Third Circuit Recognizes Escobar “Heightened Materiality Standard” in Dismissal of False Claims Act Case Tied to Avastin

by Robinson+Cole Health Law Diagnosis
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In May 2017, the U.S. Court of Appeals for the Third Circuit relied on the “heightened materiality standard” endorsed by the U.S. Supreme Court in its 2016 Escobar decision in dismissing a False Claims Act (FCA) whistleblower suit filed against pharmaceutical giant Genentech related to its billion dollar cancer drug Avastin. In Escobar, the Supreme Court upheld the validity—“at least in some circumstances”—of the “implied false certification” theory of FCA liability, but provided that in order for this theory to attach a defendant must (1) make a specific representation on a claim for payment to the government, and (2) fail to disclose noncompliance with a material requirement for payment, which failure renders that representation a “misleading half-truth” (even if the representation is true on its face).

In U.S. ex rel. Petratos v. Genentech, Inc., Genentech’s former head of healthcare data analytics alleged that Genentech concealed information from the Food and Drug Administration (FDA) and other government agencies regarding Avastin’s health risks by ignoring and suppressing data concerning its side effects. The suit, which was filed under seal in 2011, alleged that this was done in part to avoid reporting serious adverse events to the FDA that could have caused the FDA to change Avastin’s approved label, which in turn would have changed the standard of care associated with the use of Avastin. Consequently, the whistleblower claimed, Genentech caused health care providers to submit reimbursement claims to Medicare that were not reasonable or necessary and thus in violation of the FCA under the implied false certification theory of FCA liability.

In an opinion authored by Judge Thomas Hardiman – a reported finalist for the recent Supreme Court nomination awarded to now-Justice Neil Gorsuch – a unanimous panel of the Third Circuit rejected the whistleblower’s claims and affirmed dismissal of the suit. The opinion first reviewed how the Centers for Medicare and Medicaid Services (CMS) determines whether a prescribed drug is “reasonable and necessary” and thus eligible for reimbursement under Medicare. The court noted that generally, a drug must have marketing approval from the FDA and be used for a medically accepted indication. The court observed further that a specific use of a drug must be reasonable and necessary for the particular patient, and therefore a “reasonable and necessary” determination involves a combination of the FDA, CMS, and an individual patient’s physician, and does not rely solely on FDA approval.

After establishing this context for Medicare reimbursement of prescription drugs, the court determined that the whistleblower “cannot establish materiality” under the FCA for his claims regarding Avastin, as the allegations represent the “sort of ’minor or insubstantial’ noncompliance” with a statutory, regulatory or contractual obligation that the Supreme Court in Escobar cautioned should not be subject to FCA liability. In explaining why the claims “do not meet this high standard,” the Third Circuit noted that the whistleblower not only failed to plead that CMS consistently refuses to pay claims similar to those alleged, but also “essentially concedes that CMS would consistently reimburse these claims with full knowledge of the purported noncompliance.” (emphasis in original). The court also cited the fact that the whistleblower notified the FDA and Department of Justice (DOJ) of his allegations in 2010 and 2011, and since that time the DOJ has taken no action against Genentech and declined to intervene in this case, and the FDA has not only continued to approve of Avastin, but has actually increased the number of approved indications for the drug, and has not sought to more strictly enforce its adverse-event reporting rules.

The court thus concluded that an FCA suit “is not the appropriate way to address” the whistleblower’s claims because the expert agencies and government regulators have determined the alleged violations to be insignificant. The court affirmed dismissal of the case and noted that if existing laws fail to appropriately protect patients, it is up to other branches of government to remedy the current state.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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