The United States Court of Appeals for the Ninth Circuit unanimously reversed dismissal of a False Claims Act Complaint in United States ex rel. Campie v. Gilead Sciences. The most notable aspect of the case is that the panel revived claims based on an implied false certification theory under the Supreme Court’s recent decision in Universal Health Servs. v. United States ex rel Escobar. This case is noteworthy because the court reversed dismissal even though the relator did not dispute that the government continued to pay claims to the defendant even after the government learned about the defendant’s conduct—a fact that the Third Circuit zeroed in on in recently affirming dismissal in a similar case. Gilead may be the harbinger of a circuit split regarding how to apply Escobar’s “demanding and rigorous” materiality standard.
Background in Gilead
The relators claimed that their former employer made misstatements in documents it submitted to the FDA to gain approval to sell certain pharmaceuticals in the United States. The statements related to the facilities from which the company sourced an active ingredient in its medication and some internal test results.
The Complaint raised claims alleging factually false certifications and implied false certifications to the FDA. Under the implied false certification theory, a defendant who submits a claim is impliedly certifying compliance with all the conditions of payment. If the claim omits information that would expose a violation of a “material statutory, regulatory, or contractual requirement of payment,” the defendant’s conduct renders the claim fraudulent. The crux of the Complaint here was that the defendant’s alleged false statements and fraudulent conduct caused the government to pay claims for the medications under Medicare and Medicaid systems, even though those drugs failed to meet the FDA’s approval requirements.
After the district court dismissed the case, the Ninth Circuit reversed because it found that assuming all of the relators’ factual allegations were true, their allegations of materiality met the “demanding” Escobar standard. The Complaint alleged that the defendant’s false statements “permeated the [FDA] regulatory process,” and facilitated the FDA-approval process so that the defendant would be eligible for reimbursement with government funds. The court also rejected the defendant’s argument that the alleged false statements were immaterial because after the FDA learned of the alleged violations, it continued to reimburse the defendant. The court refused to allow the defendant to use that fact as a “shield against liability for fraud.” Further, the relators claimed that the defendant’s statements tainted the same FDA-approval process the defendant now depended on to support dismissal. Hence, the court did not find the FDA’s approval to be compelling.
The court also was unpersuaded by the Third Circuit’s decision in United States ex rel. Petratos v. Genentech. In that case, the Third Circuit affirmed dismissal of a qui tam action, in part, because the relator acknowledged that the government continued to pay claims although it knew the defendant allegedly suppressed data about its cancer drug to FDA. However, the court took a different route, choosing not to weigh the government’s conduct at the pleadings stage. Instead, it observed that there was “no evidence before the court to assess whether the government paid claims once the violations came to light.”
Assessing Materiality on the Pleadings: Is the Government’s Payment History Relevant and What Does Relator’s Complaint Need to Allege in Light of Petratos and Gilead?
While the facts the realtors alleged may not be particularly unique, the outcome of the case under Escobar certainly is. As we recently reported here, the Petratos panel relied on the absence of the complaint’s allegations that the government’s knowledge of the alleged fraud would have impacted its decision to pay, paired with concessions about the government’s true payment behavior. This approach seems to raise the bar higher at the pleadings stage than the Ninth Circuit was willing to go. While the Ninth Circuit distinguished Petratos because the parties disputed “what the government knew and when,” the court’s warning that the government’s conduct is best assessed after the pleadings stage, on a more developed record, indicates a reluctance to place dispositive weight on the government’s response (or lack thereof) early in litigation.
Petratos and Gilead arguably represent two divergent approaches to the same question. Together, they suggest an emerging circuit split on how the government’s conduct may impact a court’s assessment of the sufficiency of an FCA complaint’s materiality allegations. Clients are advised to keep a lookout for how circuit courts continue to define and redefine materiality post-Escobar.
