Applying Escobar, Court Rejects Comparative Effectiveness and “Fraud on the Formulary” Claims

The heightened materiality standard imposed by the Supreme Court last year in Escobar continues to pose a formidable bar to relators pursuing expansive theories of FCA liability.  As we explain below, one court recently rejected a claim against pharmaceutical manufacturers alleging that the defendants had fraudulently induced state formulary committees to cover the defendants’ drug, refusing to take a “step toward bringing all misrepresentations to government bodies within the purview of the FCA.”  See United States ex rel. Dickson v. Bristol-Myers Squibb Co., No. 13-cv-01039 (D.N.J. June 27, 2017). 

The relator asserted two sets of allegations pertaining to defendants’ alleged marketing of Plavix as more effective than aspirin.  1) “Prescriber Allegations”:  Many state Medicaid programs have a cost-effectiveness requirement as a condition of reimbursement.  Defendants’ marketing caused physicians to submit prescriptions to Medicaid that contained an implied false certification that Plavix complied with cost-effectiveness requirements.  2) “Formulary Allegations”: Defendants’ marketing fraudulently induced state Medicaid formulary committees to place Plavix on their state Preferred Drug Lists (“PDLs”).

The court concluded that the relator had in effect pled that the implied certifications at issue in her Prescriber Allegations were not material.  According to the relator, by placing Plavix on PDLs, states exempted Plavix from prior authorization requirements, and accordingly, state Medicaid programs automatically reimbursed Plavix claims.  As the court explained, because states reimbursed claims “without consideration of what certifications the prescribing physicians might or might not have been making about the drug,” a physician’s implied certifications per se could not have been material to any government payment decisions.  The court also pointed to other Escobar factors that undercut materiality, including that the relator failed to plead that Medicaid programs “in fact consistently refuse to pay claims like those alleged.”

The relator asserted that because physicians believed, as a result of defendants’ marketing, that Plavix was cost-effective, the marketing campaign was material to the resulting prescribing decisions and ultimate submission of false claims.  The court, pointing to a recent Third Circuit opinion (discussed here), noted that this alleged chain of events could be relevant to establishing causation—i.e., that the alleged misrepresentations caused physicians to prescribe the drug—but it did not establish materiality  because “materiality is judged exclusively in relation to the government’s payment decision”—not to physician prescribing decisions.

The court also poked a number of holes in the relator’s Formulary Allegations.  These claims take the fraudulent inducement theory (premised on the notion that all claims submitted to the government under a contract procured by fraud are false) and extend it to the novel circumstance of formulary decisions supposedly procured by fraud.  The court refused to “craft a fraud-on-the-formulary theory for Relator out of whole cloth,” citing a lack of persuasive authority that the fraudulent inducement theory “should be applied equally in the context of non-contract interactions with government regulatory bodies.”  This is particularly true, in the court’s view, where there is no direct causal connection between the alleged fraud on the formulary committee and submission of false claims.  As the court noted, other judges have been equally dubious of efforts to stretch fraudulent inducement to cover “fraud on the FDA” (discussed further here and here).

Causation and materiality under Escobar played strong supporting roles to this conclusion.  First, the court noted that the Fifth Circuit’s pre-Escobar test for materiality—having “the potential to influence the government’s decisions” —was superseded because it is “significantly more permissive and expansive” than the Escobar test.  The court then determined that the relator failed to meet the more demanding Escobar materiality standard.  In particular, the relator had not pled that “any government Medicaid payor actually stopped reimbursing for Plavix or took other remedial action in the wake of gaining actual knowledge of the allegations of fraud-on-the-formulary committees.”  Notably, although the relator argued that government payors might lack actual knowledge of the alleged fraud, the court pointed to not only “active participation” by state attorneys general but also the “very-well-publicized, high-profile” nature of the litigation.

Second, with respect to causation, the court ruled that the relator’s failure to plead that any state formulary had actually delisted Plavix since the litigation began was fatal to her claims.  Being able to point to some remedial conduct that the allegedly defrauded entity undertakes after learning of the fraud is realistically necessary, explained the court, because otherwise courts would need to “second guess” the entity’s decisions.  The court again relied on the fraud on the FDA line of cases, in which courts have repeatedly balked at the contention that they must second guess FDA’s decisionmaking.

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