Jan 32017

First Circuit Reins In Fraud-on-the-FDA Theory

Scott D. Stein and Brenna E. Jenny
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In a recent opinion, the First Circuit significantly constrained the scope of the fraud-on-the-FDA theory of liability, which posits that had the FDA known of the defendant’s alleged violation of the Food, Drug, and Cosmetic Act (“FDCA”), it would not have approved the defendant’s product, such that no claims for that product would have been covered by federal healthcare programs.  See United States ex rel. D’Agostino v. ev3, Inc., No. 16-1126 (1st Cir. Dec. 23, 2016).  The court imposed a rigorous causation standard on fraud-on-the-FDA claims, requiring relators to show that FDA took “official action” after discovering that a manufacturer had submitted fraudulent information to the agency.  This standard mirrors the new materiality standard set forth by the Supreme Court in Escobar, in that both require relators to ground their allegations in how the government reacted to learning of the alleged fraud.

D’Agostino, a former sales representative for defendant ev3, filed a qui tam asserting a variety of claims premised on alleged violations of the FDCA.  D’Agostino’s principal claim was that ev3 had fraudulently induced FDA to approve a device named Onyx by, among other things, omitting safety information and disclaiming its intent to promote additional, non-approved indications.  According to D’Agostino, these fraudulent representations “could have” influenced FDA’s decision to approve Onyx.  As we previously discussed here, DOJ filed a Statement of Interest in support of the relator encouraging the First Circuit to uphold the viability of the fraud-on-the-FDA theory.

The court did not foreclose the theory completely, but it did significantly constrain it.  The court held that a fraudulent inducement theory of liability, such as fraud-on-the-FDA, requires the plaintiff to show causation.  In these circumstances, the court ruled, the relator must show that FDA would not have approved Onyx absent the fraudulent representations—not merely that the FDA “could have” taken adverse action against the manufacturer.  The court explained why it was scratching the relator’s claim with an analogy to the game of billiards:  “If the representations did not actually cause the FDA to grant approval it otherwise would not have granted, CMS would still have paid the claims.  In this respect, D’Agostino’s fraudulent inducement theory is like a kick shot in billiards where the cue ball ‘could have’ but did not in fact bounce off the rail, much less hit the targeted ball.”  Here, the fact that FDA never withdrew its approval of Onyx in the six years since D’Agostino filed his case “precludes D’Agostino from resting his claims on a contention that the FDA’s approval was fraudulently obtained.”   “To rule otherwise,” the court concluded, “would be to turn the FCA into a tool with which a jury of six people could retroactively eliminate the value of FDA approval and effectively require that a product largely be withdrawn from the market even when the FDA itself sees no reason to do so.”

D’Agostino argued that his “could have” standard was supported by the FCA’s materiality requirement, which asks whether the defendant’s conduct was capable of influencing payment.  But the court noted that the element of causation is separate from the FCA’s materiality requirement.  While the court declined to rule on materiality in light of its finding regarding causation, it leveraged Escobar’s “demanding” new materiality standard to point out that CMS’s similar failure to “den[y] reimbursement for Onyx in the wake of D’Agostino’s allegations casts serious doubt on the materiality” of the supposed fraudulent representations.

The First Circuit’s decision stands as a forceful refutation of attempts to use the FCA to litigate disagreements with perceived regulatory shortcomings.  As the court aptly noted, “The FCA exists to protect the government from paying fraudulent claims, not to second-guess agencies’ judgments about whether to rescind regulatory rulings. . . . If jurors in a single qui tam case could determine precisely what representations were essential to approval, which experts to believe, and how the FDA interpreted submissions made to it, some potential applicants who would otherwise seek approval for new products might be deterred, others might swamp the FDA with more data than it wants, and the ‘FDA’s responsibility to police fraud consistently with the Administration’s judgment and objectives’ might be undercut.”

In so holding, the First Circuit also cast doubt on the evidentiary value of the testimony of current and former regulatory agency employees in such matters, in the absence of any actual adverse regulatory action.  “Would competing experts read someone’s mind?  Whose?  What if former officials no longer in government were of one view, and current officials of another? These and similar questions all support our position that the absence of some official agency action confirming its position and judgment in accordance with the law renders D’Agostino’s fraud-on-the-FDA theory futile.”

A copy of the court’s opinion can be found here.

Scott D. Stein

Chicago

sstein@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

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