Jul 182017

Ninth Circuit Affirms Viability of FCA Liability for Misrepresentations to FDA

Jaime L.M. Jones and Brenna E. Jenny
,

Both before and after the Supreme Court’s decision in Escobar, courts have hesitated to accept “fraud on the FDA” theories of liability, which posit that misrepresentations aimed at FDA render subsequent requests to government payors false.  Breaking with a growing line of courts, the Ninth Circuit recently articulated a broad understanding of how noncompliance with FDA regulations can form the basis of FCA liability.  See United States ex rel. Campie v. Gilead Sciences, Inc., No. 15-16380 (9th Cir. July 7, 2017).

The relators alleged that the defendant’s manufacturing processes for certain drugs deviated from representations in their New Drug Applications (“NDAs”) and that those drugs were also impacted by contamination problems.  As reported here and here, the district court had rejected the proposition that alleged misrepresentations to FDA could trigger FCA liability.  The government did not intervene but actively participated in the appeal (as discussed here).  Siding with the relators and the government, the Ninth Circuit ruled that the allegations stated three different viable FCA theories of liability.

To reach this conclusion, the panel demonstrated a broad understanding of falsity under the FCA:

  • Factually false certification: According to the panel, the defendant had represented to FDA that its active ingredients were manufactured in certain facilities when they were not.  By providing drugs that were not manufactured fully in accordance with the terms of their FDA-approved NDAs, the defendant sold “nonconforming goods” to the government and the resulting claims for those drugs were factually false.  The panel specifically noted that the nonconformance need not relate to an express contract specification.
  • Implied certification: Citing Escobar, the panel explained that failure to disclose certain regulatory noncompliances can make related representations “misleading half-truths.”  The defendant represented that the drugs at issue were manufactured at approved facilities and not contaminated or misbranded; the panel concluded that these representations were “misleading in this context” because the defendant “misrepresented its compliance with FDA regulations by omitting critical information.”  Although the alleged omissions were directed at FDA, rather than government payors, the panel held that the FCA’s scope is not so narrow as to require that the falsity at issue be directed to the federal entities actually making payment decisions.  By unmooring false representations from payment processes, the panel significantly expands the potential scope of liability in the Ninth Circuit under implied certification theories.
  • Fraud on the FDA: In a brief paragraph, the panel concluded that because relators adequately alleged that the defendant had fraudulently obtained FDA approval for its products, each of the resulting claims for those products was false, even if the claims themselves did not contain false representations.

The panel articulated an equally broad understanding of materiality under the Escobar standard.  The panel noted that materiality under all three theories must be assessed under Escobar, and that the relators’ allegations adequately pled materiality.  In making this assessment, the panel recognized that the relators “face an uphill battle in alleging materiality,” because throughout the litigation the drugs at issue retained their FDA approvals and the government continued to purchase them.  The court also acknowledged that many courts have concluded it would be inappropriate for the judiciary to second-guess, in the absence of agency action, the types of regulatory violations that are material to payment decisions.  Nonetheless, the panel concluded that the relators pled materiality for three reasons.  First, the court dismissed the import of the products’ continued FDA approval because to do otherwise would permit the defendant “to use the allegedly fraudulently-obtained FDA approval as a shield against liability for fraud.”  Second, the panel accepted a point that DOJ in particular had emphasized during oral arguments, namely that “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government” purchased allegedly nonconforming drugs.  Third, the court noted that the defendant ultimately halted its NDA nonconformance, and thus “the government’s decision to keep paying for compliant drugs” was understandable.  The court conceded that the government may regularly pay for products with knowledge that they violated the regulations at issue in the case—which would be fatal to materiality under Escobar—but that such evidence must be developed through discovery in order to defeat relators’ materiality allegations.

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

Jaime L.M. Jones

Chicago

jaimejones@sidley.com

Brenna E. Jenny

Washington, D.C.

bjenny@sidley.com

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