Arizant Inc. owes former CEO Scott Augustine $2.3 million in fines and legal fees, even though he pleaded guilty to misdemeanor charges in a Medicare fraud case, the Minnesota Supreme Court ruled Thursday.

The ruling reversed a state appeals court decision last year that struck down a Hennepin County jury decision in Augustine's favor.

Arizant, which bought Augustine Medical in 2003, appealed the Hennepin jury award on grounds that Augustine's plea to a lesser charge after the government dropped felony charges during the 2004 trial proved that he acted in bad faith.

"The jury found that he acted in good faith on behalf of the company and in the best interests of the company," said David Marshall, Augustine's attorney. "The successor company argued that, since he pleaded guilty to a misdemeanor, he automatically should be found in bad faith and not even have the right to assert indemnification."

"The Supreme Court said, 'No, he gets a chance to demonstrate that he acted in good faith.' And that's what the jury decided," Marshall added.

Augustine sued Arizant after he pleaded guilty to reduced charges. He was sentenced to probation, banned from the Medicare program for five years and ordered to pay a $2 million fine. Earlier, Augustine Medical pleaded guilty to conspiring to defraud the United States and was ordered to pay a criminal fine of $5.2 million and a civil fine of more than $7 million.

The controversy revolved around Medicare reimbursements for the use of Augustine Medical's "Warm-Up Active Wound Therapy" for treating chronic wounds at nursing homes, outpatient rehabilitation facilities and home health care.

Tri-Span, a private insurer that handled claims for Medicare, sent a letter in 2000 to Augustine Medical denying coverage. Augustine Medical executives decided that the letter was wrong, and decided to continue submitting claims for reimbursement on a case-by-case basis. That same year, Southern Medical Distributors, part of a government sting operation to uncover Medicare fraud, solicited Augustine Medical.

Augustine warned Southern Medical that Tri-Span had denied coverage because the product was "investigational," but declined to cite Tri-Span's letter. Augustine later admitted that he had withheld information in order to get reduced charges.

Augustine, an anesthesiologist and inventor, launched Augustine Medical in 1987. He has started another company and is underwriting a medical clinic in Africa, his lawyer said.

Neal St. Anthony • 612-673-7144