May 242017

Third Circuit Provides New Guidance on Escobar’s Materiality Requirement in Healthcare Cases

Scott D. Stein and Brenna E. Jenny
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In a recent opinion, the Third Circuit provided new guidance on the application of Escobar’s ”heightened” materiality standard to cases involving healthcare entities.  The relator in United States ex rel. Petratos v. Genentech, No. 15-3805 (3d Cir. May 1, 2017) alleged that a pharmaceutical manufacturer ignored safety information about one of its drugs and potentially violated FDA’s adverse event reporting requirements.  As a result, the relator contended, physicians submitted Medicare claims for prescriptions that were not “reasonable and necessary.”  The Third Circuit concluded that the relator did not meet the “high standard” for pleading materiality post-Escobar because he failed to plead that CMS, the federal agency to which Medicare claims for the drug were submitted, consistently refuses to pay claims like those alleged (and indeed “essentially concedes that CMS would consistently reimburse these claims with full knowledge of the purported noncompliance”).  Moreover, the court noted, not only had FDA not taken any enforcement action, but it had actually approved multiple new indications for the drug at issue.  The court also observed that DOJ “has taken no action against Genentech and declined to intervene in this suit.” 

The United States, which filed an amicus brief, had argued for the viability of the “fraud on the FDA” theory.  That theory, discussed further here and here, posits that fraud directed at FDA can support FCA liability through its hypothetical impact on the payment decisions of other government agencies.  DOJ asserted that “in the (rare) circumstances in which the defendant’s false statements masked problems that were so serious that FDA would have (for example) withheld or withdrawn its approval of the drug application for all indications had it known the truth, subsequent claims for reimbursement for that drug could be rendered ‘false or fraudulent’ because the government would not have paid for the drugs but for the defendant’s fraud.”

The Third Circuit ultimately chose not to address the viability of the fraud on the FDA theory directly.  But in discussing the FCA’s materiality requirement, the court invoked one of the judiciary’s most significant conceptual concerns with the theory—namely, that courts or juries would be required to second-guess the FDA.  As the court explained, where “expert agencies and government regulators have deemed these violations insubstantial (or at least would do so if made aware), we do not think it appropriate for a private citizen to enforce these regulations through the False Claims Act.”

The relator tried to avoid the import of the relevant history of government conduct by urging the court to focus instead on physicians’ decisions, rather than the government’s.  The relator insisted that he could establish materiality by adequately pleading that physicians would have prescribed less of the manufacturer’s drug had they known of the undisclosed information, thereby causing the government to reimburse fewer claims.  The court rejected these efforts to conflate materiality with causation.  The court underscored that under Escobar, a court’s focus “should not be [on] whether the alleged fraud deceived the prescribing physicians, but rather whether it affected CMS’s payment decision.”

A copy of the court’s opinion can be found here, and a copy of DOJ’s amicus brief can be found here.

Scott D. Stein

Chicago

sstein@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

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