e., the percentage rate) is set in advance, even if the absolute dollar amount is not. This interpretation is reasonable but not free from risk.

Volume-or-Value Concern. The commission structure inherently ties compensation to the volume of sales. The OIG has acknowledged that bona fide distribution arrangements—where the distributor takes title to the product, bears inventory risk, and provides genuine distribution services—present different considerations from pure referral or marketing agent arrangements. However, the volume-or-value concern remains relevant, particularly in the context of a product that is reimbursed by federal healthcare programs.

Recommendation. We recommend that the proposed amendments to the ADS Distribution Agreement include express contractual language documenting: (i) that the 18% commission rate was the product of arm's-length negotiation between unrelated parties; (ii) that the rate is consistent with commercially available distribution rates for comparable exclusive medical device distribution arrangements in the cardiac rhythm management and cardiac monitoring space; (iii) that the rate was not determined in a manner intended to induce referrals of federal healthcare program business; and (iv) that the rate is supported by an independent FMV assessment. We further recommend attaching the FMV certification as a new exhibit to the agreement.

C. Distinction Between Distribution and Referral

A critical factor in the AKS analysis is whether ADS functions as a bona fide distributor or as a mere marketing agent or referral source. The distinction is significant because the OIG has consistently viewed arrangements in which a third party performs genuine distribution functions—taking title to product, bearing inventory and credit risk, maintaining warehousing and logistics capabilities, and providing post-sale services—as presenting a lower risk of AKS abuse than arrangements in which a third party simply identifies customers or channels orders to the manufacturer in exchange for a commission.

We have reviewed the relevant provisions of the ADS Distribution Agreement and note the following:

• Title Transfer. Under Section 3.3, title to Pulsar™ products passes to ADS upon delivery to ADS's designated distribution center. ADS bears the risk of loss from that point forward.

• Inventory Risk. ADS is required to maintain specified minimum inventory levels (Section 4.2) and bears the financial risk associated with unsold inventory, subject to limited return rights set forth in Section 10.

• Distribution Services. ADS provides a comprehensive suite of distribution services, including warehousing, logistics, order fulfillment, customer service, complaint handling, and field clinical support. These services represent genuine value-added distribution functions beyond mere order facilitation.

• Returns Management. ADS is responsible for managing product returns in accordance with Solstice's returns policy, including processing, documentation, and reverse logistics.

Assessment. Based on our review of the agreement's provisions regarding title transfer, risk allocation, inventory obligations, and the scope of distribution services, ADS's role as structured appears to be that of a bona fide distributor rather than a mere marketing agent or referral source. This characterization, if supported by the actual course of dealing between the parties, materially reduces (but does not eliminate) AKS risk relative to a commission-based referral arrangement. It is essential, however, that the actual operations of ADS correspond to the contractual framework. If, in practice, ADS's distribution activities were to be reduced to primarily promotional or referral functions while the substantive distribution work were performed by Solstice or its other agents, the bona fide distributor characterization could be undermined.

We recommend that Solstice monitor ADS's actual performance of distribution services on an ongoing basis as part of its compliance oversight program.

V. Sub-Distributor Approval and Compliance Certification Protocols

A. Current Agreement Provisions

Section 5.3 of the ADS Distribution Agreement permits ADS to engage up to five authorized sub-distributors to assist in the distribution and sale of Pulsar™ products within the US territory. The engagement of each sub-distributor is subject to two conditions: (i) Solstice must provide its prior written approval of the sub-distributor; and (ii) each sub-distributor must execute a "Compliance Certification" in the form attached as Exhibit D to the agreement.

We have reviewed the Compliance Certification form attached as Exhibit D. The current form is a single-page document that contains general representations by the sub-distributor that it will "comply with all applicable laws and regulations" and will "conduct its activities in a manner consistent with ethical business practices." While these representations are appropriate as far as they go, the form lacks the specificity and substantive compliance content necessary to provide meaningful protection to Solstice.

B. Identified Gaps

Our review has identified the following significant gaps in the current sub-distributor compliance framework:

(1) AKS Compliance Programs. The existing Compliance Certification does not require sub-distributors to maintain their own Anti-Kickback Statute compliance programs. Given that sub-distributors will be operating in the market on behalf of Solstice and interacting with healthcare professionals who may be in a position to order or recommend the Pulsar™ CRM System, the absence of this requirement creates a material compliance gap.

(2) Background Screening and Exclusion List Checks. The Compliance Certification does not require sub-distributors to undergo background screening or exclusion list checks against the OIG List of Excluded Individuals and Entities ("LEIE") or the General Services Administration System for Award Management ("GSA SAM"). Federal healthcare program regulations prohibit manufacturers from doing business with excluded entities and individuals, and Solstice could face CMPs for employing or contracting with an excluded person in connection with items or services reimbursed by federal healthcare programs.

(3) Sunshine Act Data-Collection Obligations. The Compliance Certification contains no provisions requiring sub-distributors to track and report transfers of value to covered recipients. As discussed in Section VIII below, Solstice bears the legal obligation to report such transfers regardless of whether they are made directly or through sub-distributors.

(4) AdvaMed Code of Ethics. The Compliance Certification does not require sub-distributors to comply with the AdvaMed Code of Ethics (2020 Revision), which Solstice has adopted as its baseline for US HCP interactions.

(5) Audit Rights. Section 12 of the ADS Distribution Agreement grants Solstice the right to audit ADS, but this right does not extend to sub-distributors. As a result, Solstice has no contractual ability to directly audit the compliance practices and records of entities that are selling its products to healthcare providers.

(6) Annual Compliance Recertification. The existing form requires a one-time certification at the time of appointment. There is no requirement for sub-distributors to provide annual compliance recertifications, which would serve as a periodic check on continued compliance.

(7) Flow-Down of Compliance Policies. There is no mechanism for flowing down Solstice's US compliance policies and procedures to sub-distributor personnel. Without such a mechanism, sub-distributor personnel may operate without awareness of or adherence to the specific compliance standards that Solstice expects.

(8) Direct Termination Rights. The current agreement does not provide Solstice with a mechanism to terminate or disapprove a sub-distributor for compliance violations without first exercising remedies against ADS under the master agreement. This creates an impractical and potentially dangerous delay in Solstice's ability to address sub-distributor compliance problems.

C. Recommendations. We recommend the following enhancements to the sub-distributor compliance framework:

Comprehensive Sub-Distributor Compliance Addendum. The current one-page Compliance Certification (Exhibit D) should be replaced with a comprehensive Sub-Distributor Compliance Addendum. A proposed form of this addendum is included in Appendix B to this memorandum. The addendum should require each sub-distributor to:

(a) Certify compliance with the AKS, FCA, Sunshine Act, applicable state marketing compliance laws, and the AdvaMed Code of Ethics;

(b) Implement and maintain written compliance policies and procedures specific to its distribution of Pulsar™ products, and designate a compliance contact responsible for overseeing compliance with these policies;

(c) Undergo OIG LEIE and GSA SAM exclusion list screening prior to appointment and on a monthly basis thereafter, with results reported to ADS and Solstice;

(d) Agree to direct audit rights by Solstice, separate from and in addition to ADS's own audit rights over the sub-distributor;

(e) Submit quarterly compliance reports to both ADS and Solstice, covering transfer-of-value data, training completion, exclusion list screening results, and any compliance incidents or concerns;

(f) Participate in Solstice-approved compliance training, using materials developed in coordination with Meridian Consulting Group LLC, prior to commencing distribution activities and on an annual basis thereafter;

(g) Provide annual compliance recertifications to both ADS and Solstice; and

(h) Acknowledge and agree that any material breach of the Compliance Addendum constitutes grounds for immediate termination of the sub-distributor's appointment.

Solstice Unilateral Termination Right. The proposed amendments to the ADS Distribution Agreement should grant Solstice a unilateral right to disapprove or terminate any sub-distributor for compliance concerns, independent of ADS's own sub-distributor management authority and without requiring Solstice to first exercise remedies against ADS under the master agreement. This right is essential to ensure that Solstice can act swiftly to remove a sub-distributor from the distribution chain if a compliance risk is identified.

Fair Market Value Documentation for Sub-Distributor Compensation. Sub-distributor compensation should be capped at fair market value, with written FMV support required for each sub-distributor engagement. The proposed Compliance Addendum should include a representation by the sub-distributor that its compensation is consistent with fair market value and was not set in a manner intended to induce referrals.

VI. Audit Rights Analysis (Section 12)

A. Current Provisions

Section 12 of the ADS Distribution Agreement establishes Solstice's right to audit ADS's "compliance records." The current provisions may be summarized as follows: (i) Solstice may audit ADS's compliance records; (ii) Solstice must provide 30 days' prior written notice of any audit; (iii) Solstice may conduct up to two audits per calendar year; and (iv) audits must be conducted during regular business hours.

While the inclusion of audit rights in the agreement is a positive feature, the current provisions suffer from significant limitations that undermine their effectiveness as a compliance oversight tool.

B. Identified Limitations

We have identified the following specific limitations in the current audit provisions:

Undefined Scope. The term "compliance records" is not defined anywhere in the ADS Distribution Agreement. This ambiguity creates a substantial risk that ADS could narrowly construe the term to resist production of records that Solstice reasonably needs to evaluate ADS's compliance posture. It is unclear, for example, whether "compliance records" encompasses financial records (including ADS's internal commission and bonus records for sales personnel), sales data at the customer or transaction level, healthcare professional interaction logs, sub-distributor agreements and correspondence, training records and certifications, customer and healthcare provider correspondence, internal compliance investigation files, or expense reports. Without a clear definition, the audit right may be rendered largely ineffective.

No Sub-Distributor Coverage. The audit right extends only to ADS directly. There is no provision for Solstice to audit the records and compliance practices of sub-distributors engaged by ADS. Given that sub-distributors will be operating in the market on behalf of Solstice and interacting directly with healthcare professionals, this is a significant gap.

No Record Retention Obligation. The agreement does not require ADS to retain records for any specified period. Without a retention requirement, ADS could dispose of records before Solstice has the opportunity to review them. This is particularly problematic given that the FCA has a statute of limitations of six years (or ten years in certain circumstances under the Wartime Suspension of Limitations Act), meaning that records from the early years of the agreement could be relevant to potential FCA claims well into the future.

No Consequences for Non-Compliance. The current provisions do not specify any consequences for ADS's failure to cooperate with an audit or for material findings of non-compliance. The absence of specified consequences limits Solstice's leverage and creates uncertainty about the remedies available if an audit reveals compliance problems.

No Third-Party Auditors. The agreement does not expressly authorize Solstice to engage third-party auditors, such as Pinnacle Auditing & Advisory LLP or another independent firm, to conduct audits on its behalf. In practice, compliance audits are frequently conducted by specialized third-party firms, and the absence of an express authorization could enable ADS to object to the use of such firms.

Notice Period and Frequency Cap. The 30-day advance notice requirement is commercially reasonable for routine audits. However, in circumstances where Solstice has reason to suspect a compliance violation or where a government investigation is underway, a 30-day notice period may allow ADS to alter, destroy, or conceal records. Moreover, the twice-per-calendar-year cap may prove insufficient if compliance concerns arise that warrant more frequent auditing.

C. Recommendations (Proposed Amendments to Section 12)

We recommend comprehensive amendments to Section 12 of the ADS Distribution Agreement, as set forth in the proposed redline in Appendix A. The key elements of the proposed amendments are as follows:

Section 12.1 — Definition of "Compliance Records." Define "Compliance Records" broadly to include all books, records, documents, communications (including electronic communications), financial records, sales reports and data, customer and healthcare professional interaction logs, sub-distributor agreements and correspondence, training records and certifications, employee and contractor certifications, expense reports and reimbursement records, internal compliance investigation files, complaint and adverse event records, and any other documents or data related to the distribution, sale, marketing, or clinical support of Pulsar™ products.

Section 12.2 — "For Cause" Audit Right. Add a "for cause" audit right that permits Solstice to conduct an audit on five business days' notice (or no advance notice in the event of a government investigation, subpoena, or law enforcement inquiry related to Pulsar™ distribution). For-cause audits should not count against the twice-per-calendar-year cap for routine audits.

Section 12.3 — Sub-Distributor Audit Rights. Extend Solstice's audit rights to cover all sub-distributors engaged by ADS. This may be accomplished through a flow-through audit clause requiring ADS to include in each sub-distributor agreement a provision granting Solstice direct audit rights over the sub-distributor on the same terms as those applicable to ADS.

Section 12.4 — Third-Party Auditors. Expressly authorize Solstice to engage independent third-party auditors at Solstice's cost to conduct audits on Solstice's behalf, subject to the third-party auditor's execution of appropriate confidentiality agreements.

Section 12.5 — Record Retention. Require ADS to retain all Compliance Records for a minimum of six years following the calendar year to which they relate. This period is consistent with the FCA's six-year statute of limitations and reflects industry best practices for healthcare compliance record retention.

Section 12.6 — Cooperation and Access. Specify that ADS must make its premises, records, systems, and personnel (including compliance, legal, sales, and finance personnel) available during audits. ADS personnel must be available for interviews and must respond to auditor inquiries within reasonable timeframes.

Section 12.7 — Consequences of Adverse Findings. Establish a graduated consequence framework for adverse audit findings, including: (i) development and implementation of a remediation plan within 30 days of notification of findings; (ii) financial clawback rights for commissions attributable to sales that are determined to have resulted from AKS violations or fraudulent conduct; (iii) escalation to additional audits and enhanced monitoring; and (iv) termination rights as set forth in the proposed compliance termination provisions.

VII. Flow-Down Compliance Obligations

A. ADS Personnel Compliance

Section 7.1 of the current ADS Distribution Agreement contains a general representation that ADS will "comply with all applicable laws and regulations in connection with its performance of the distribution services contemplated by this Agreement." While this general compliance representation is necessary, it is insufficient standing alone to establish the compliance infrastructure needed for a medical device distribution arrangement implicating federal healthcare programs.

Our review has identified the following specific gaps in the current agreement's treatment of ADS personnel compliance:

• The agreement does not require ADS to adopt a written compliance program specific to the distribution of Solstice products. While ADS has a general corporate compliance program (as would be expected of a distributor of its size), the agreement does not ensure that such a program addresses the specific regulatory risks associated with the Pulsar™ CRM System.

• The agreement does not mandate AKS, FCA, or Sunshine Act training for ADS sales, marketing, or clinical personnel who will be involved in the promotion and distribution of Pulsar™ products.

• The agreement does not require ADS to designate a compliance officer or compliance contact specifically responsible for the Solstice product line. While we note that Dawn Hitchens serves as Vice President, Compliance & Legal at ADS—a positive structural element that suggests organizational commitment to compliance—this role is not formalized in the agreement with respect to Solstice-specific compliance obligations.

• The agreement does not require ADS to screen its employees and contractors against the OIG LEIE and GSA SAM exclusion lists, either at the time of hire or on a periodic basis. Federal regulations impose CMPs on entities that employ or contract with excluded individuals in connection with items or services reimbursed by federal healthcare programs.

• The agreement does not impose a code of conduct or specific behavioral standards applicable to ADS personnel's interactions with healthcare professionals on Solstice's behalf. Without such standards, ADS personnel may engage in conduct—such as providing excessive meals or gifts, making off-label promotional statements, or entering into inappropriate consulting arrangements with physicians—that could expose Solstice to AKS, FCA, or Sunshine Act liability.

B. Recommended Flow-Down Provisions

We recommend that the proposed amendments to the ADS Distribution Agreement include comprehensive flow-down compliance provisions, as follows:

Compliance Program Requirements. ADS should be contractually required to implement and maintain a written compliance program that addresses the specific risks associated with the distribution of Pulsar™ products. At a minimum, the compliance program should incorporate the seven elements of an effective compliance program identified in the OIG's General Compliance Program Guidance (November 2023):

(1) Written Policies and Procedures. ADS must maintain written policies and procedures addressing AKS compliance, Sunshine Act reporting, FDA promotional compliance, HCP interaction standards, and state marketing law compliance, each specific to the distribution of Pulsar™ products.

(2) Compliance Leadership and Oversight. ADS must designate a compliance contact for the Solstice product line with authority and resources to implement and oversee the compliance program. We recommend that this initially be Dawn Hitchens, but the agreement should require the designation by role rather than by name to ensure continuity.

(3) Training and Education. ADS must provide annual compliance training to all personnel involved in Pulsar™ sales, marketing, clinical support, or HCP interactions. Training should cover the AKS and its safe harbors, the FCA and qui tam provisions, the Sunshine Act reporting requirements, FDA promotional compliance rules including the prohibition on off-label promotion, AdvaMed Code of Ethics requirements, and applicable state marketing laws. Training materials should be developed in collaboration with Solstice or using Solstice-approved materials developed by Meridian Consulting Group LLC.

(4) Effective Lines of Communication. ADS must establish and publicize mechanisms for personnel to report compliance concerns without fear of retaliation, including the ability to report concerns directly to Solstice's compliance hotline (operated by Clearpath Ethics Services Inc., contract Ref. CP-SBD-2024-061).

(5) Enforcing Standards Through Well-Publicized Disciplinary Guidelines. ADS must maintain and enforce disciplinary policies for personnel who violate compliance standards in connection with Pulsar™ distribution activities.

(6) Internal Monitoring and Auditing. ADS must conduct internal monitoring and periodic auditing of its Pulsar™-related compliance activities and make the results of such activities available to Solstice upon request.

(7) Prompt Response to Detected Offenses and Corrective Action. ADS must have procedures in place to promptly respond to detected compliance violations, including investigation, remediation, and corrective action, and must promptly notify Solstice of any material findings.

OIG LEIE and GSA SAM Screening. ADS should be required to conduct monthly screening of all personnel and contractors involved in the distribution, sale, marketing, or clinical support of Pulsar™ products against the OIG LEIE and GSA SAM exclusion databases. Results should be documented and made available to Solstice upon request. The same screening obligation should flow down to sub-distributors.

Notification Obligations. ADS should be required to promptly notify Solstice—within five business days—of any compliance concern, government inquiry, subpoena, civil investigative demand, or investigation related to the distribution of Pulsar™ products. Additionally, ADS should be required to report any known or suspected AKS or FCA violation to Solstice's compliance hotline.

VIII. Sunshine Act / Open Payments Data-Collection Obligations

A. Gap in Current Agreement

As noted in the Executive Summary, the ADS Distribution Agreement contains no provisions whatsoever addressing Sunshine Act compliance. This represents a significant compliance gap that must be remedied before the October 1, 2024 US commercial launch.

Solstice Biomedical Inc., as the applicable manufacturer of the Pulsar™ CRM System, will bear the legal obligation to report all transfers of value to covered recipients made in connection with Pulsar™ products—regardless of whether those transfers are made directly by Solstice or by ADS or its sub-distributors acting on behalf of Solstice. CMS regulations and guidance make clear that manufacturers cannot avoid reporting obligations by routing transfers of value through distributors or other intermediaries.

As noted above, Solstice has submitted its CMS Manufacturer Identification application in June 2024, which is currently pending. The reporting thresholds for calendar year 2024 are $12.49 per individual transfer and $100 in aggregate per covered recipient per calendar year. Data regarding CY2024 transfers of value must be submitted to CMS by March 31, 2025.

B. Specific Risks

The absence of contractual data-collection obligations creates the following specific risks:

Data Collection Failure. ADS personnel will be interacting with physicians, physician assist

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Declan Harrington, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.
CC: Siobhán Mulcahy, Head of Global Compliance, Solstice Biomedical Devices Ltd.; Joel Strauss, Partner, Calderwood & Harkness LLP; Sean Morrissey, Associate, Calderwood & Harkness LLP
FROM: Amy Whitfield, Lead Associate, Calderwood & Harkness LLP
DATE: June 25, 2024
RE: Compliance Review of Distribution Agreement Between Solstice Biomedical Devices Ltd. and Ascendant Distribution Solutions LLC (Ref. SBD-ADS-2024-0315)
Matter No.: 1037-00003
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I. Executive Summary
This memorandum sets forth the findings and recommendations of Calderwood & Harkness LLP ("Calderwood & Harkness") arising from our comprehensive compliance review of the Distribution Agreement dated March 15, 2024 (the "ADS Distribution Agreement," Ref. SBD-ADS-2024-0315) between Solstice Biomedical Devices Ltd. ("Solstice" or "SBD") and Ascendant Distribution Solutions LLC ("ADS" or "Ascendant"). The ADS Distribution Agreement governs the exclusive United States distribution of the Pulsar™ Cardiac Rhythm Monitoring System (the "Pulsar™ CRM System"), a Class II medical device that received 510(k) clearance from the U.S. Food and Drug Administration ("FDA") on February 9, 2024 (No. K232847).
This review was conducted within the context of Solstice's first commercial launch in the United States, presently scheduled for October 1, 2024. The US market represents a critical expansion milestone for Solstice, with projected Year-1 net US sales of $26 million, generating an anticipated ADS commission of approximately $4.68 million (calculated at the contractual rate of 18% of net US sales).
Our analysis has been framed principally against the following regulatory and legal authorities: the Federal Anti-Kickback Statute ("AKS") (42 U.S.C. § 1320a-7b(b)) and its implementing safe harbor regulations (42 C.F.R. § 1001.952); the Federal False Claims Act ("FCA") (31 U.S.C. §§ 3729–3733); the Physician Payments Sunshine Act (42 U.S.C. § 1320a-7h) and the Centers for Medicare & Medicaid Services ("CMS") Open Payments program; and applicable state marketing compliance laws across the twelve jurisdictions surveyed separately.
Overall Assessment. The ADS Distribution Agreement provides a sound commercial framework for the US distribution of the Pulsar™ CRM System. The agreement reflects a commercially reasonable business arrangement between a medical device manufacturer and a well-established US distribution partner. However, our review has identified several areas in which the agreement requires targeted compliance amendments to reduce federal and state enforcement risk, ensure Sunshine Act data-collection compliance, and establish robust sub-distributor oversight mechanisms.
Summary of Key Findings. Our principal findings are as follows:
(a) Commission Structure. The 18% commission structure falls within the fair market value range for exclusive medical device distribution arrangements in the cardiac rhythm management and cardiac monitoring space, based on available industry benchmarking data. However, the agreement lacks contemporaneous fair market value documentation, which is essential for qualification under the Personal Services and Management Contracts safe harbor (42 C.F.R. § 1001.952(d)) and is strongly recommended by the Office of Inspector General ("OIG") of the U.S. Department of Health and Human Services ("HHS").
(b) Sub-Distributor Protocols. The sub-distributor approval protocols, while requiring Solstice's prior written approval and execution of a Compliance Certification, lack sufficient compliance certification specificity and fail to include adequate flow-down provisions covering AKS compliance, Sunshine Act data collection, exclusion list screening, and audit rights.
(c) Audit Rights. The audit rights set forth in Section 12 of the ADS Distribution Agreement are adequate in frequency (twice per calendar year) but materially limited in scope. The term "compliance records" is undefined, no for-cause audit mechanism exists, sub-distributors are not covered, and the agreement does not address record retention obligations or consequences of adverse findings.
(d) Sunshine Act Compliance. The agreement contains no provisions whatsoever addressing Sunshine Act data-collection or reporting obligations—a significant gap given that Solstice Biomedical Inc., as an "applicable manufacturer," will bear the legal obligation to report all transfers of value to covered recipients, including those made by or through ADS and its sub-distributors.
(e) Compliance Training. The agreement contains no requirements for compliance training of ADS personnel involved in the sale, marketing, or clinical support of the Pulsar™ CRM System. This gap is particularly notable given the scope of ADS's field-level interactions with healthcare professionals.
Recommended amendments to Sections 7 (Compliance) and 12 (Audit Rights) are attached as proposed redlines in Appendix A. A proposed form of Sub-Distributor Compliance Addendum is attached as Appendix B. A proposed Sunshine Act Monthly Reporting Template is attached as Appendix C.
We recommend that Solstice transmit the proposed amendments to ADS's counsel during the week of July 1, 2024, with a target completion date for final negotiation and execution of August 15, 2024—well in advance of the October 1, 2024 commercial launch date.
II. Background
A. The Parties
Solstice Biomedical Devices Ltd. Solstice is a private limited company incorporated and organized under the laws of Ireland, with its registered office at Unit 14, Clarion Business Park, Sandyford, Dublin D18 X4F2, Ireland. Solstice is a medical device company specializing in the development and commercialization of cardiac rhythm management systems, including implantable cardiac monitors and associated remote telemetry platforms. Solstice closed its Series C financing round in November 2023, bringing its total capital raised to date to approximately €187 million, at a post-money valuation of approximately €640 million. The lead investor in the Series C round was Alder Peak Ventures, LP, which holds approximately 22.6% of Solstice's fully diluted equity. Solstice's fiscal year 2023 revenue was €38.4 million, derived entirely from sales in the European Union and the United Kingdom. To date, Solstice has generated no revenue in the United States.
Solstice Biomedical Inc. In anticipation of the US commercial launch, Solstice formed Solstice Biomedical Inc., a corporation organized under the laws of the State of Delaware on January 22, 2024 (Delaware File No. 7924813; Employer Identification Number 93-4718206). Solstice Biomedical Inc. maintains its principal offices at 200 Harborview Drive, Suite 1100, Boston, Massachusetts 02210. The US subsidiary serves as the operating entity through which the US commercial launch of the Pulsar™ CRM System will occur, including the engagement with ADS and the marketing and distribution of the device throughout the United States. For purposes of the Physician Payments Sunshine Act and the CMS Open Payments program, Solstice Biomedical Inc. will constitute the "applicable manufacturer" upon commencement of commercial operations in the United States.
Ascendant Distribution Solutions LLC. ADS is a limited liability company organized under the laws of the State of Delaware (Employer Identification Number 84-3291054), with its principal offices located at 6700 Lakeshore Boulevard, Suite 400, Cleveland, Ohio 44114. ADS is a national medical device distribution company with a significant presence in the cardiovascular and cardiac electrophysiology markets. ADS reported annual revenue of approximately $214 million for fiscal year 2023 and maintains distribution and logistics operations in multiple locations across the United States. ADS's Chief Executive Officer is Robert "Rob" Kessler. Dawn Hitchens serves as Vice President, Compliance & Legal. ADS's outside legal counsel for purposes of the ADS Distribution Agreement is Hadley, Ostrander & Paige LLP, with the lead attorney being Gregory Paige, located at 1301 East Ninth Street, Suite 3500, Cleveland, Ohio 44114.
B. The ADS Distribution Agreement
The ADS Distribution Agreement was executed on March 15, 2024, bearing reference number SBD-ADS-2024-0315. Pursuant to the agreement, Solstice granted ADS exclusive distribution rights for the Pulsar™ CRM System throughout all 50 United States and US territories. The product portfolio covered by the agreement includes the implantable cardiac monitor component (US list price of $4,950 per unit) and the associated remote telemetry transmitter (US list price of $1,200 per unit).
The initial term of the agreement is five years, commencing March 15, 2024, and expiring March 14, 2029. The agreement provides for two optional two-year renewal periods, each exercisable by mutual written consent.
The agreement provides for a commission payable to ADS at a rate of 18% of net US sales. Based on Solstice's internal projections for Year-1 net US sales of $26 million, the anticipated Year-1 commission payable to ADS is approximately $4.68 million (18% × $26 million). Net US sales are defined in Section 2.4 of the agreement to mean gross invoiced sales less returns, allowances, trade discounts, and rebates, consistent with standard industry practice.
Under Section 5.3 of the agreement, ADS is authorized to engage up to five authorized sub-distributors to assist in the distribution and sale of Pulsar™ products. Each sub-distributor engagement requires Solstice's prior written approval and the execution of a Compliance Certification by the sub-distributor, in the form attached as Exhibit D to the ADS Distribution Agreement.
Section 12 of the agreement establishes Solstice's audit rights. Solstice may audit ADS's compliance records upon 30 days' written notice, up to two times per calendar year.
C. The Product
The Pulsar™ CRM System is a subcutaneous implantable cardiac monitor integrated with a proprietary cloud-based remote telemetry platform. The system is designed to provide continuous, long-term monitoring of cardiac rhythm in adult patients with suspected or documented cardiac arrhythmias. The implantable monitor is inserted subcutaneously via a minimally invasive procedure and continuously records electrocardiographic data, which is transmitted via the remote telemetry transmitter to the Pulsar™ cloud platform for analysis by the patient's treating physician.
The Pulsar™ CRM System received FDA 510(k) clearance on February 9, 2024, under 510(k) No. K232847. The predicate device relied upon in the 510(k) submission was the CardioStar™ SC-200 manufactured by Vantage Medical Technologies Inc. (510(k) No. K201156). The Pulsar™ CRM System is classified as a Class II medical device under FDA Product Code MHX (Electrocardiograph, Telephone).
The intended use of the device, as stated in the cleared labeling, is "continuous cardiac rhythm monitoring in adult patients with suspected or documented cardiac arrhythmias." This cleared indication for use defines the permissible scope of promotional claims by Solstice, ADS, and any sub-distributors, and serves as the baseline against which any promotional activity must be measured for FDA compliance purposes.
Solstice's planned US commercial launch date for the Pulsar™ CRM System is October 1, 2024.
D. Scope of This Review
This engagement was opened on April 8, 2024, under Calderwood & Harkness LLP Matter No. 1037-00003, pursuant to an engagement letter dated April 5, 2024, executed between Calderwood & Harkness and Solstice Biomedical Devices Ltd.
This memorandum constitutes one component of the broader US sales-and-marketing compliance review being conducted by Calderwood & Harkness in connection with Solstice's US market entry. Companion deliverables under this engagement include a detailed Anti-Kickback Statute and False Claims Act analysis memorandum, a Sunshine Act compliance framework memorandum, and a twelve-state marketing compliance survey. This memorandum is intended to be read in conjunction with those companion deliverables.
Our analysis has been coordinated with Meridian Consulting Group LLC, which has been separately retained by Solstice to design and implement the US compliance program structure. The Meridian engagement is led by Dr. Lena Voss, Managing Partner, and James Cho, Senior Director, Life Sciences Compliance. Meridian's work product has informed certain of the recommendations contained herein, particularly those relating to compliance training, compliance program design, and Sunshine Act data-collection infrastructure.
All analysis and opinions expressed in this memorandum are subject to the qualifications and limitations set forth in our engagement letter and are rendered as of the date of this memorandum based on the laws, regulations, and regulatory guidance currently in effect.
III. Legal Framework
This Section provides an overview of the principal federal and state legal authorities relevant to our compliance review. The analysis that follows in subsequent sections is grounded in this framework.
A. Federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b))
The Federal Anti-Kickback Statute is the primary federal law governing financial relationships between entities that furnish, order, or refer items or services reimbursable under federal healthcare programs, including Medicare and Medicaid. The AKS prohibits the knowing and willful offering, paying, soliciting, or receiving of any remuneration (whether directly or indirectly, in cash or in kind) to induce or reward: (i) the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program; or (ii) the purchasing, leasing, ordering, or arranging for or recommending the purchasing, leasing, or ordering of any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program.
Criminal Penalties. A violation of the AKS is a federal felony offense, punishable by a fine of up to $100,000, imprisonment for up to 10 years, or both, per violation. In addition, a person convicted of a violation of the AKS is subject to mandatory exclusion from participation in all federal healthcare programs under 42 U.S.C. § 1320a-7(a).
Civil Monetary Penalties. The OIG may also impose civil monetary penalties ("CMPs") of up to $100,000 per violation, plus an assessment of up to three times the total amount of the remuneration at issue, under the authority of the Civil Monetary Penalties Law (42 U.S.C. § 1320a-7a).
Intent Standard. Following the enactment of the Affordable Care Act ("ACA") in 2010, the intent standard for AKS violations was clarified. Under Section 6402(f) of the ACA (codified at 42 U.S.C. § 1320a-7b(h)), a person need not have actual knowledge of the AKS or specific intent to commit a violation. Moreover, the statute was amended to make clear that "a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of" the False Claims Act. This is sometimes referred to as the "one purpose" test: it is sufficient that one purpose of the remuneration is to induce referrals, even if the remuneration also serves other legitimate purposes.
Relevance to Distributor Arrangements. Commissions and other compensation paid to distributors for the sale of medical devices that are reimbursed by Medicare, Medicaid, or other federal healthcare programs directly implicate the AKS. This is because such payments constitute "remuneration" within the meaning of the statute, and the distribution activities may involve interactions with healthcare providers who are in a position to order, prescribe, or recommend the purchase of the distributed products. The Pulsar™ CRM System is expected to be reimbursed under Medicare Part B (as a durable medical equipment or physician service, depending on the site of implantation and monitoring), making AKS compliance a critical concern for the ADS Distribution Agreement.
B. Applicable AKS Safe Harbors
Congress recognized that many legitimate business arrangements in the healthcare industry involve the exchange of remuneration and directed the OIG to promulgate regulatory safe harbors that, if fully satisfied, protect such arrangements from prosecution under the AKS. The safe harbors are codified at 42 C.F.R. § 1001.952. It is important to note that failure to satisfy a safe harbor does not mean that an arrangement necessarily violates the AKS; rather, it means that the arrangement will be evaluated under the totality of the circumstances to determine whether it presents an unacceptable risk of abuse.
Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d)). This safe harbor is the most commonly invoked protection for distributor commission arrangements. To qualify, the following requirements must all be met:
(1) The arrangement must be set out in writing and signed by the parties;
(2) The writing must cover all of the services to be provided by the contractor;
(3) If the arrangement is intended to provide for services on a periodic, sporadic, or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement must specify exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;
(4) The term of the agreement must be for not less than one year;
(5) The aggregate compensation paid to the contractor over the term of the agreement must be set in advance, must be consistent with fair market value in arm's-length transactions, and must not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under a federal healthcare program; and
(6) The services performed under the agreement must not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
discount Safe Harbor (42 C.F.R. § 1001.952(h)). This safe harbor protects discounts offered by sellers to buyers in connection with the purchase of goods or services, provided that specific conditions are met regarding disclosure and reporting of the discount. The discount safe harbor may be relevant to the extent that the pricing structure between Solstice and ADS involves discounts off list price rather than (or in addition to) commissions. Our analysis focuses primarily on the Personal Services safe harbor, as the commission-based structure of the ADS arrangement more naturally fits within that framework.
The analysis of which safe harbor(s) apply, and the extent to which the ADS commission arrangement satisfies the applicable requirements, is set forth in detail in Section IV below.
C. False Claims Act (31 U.S.C. §§ 3729–3733)
The Federal False Claims Act imposes civil liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the federal government, or who knowingly makes, uses, or causes to be made or used a false record or statement material to a false or fraudulent claim.
AKS-Tainted Claims Theory. As noted above, the ACA expressly provides that claims resulting from AKS violations constitute false or fraudulent claims under the FCA. This linkage means that an AKS violation in connection with the distribution of the Pulsar™ CRM System could expose Solstice and ADS to FCA liability for every claim submitted to Medicare or Medicaid that was tainted by the unlawful arrangement.
Damages and Penalties. The FCA provides for treble damages (three times the amount of the government's loss) plus per-claim penalties. For violations occurring after January 30, 2023, the per-claim penalty range is $13,946 to $27,894, as adjusted for inflation. In the context of a national distribution arrangement for a medical device with projected Year-1 sales of $26 million, the potential FCA exposure is substantial.
Qui Tam Provisions and Whistleblower Risks. The FCA includes robust qui tam provisions that allow private persons (known as "relators") to bring suit on behalf of the United States government. Relators may receive between 15% and 30% of any recovery, depending on the government's level of participation in the case. This creates a significant financial incentive for whistleblowers, including current and former employees of distributors, to report suspected AKS and FCA violations. In the distributor context, this risk is particularly acute because distributor sales representatives and compliance personnel are well-positioned to observe conduct that could give rise to allegations of improper remuneration. The absence of robust compliance controls can itself become evidence of scienter in an FCA qui tam action.
D. Physician Payments Sunshine Act (42 U.S.C. § 1320a-7h) / Open Payments
The Physician Payments Sunshine Act, enacted as Section 6002 of the ACA, requires "applicable manufacturers" and "applicable group purchasing organizations" to report annually to CMS certain payments or other transfers of value made to "covered recipients," which include physicians (broadly defined to include medical doctors, doctors of osteopathy, dentists, podiatrists, optometrists, and chiropractors) and teaching hospitals.
Applicable Manufacturer Status. Solstice Biomedical Inc. will constitute an "applicable manufacturer" under the Sunshine Act as of the date it commences commercial activities in the United States—that is, upon the planned US commercial launch of the Pulsar™ CRM System on October 1, 2024. Solstice has submitted its CMS Manufacturer Identification application in June 2024, which is currently pending.
Reporting Thresholds. For calendar year 2024, the de minimis reporting thresholds are $12.49 per individual payment or transfer of value and $100 in aggregate per covered recipient per calendar year. Any transfer of value to a covered recipient that meets or exceeds these thresholds must be reported, unless an applicable exclusion applies.
Reporting Deadline. Data regarding transfers of value made during calendar year 2024 must be submitted to CMS by March 31, 2025.
Distributor Pass-Through Reporting. A critical feature of the Sunshine Act for purposes of this review is that applicable manufacturers are responsible for reporting transfers of value made not only directly by the manufacturer but also by entities acting on behalf of the manufacturer—including distributors. CMS has made clear in its rulemaking and FAQs that manufacturers cannot avoid reporting obligations by routing transfers of value through distributors. Accordingly, Solstice Biomedical Inc. must have contractual mechanisms in place to capture data regarding all transfers of value made by ADS and its sub-distributors to covered recipients in connection with the Pulsar™ CRM System.
Estimated Year-1 Reportable Transfers. Based on Solstice's preliminary US commercial plan and budgets reviewed by our team, we estimate that aggregate Year-1 reportable transfers of value across all programs—including consulting fees, speaker honoraria, meals, travel, educational grants, and other categories—will be approximately $650,000. The absence of contractual data-collection provisions in the current ADS Distribution Agreement represents a significant compliance gap that must be remedied before the October 1, 2024 launch.
E. OIG Compliance Guidance
The OIG has issued a series of compliance program guidance documents that, while not binding, reflect the OIG's expectations regarding effective compliance programs and are widely treated as the standard of care in the industry.
General Compliance Program Guidance (November 2023). In November 2023, the OIG released updated General Compliance Program Guidance applicable across the healthcare industry. The guidance emphasizes the importance of tailored compliance programs that address the specific risks of the entity's business model, including risks arising from third-party arrangements such as distributor relationships. The guidance identifies seven essential elements of an effective compliance program, which are discussed in greater detail in Section VII below.
Compliance Program Guidance for Pharmaceutical Manufacturers (April 2003). Although directed at pharmaceutical manufacturers, the OIG's 2003 guidance for pharmaceutical manufacturers has been widely adapted and applied by medical device companies. The guidance specifically identifies sales and marketing relationships, including arrangements with distributors and sales representatives, as a significant compliance risk area. The OIG emphasizes the need for written agreements that set forth services to be provided, compensation that reflects fair market value, and monitoring mechanisms to detect and prevent abusive practices.
Distributor Arrangements as a Risk Area. Both the 2023 and 2003 guidance documents, as well as numerous OIG Advisory Opinions and enforcement actions, underscore that distributor arrangements present heightened compliance risk. The OIG has consistently stated that arrangements involving percentage-based compensation to distributors who have relationships with referring physicians or purchasing decision-makers warrant careful structuring, documentation, and ongoing monitoring.
F. AdvaMed Code of Ethics (2020 Revision)
The Advanced Medical Technology Association ("AdvaMed") Code of Ethics on Interactions with U.S. Health Care Professionals (2020 Revision) is a voluntary industry code that establishes standards for medical device company interactions with healthcare professionals. Solstice has adopted the AdvaMed Code as the baseline for its US interactions with healthcare professionals, a commitment that is referenced in Solstice's Board-approved US Compliance Framework Resolution dated February 2024.
The AdvaMed Code is relevant to the ADS Distribution Agreement because ADS personnel will be interacting with healthcare professionals on behalf of Solstice in connection with the sale and clinical support of the Pulsar™ CRM System. Under the AdvaMed Code, meals provided in connection with informational presentations or product demonstrations are subject to a per-person cap of $150 per attendee per event. The Code also addresses gifts, entertainment, consulting arrangements, speaker programs, and other interactions with healthcare professionals.
The current ADS Distribution Agreement does not require ADS to comply with the AdvaMed Code. This gap should be addressed in the proposed amendments, as discussed in Section VII below.
G. State Marketing Compliance Laws
A separate twelve-state marketing compliance survey has been conducted under this engagement, covering the following jurisdictions: California, Colorado, Connecticut, Louisiana, Maine, Massachusetts, Minnesota, Nevada, New Jersey, Oregon, Vermont, and Washington, D.C. The survey findings are set forth in a companion memorandum and are referenced here only in summary.
Several states impose requirements that directly affect distributor activities on behalf of medical device manufacturers, including:
• Aggregate spend reporting requirements in states such as Minnesota (annual reporting of payments to healthcare practitioners) and Vermont (annual disclosure of manufacturer marketing costs);
• Gift bans in states such as Massachusetts (comprehensive ban on gifts to prescribers), Vermont, and the District of Columbia;
• Marketing code adoption requirements, including Massachusetts's requirement that manufacturers attest to compliance with an industry marketing code of conduct; and
• Registration and fee requirements, including Vermont's requirement for annual registration with the Office of the Attorney General ($500/year), Massachusetts's annual registration requirement ($2,000/year plus PhRMA/AdvaMed Code attestation), and Minnesota's annual reporting obligations.
ADS currently maintains operations in states with specific registration and fee requirements. The proposed compliance amendments should require ADS to comply with all applicable state marketing compliance laws and to cooperate with Solstice in meeting state-specific registration, reporting, and attestation requirements.
IV. Analysis of ADS Commission Structure Under the Anti-Kickback Statute
A. Commission Rate Assessment
The ADS Distribution Agreement provides for a commission payable to ADS at a rate of 18% of net US sales. Based on Solstice's projected Year-1 net US sales of $26 million, the anticipated Year-1 commission is approximately $4.68 million.
We have evaluated the 18% commission rate against available industry benchmarks for exclusive medical device distribution arrangements, with particular focus on the cardiac rhythm management and cardiac monitoring segment. Based on publicly available data, industry publications (including the AdvaMed/HIDA distribution survey data), and our experience with comparable engagements, exclusive distribution commissions for Class II implantable cardiac devices typically range from 12% to 22% of net sales, depending on the scope of services provided, the exclusivity of the arrangement, the stage of market development (launch vs. established product), and the level of clinical and logistics support required. The 18% rate falls within this range, although it is positioned in the upper half, which reflects the fact that this is a US market launch of a new product requiring significant investment by ADS in field clinical support, customer education, logistics infrastructure, and inventory management.
The projected Year-1 commission of $4.68 million represents approximately 2.2% of ADS's reported FY2023 revenue of $214 million. When considered in relation to the services that ADS is contractually obligated to provide under the agreement—including warehousing, logistics, field clinical support, customer service, complaint handling, and returns management—the commission amount appears commercially reasonable. However, commercial reasonableness alone is not sufficient to insulate the arrangement from AKS scrutiny.
The current agreement references "commercial reasonableness" in Section 3.1(c) as a basis for the commission rate but does not include or reference an independent fair market value assessment. The absence of a contemporaneous FMV opinion is a material gap. The OIG has consistently emphasized the importance of independent FMV documentation as a hallmark of legitimate compensation arrangements that reduce the risk of AKS exposure. In multiple advisory opinions and enforcement contexts, the OIG has treated the absence of FMV support as a factor weighing against the legitimacy of a compensation arrangement.
Recommendation. We strongly recommend that Solstice retain a qualified independent valuation firm to prepare a written FMV opinion documenting that the 18% commission rate reflects arm's-length, market-rate compensation for the distribution services specified in the ADS Distribution Agreement. The valuation should be completed prior to the October 1, 2024 launch date and should be referenced in the proposed amendments to the agreement. We can provide recommendations for appropriate valuation firms upon request; firms that are commonly engaged for this purpose include Harborview Management Consulting, Sundial Management Consulting, and Pinnacle Healthcare Consulting.
B. Safe Harbor Qualification Analysis
We have assessed the ADS commission arrangement against the requirements of the Personal Services and Management Contracts safe harbor at 42 C.F.R. § 1001.952(d). Our analysis of each element is as follows:
Written Agreement Signed by the Parties. The ADS Distribution Agreement is in writing and has been duly executed by authorized representatives of both parties. This element is satisfied.
Term of at Least One Year. The agreement provides for an initial term of five years (March 15, 2024 through March 14, 2029). This element is satisfied.
Specification of Services. The agreement describes the distribution services to be provided by ADS in Section 4 (Distribution Services), including warehousing and logistics, order processing, customer service, field clinical support, complaint handling, and returns management. While the general scope of services is described, the agreement would benefit from greater granularity regarding the specific service obligations, performance standards, and deliverables expected of ADS. For example, the agreement does not specify the minimum number of field clinical support personnel to be dedicated to the Pulsar™ product line, the geographic coverage requirements, or the response time standards for customer service and complaint handling. This element is therefore only partially satisfied.
Aggregate Compensation Set in Advance, Consistent with Fair Market Value, and Not Determined in a Manner Reflecting Volume or Value of Referrals. This element presents the most significant analytical issue. The 18% commission is structured as a percentage of net US sales. By its nature, percentage-based compensation means that the aggregate amount payable to ADS over the term of the agreement is not fixed in advance but varies directly with the volume of sales. The safe harbor requires that aggregate compensation be "set in advance" and "not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties."
The OIG has recognized in multiple advisory opinions and guidance documents that percentage-based compensation arrangements in bona fide distribution agreements are common and may be commercially reasonable. The OIG has not categorically excluded percentage-based arrangements from safe harbor protection, but it has cautioned that such arrangements warrant heightened scrutiny because the total compensation paid is inherently tied to the volume of business. In OIG Advisory Opinion No. 09-09, for example, the OIG noted that while percentage-based compensation is not per se illegal, the arrangement must be carefully structured to ensure that the percentage rate itself reflects fair market value for the services rendered and was not set at a level intended to induce referrals.
The practical challenge with applying the Personal Services safe harbor to percentage-based distribution commissions is that the "set in advance" requirement is difficult to satisfy when the aggregate payment amount depends on future sales volumes that are not known at the time of contracting. Some practitioners and the OIG have interpreted this requirement to be satisfied when the methodology for calculating compensation (i.e., the percentage rate) is set in advance, even if the absolute dollar amount is not. This interpretation is reasonable but not free from risk.
Volume-or-Value Concern. The commission structure inherently ties compensation to the volume of sales. The OIG has acknowledged that bona fide distribution arrangements—where the distributor takes title to the product, bears inventory risk, and provides genuine distribution services—present different considerations from pure referral or marketing agent arrangements. However, the volume-or-value concern remains relevant, particularly in the context of a product that is reimbursed by federal healthcare programs.
Recommendation. We recommend that the proposed amendments to the ADS Distribution Agreement include express contractual language documenting: (i) that the 18% commission rate was the product of arm's-length negotiation between unrelated parties; (ii) that the rate is consistent with commercially available distribution rates for comparable exclusive medical device distribution arrangements in the cardiac rhythm management and cardiac monitoring space; (iii) that the rate was not determined in a manner intended to induce referrals of federal healthcare program business; and (iv) that the rate is supported by an independent FMV assessment. We further recommend attaching the FMV certification as a new exhibit to the agreement.
C. Distinction Between Distribution and Referral
A critical factor in the AKS analysis is whether ADS functions as a bona fide distributor or as a mere marketing agent or referral source. The distinction is significant because the OIG has consistently viewed arrangements in which a third party performs genuine distribution functions—taking title to product, bearing inventory and credit risk, maintaining warehousing and logistics capabilities, and providing post-sale services—as presenting a lower risk of AKS abuse than arrangements in which a third party simply identifies customers or channels orders to the manufacturer in exchange for a commission.
We have reviewed the relevant provisions of the ADS Distribution Agreement and note the following:
• Title Transfer. Under Section 3.3, title to Pulsar™ products passes to ADS upon delivery to ADS's designated distribution center. ADS bears the risk of loss from that point forward.
• Inventory Risk. ADS is required to maintain specified minimum inventory levels (Section 4.2) and bears the financial risk associated with unsold inventory, subject to limited return rights set forth in Section 10.
• Distribution Services. ADS provides a comprehensive suite of distribution services, including warehousing, logistics, order fulfillment, customer service, complaint handling, and field clinical support. These services represent genuine value-added distribution functions beyond mere order facilitation.
• Returns Management. ADS is responsible for managing product returns in accordance with Solstice's returns policy, including processing, documentation, and reverse logistics.
Assessment. Based on our review of the agreement's provisions regarding title transfer, risk allocation, inventory obligations, and the scope of distribution services, ADS's role as structured appears to be that of a bona fide distributor rather than a mere marketing agent or referral source. This characterization, if supported by the actual course of dealing between the parties, materially reduces (but does not eliminate) AKS risk relative to a commission-based referral arrangement. It is essential, however, that the actual operations of ADS correspond to the contractual framework. If, in practice, ADS's distribution activities were to be reduced to primarily promotional or referral functions while the substantive distribution work were performed by Solstice or its other agents, the bona fide distributor characterization could be undermined.
We recommend that Solstice monitor ADS's actual performance of distribution services on an ongoing basis as part of its compliance oversight program.
V. Sub-Distributor Approval and Compliance Certification Protocols
A. Current Agreement Provisions
Section 5.3 of the ADS Distribution Agreement permits ADS to engage up to five authorized sub-distributors to assist in the distribution and sale of Pulsar™ products within the US territory. The engagement of each sub-distributor is subject to two conditions: (i) Solstice must provide its prior written approval of the sub-distributor; and (ii) each sub-distributor must execute a "Compliance Certification" in the form attached as Exhibit D to the agreement.
We have reviewed the Compliance Certification form attached as Exhibit D. The current form is a single-page document that contains general representations by the sub-distributor that it will "comply with all applicable laws and regulations" and will "conduct its activities in a manner consistent with ethical business practices." While these representations are appropriate as far as they go, the form lacks the specificity and substantive compliance content necessary to provide meaningful protection to Solstice.
B. Identified Gaps
Our review has identified the following significant gaps in the current sub-distributor compliance framework:
(1) AKS Compliance Programs. The existing Compliance Certification does not require sub-distributors to maintain their own Anti-Kickback Statute compliance programs. Given that sub-distributors will be operating in the market on behalf of Solstice and interacting with healthcare professionals who may be in a position to order or recommend the Pulsar™ CRM System, the absence of this requirement creates a material compliance gap.
(2) Background Screening and Exclusion List Checks. The Compliance Certification does not require sub-distributors to undergo background screening or exclusion list checks against the OIG List of Excluded Individuals and Entities ("LEIE") or the General Services Administration System for Award Management ("GSA SAM"). Federal healthcare program regulations prohibit manufacturers from doing business with excluded entities and individuals, and Solstice could face CMPs for employing or contracting with an excluded person in connection with items or services reimbursed by federal healthcare programs.
(3) Sunshine Act Data-Collection Obligations. The Compliance Certification contains no provisions requiring sub-distributors to track and report transfers of value to covered recipients. As discussed in Section VIII below, Solstice bears the legal obligation to report such transfers regardless of whether they are made directly or through sub-distributors.
(4) AdvaMed Code of Ethics. The Compliance Certification does not require sub-distributors to comply with the AdvaMed Code of Ethics (2020 Revision), which Solstice has adopted as its baseline for US HCP interactions.
(5) Audit Rights. Section 12 of the ADS Distribution Agreement grants Solstice the right to audit ADS, but this right does not extend to sub-distributors. As a result, Solstice has no contractual ability to directly audit the compliance practices and records of entities that are selling its products to healthcare providers.
(6) Annual Compliance Recertification. The existing form requires a one-time certification at the time of appointment. There is no requirement for sub-distributors to provide annual compliance recertifications, which would serve as a periodic check on continued compliance.
(7) Flow-Down of Compliance Policies. There is no mechanism for flowing down Solstice's US compliance policies and procedures to sub-distributor personnel. Without such a mechanism, sub-distributor personnel may operate without awareness of or adherence to the specific compliance standards that Solstice expects.
(8) Direct Termination Rights. The current agreement does not provide Solstice with a mechanism to terminate or disapprove a sub-distributor for compliance violations without first exercising remedies against ADS under the master agreement. This creates an impractical and potentially dangerous delay in Solstice's ability to address sub-distributor compliance problems.
C. Recommendations. We recommend the following enhancements to the sub-distributor compliance framework:
Comprehensive Sub-Distributor Compliance Addendum. The current one-page Compliance Certification (Exhibit D) should be replaced with a comprehensive Sub-Distributor Compliance Addendum. A proposed form of this addendum is included in Appendix B to this memorandum. The addendum should require each sub-distributor to:
(a) Certify compliance with the AKS, FCA, Sunshine Act, applicable state marketing compliance laws, and the AdvaMed Code of Ethics;
(b) Implement and maintain written compliance policies and procedures specific to its distribution of Pulsar™ products, and designate a compliance contact responsible for overseeing compliance with these policies;
(c) Undergo OIG LEIE and GSA SAM exclusion list screening prior to appointment and on a monthly basis thereafter, with results reported to ADS and Solstice;
(d) Agree to direct audit rights by Solstice, separate from and in addition to ADS's own audit rights over the sub-distributor;
(e) Submit quarterly compliance reports to both ADS and Solstice, covering transfer-of-value data, training completion, exclusion list screening results, and any compliance incidents or concerns;
(f) Participate in Solstice-approved compliance training, using materials developed in coordination with Meridian Consulting Group LLC, prior to commencing distribution activities and on an annual basis thereafter;
(g) Provide annual compliance recertifications to both ADS and Solstice; and
(h) Acknowledge and agree that any material breach of the Compliance Addendum constitutes grounds for immediate termination of the sub-distributor's appointment.
Solstice Unilateral Termination Right. The proposed amendments to the ADS Distribution Agreement should grant Solstice a unilateral right to disapprove or terminate any sub-distributor for compliance concerns, independent of ADS's own sub-distributor management authority and without requiring Solstice to first exercise remedies against ADS under the master agreement. This right is essential to ensure that Solstice can act swiftly to remove a sub-distributor from the distribution chain if a compliance risk is identified.
Fair Market Value Documentation for Sub-Distributor Compensation. Sub-distributor compensation should be capped at fair market value, with written FMV support required for each sub-distributor engagement. The proposed Compliance Addendum should include a representation by the sub-distributor that its compensation is consistent with fair market value and was not set in a manner intended to induce referrals.
VI. Audit Rights Analysis (Section 12)
A. Current Provisions
Section 12 of the ADS Distribution Agreement establishes Solstice's right to audit ADS's "compliance records." The current provisions may be summarized as follows: (i) Solstice may audit ADS's compliance records; (ii) Solstice must provide 30 days' prior written notice of any audit; (iii) Solstice may conduct up to two audits per calendar year; and (iv) audits must be conducted during regular business hours.
While the inclusion of audit rights in the agreement is a positive feature, the current provisions suffer from significant limitations that undermine their effectiveness as a compliance oversight tool.
B. Identified Limitations
We have identified the following specific limitations in the current audit provisions:
Undefined Scope. The term "compliance records" is not defined anywhere in the ADS Distribution Agreement. This ambiguity creates a substantial risk that ADS could narrowly construe the term to resist production of records that Solstice reasonably needs to evaluate ADS's compliance posture. It is unclear, for example, whether "compliance records" encompasses financial records (including ADS's internal commission and bonus records for sales personnel), sales data at the customer or transaction level, healthcare professional interaction logs, sub-distributor agreements and correspondence, training records and certifications, customer and healthcare provider correspondence, internal compliance investigation files, or expense reports. Without a clear definition, the audit right may be rendered largely ineffective.
No Sub-Distributor Coverage. The audit right extends only to ADS directly. There is no provision for Solstice to audit the records and compliance practices of sub-distributors engaged by ADS. Given that sub-distributors will be operating in the market on behalf of Solstice and interacting directly with healthcare professionals, this is a significant gap.
No Record Retention Obligation. The agreement does not require ADS to retain records for any specified period. Without a retention requirement, ADS could dispose of records before Solstice has the opportunity to review them. This is particularly problematic given that the FCA has a statute of limitations of six years (or ten years in certain circumstances under the Wartime Suspension of Limitations Act), meaning that records from the early years of the agreement could be relevant to potential FCA claims well into the future.
No Consequences for Non-Compliance. The current provisions do not specify any consequences for ADS's failure to cooperate with an audit or for material findings of non-compliance. The absence of specified consequences limits Solstice's leverage and creates uncertainty about the remedies available if an audit reveals compliance problems.
No Third-Party Auditors. The agreement does not expressly authorize Solstice to engage third-party auditors, such as Pinnacle Auditing & Advisory LLP or another independent firm, to conduct audits on its behalf. In practice, compliance audits are frequently conducted by specialized third-party firms, and the absence of an express authorization could enable ADS to object to the use of such firms.
Notice Period and Frequency Cap. The 30-day advance notice requirement is commercially reasonable for routine audits. However, in circumstances where Solstice has reason to suspect a compliance violation or where a government investigation is underway, a 30-day notice period may allow ADS to alter, destroy, or conceal records. Moreover, the twice-per-calendar-year cap may prove insufficient if compliance concerns arise that warrant more frequent auditing.
C. Recommendations (Proposed Amendments to Section 12)
We recommend comprehensive amendments to Section 12 of the ADS Distribution Agreement, as set forth in the proposed redline in Appendix A. The key elements of the proposed amendments are as follows:
Section 12.1 — Definition of "Compliance Records." Define "Compliance Records" broadly to include all books, records, documents, communications (including electronic communications), financial records, sales reports and data, customer and healthcare professional interaction logs, sub-distributor agreements and correspondence, training records and certifications, employee and contractor certifications, expense reports and reimbursement records, internal compliance investigation files, complaint and adverse event records, and any other documents or data related to the distribution, sale, marketing, or clinical support of Pulsar™ products.
Section 12.2 — "For Cause" Audit Right. Add a "for cause" audit right that permits Solstice to conduct an audit on five business days' notice (or no advance notice in the event of a government investigation, subpoena, or law enforcement inquiry related to Pulsar™ distribution). For-cause audits should not count against the twice-per-calendar-year cap for routine audits.
Section 12.3 — Sub-Distributor Audit Rights. Extend Solstice's audit rights to cover all sub-distributors engaged by ADS. This may be accomplished through a flow-through audit clause requiring ADS to include in each sub-distributor agreement a provision granting Solstice direct audit rights over the sub-distributor on the same terms as those applicable to ADS.
Section 12.4 — Third-Party Auditors. Expressly authorize Solstice to engage independent third-party auditors at Solstice's cost to conduct audits on Solstice's behalf, subject to the third-party auditor's execution of appropriate confidentiality agreements.
Section 12.5 — Record Retention. Require ADS to retain all Compliance Records for a minimum of six years following the calendar year to which they relate. This period is consistent with the FCA's six-year statute of limitations and reflects industry best practices for healthcare compliance record retention.
Section 12.6 — Cooperation and Access. Specify that ADS must make its premises, records, systems, and personnel (including compliance, legal, sales, and finance personnel) available during audits. ADS personnel must be available for interviews and must respond to auditor inquiries within reasonable timeframes.
Section 12.7 — Consequences of Adverse Findings. Establish a graduated consequence framework for adverse audit findings, including: (i) development and implementation of a remediation plan within 30 days of notification of findings; (ii) financial clawback rights for commissions attributable to sales that are determined to have resulted from AKS violations or fraudulent conduct; (iii) escalation to additional audits and enhanced monitoring; and (iv) termination rights as set forth in the proposed compliance termination provisions.
VII. Flow-Down Compliance Obligations
A. ADS Personnel Compliance
Section 7.1 of the current ADS Distribution Agreement contains a general representation that ADS will "comply with all applicable laws and regulations in connection with its performance of the distribution services contemplated by this Agreement." While this general compliance representation is necessary, it is insufficient standing alone to establish the compliance infrastructure needed for a medical device distribution arrangement implicating federal healthcare programs.
Our review has identified the following specific gaps in the current agreement's treatment of ADS personnel compliance:
• The agreement does not require ADS to adopt a written compliance program specific to the distribution of Solstice products. While ADS has a general corporate compliance program (as would be expected of a distributor of its size), the agreement does not ensure that such a program addresses the specific regulatory risks associated with the Pulsar™ CRM System.
• The agreement does not mandate AKS, FCA, or Sunshine Act training for ADS sales, marketing, or clinical personnel who will be involved in the promotion and distribution of Pulsar™ products.
• The agreement does not require ADS to designate a compliance officer or compliance contact specifically responsible for the Solstice product line. While we note that Dawn Hitchens serves as Vice President, Compliance & Legal at ADS—a positive structural element that suggests organizational commitment to compliance—this role is not formalized in the agreement with respect to Solstice-specific compliance obligations.
• The agreement does not require ADS to screen its employees and contractors against the OIG LEIE and GSA SAM exclusion lists, either at the time of hire or on a periodic basis. Federal regulations impose CMPs on entities that employ or contract with excluded individuals in connection with items or services reimbursed by federal healthcare programs.
• The agreement does not impose a code of conduct or specific behavioral standards applicable to ADS personnel's interactions with healthcare professionals on Solstice's behalf. Without such standards, ADS personnel may engage in conduct—such as providing excessive meals or gifts, making off-label promotional statements, or entering into inappropriate consulting arrangements with physicians—that could expose Solstice to AKS, FCA, or Sunshine Act liability.
B. Recommended Flow-Down Provisions
We recommend that the proposed amendments to the ADS Distribution Agreement include comprehensive flow-down compliance provisions, as follows:
Compliance Program Requirements. ADS should be contractually required to implement and maintain a written compliance program that addresses the specific risks associated with the distribution of Pulsar™ products. At a minimum, the compliance program should incorporate the seven elements of an effective compliance program identified in the OIG's General Compliance Program Guidance (November 2023):
(1) Written Policies and Procedures. ADS must maintain written policies and procedures addressing AKS compliance, Sunshine Act reporting, FDA promotional compliance, HCP interaction standards, and state marketing law compliance, each specific to the distribution of Pulsar™ products.
(2) Compliance Leadership and Oversight. ADS must designate a compliance contact for the Solstice product line with authority and resources to implement and oversee the compliance program. We recommend that this initially be Dawn Hitchens, but the agreement should require the designation by role rather than by name to ensure continuity.
(3) Training and Education. ADS must provide annual compliance training to all personnel involved in Pulsar™ sales, marketing, clinical support, or HCP interactions. Training should cover the AKS and its safe harbors, the FCA and qui tam provisions, the Sunshine Act reporting requirements, FDA promotional compliance rules including the prohibition on off-label promotion, AdvaMed Code of Ethics requirements, and applicable state marketing laws. Training materials should be developed in collaboration with Solstice or using Solstice-approved materials developed by Meridian Consulting Group LLC.
(4) Effective Lines of Communication. ADS must establish and publicize mechanisms for personnel to report compliance concerns without fear of retaliation, including the ability to report concerns directly to Solstice's compliance hotline (operated by Clearpath Ethics Services Inc., contract Ref. CP-SBD-2024-061).
(5) Enforcing Standards Through Well-Publicized Disciplinary Guidelines. ADS must maintain and enforce disciplinary policies for personnel who violate compliance standards in connection with Pulsar™ distribution activities.
(6) Internal Monitoring and Auditing. ADS must conduct internal monitoring and periodic auditing of its Pulsar™-related compliance activities and make the results of such activities available to Solstice upon request.
(7) Prompt Response to Detected Offenses and Corrective Action. ADS must have procedures in place to promptly respond to detected compliance violations, including investigation, remediation, and corrective action, and must promptly notify Solstice of any material findings.
OIG LEIE and GSA SAM Screening. ADS should be required to conduct monthly screening of all personnel and contractors involved in the distribution, sale, marketing, or clinical support of Pulsar™ products against the OIG LEIE and GSA SAM exclusion databases. Results should be documented and made available to Solstice upon request. The same screening obligation should flow down to sub-distributors.
Notification Obligations. ADS should be required to promptly notify Solstice—within five business days—of any compliance concern, government inquiry, subpoena, civil investigative demand, or investigation related to the distribution of Pulsar™ products. Additionally, ADS should be required to report any known or suspected AKS or FCA violation to Solstice's compliance hotline.
VIII. Sunshine Act / Open Payments Data-Collection Obligations
A. Gap in Current Agreement
As noted in the Executive Summary, the ADS Distribution Agreement contains no provisions whatsoever addressing Sunshine Act compliance. This represents a significant compliance gap that must be remedied before the October 1, 2024 US commercial launch.
Solstice Biomedical Inc., as the applicable manufacturer of the Pulsar™ CRM System, will bear the legal obligation to report all transfers of value to covered recipients made in connection with Pulsar™ products—regardless of whether those transfers are made directly by Solstice or by ADS or its sub-distributors acting on behalf of Solstice. CMS regulations and guidance make clear that manufacturers cannot avoid reporting obligations by routing transfers of value through distributors or other intermediaries.
As noted above, Solstice has submitted its CMS Manufacturer Identification application in June 2024, which is currently pending. The reporting thresholds for calendar year 2024 are $12.49 per individual transfer and $100 in aggregate per covered recipient per calendar year. Data regarding CY2024 transfers of value must be submitted to CMS by March 31, 2025.
B. Specific Risks
The absence of contractual data-collection obligations creates the following specific risks:
Data Collection Failure. ADS personnel will be interacting with physicians, physician assist

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