DOJ Tries to Take Materiality Off the Table for Drug Company Motions to Dismiss

In a recent Statement of Interest, DOJ articulated a problematic, and incorrect, theory of materiality in an apparent effort to make it virtually impossible for defendants to defeat bare allegations of materiality at the motion to dismiss stage in cases that involve allegedly false claims for prescription drugs.

In Escobar, the Supreme Court explained that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material” to the government’s payment decision, and hence noncompliance with such requirements cannot form the basis for FCA liability.  In subsequent Statements of Interest (discussed for example here), DOJ has emphasized the phrase “actual knowledge” in taking the position that CMS’s continued payment of claims while DOJ is aware of the relator’s allegations cannot be taken as evidence of a lack of materiality.  Instead, DOJ maintains, in order to defeat materiality CMS (not law enforcement) must know at the time it pays claims that the defendant actually engaged in a specific course of conduct that is unlawful.

But in a recent Statement of Interest, DOJ adopted an even more extreme interpretation of this language from Escobar, asserting that in order for a defendant successfully to make an argument regarding materiality at the motion to dismiss stage, the pleadings must establish that CMS “had actual knowledge . . . .  of a specific false claim,” rather than a course of unlawful conduct.  This heightened obstacle to defeating materiality cannot be reconciled with Escobar, which clearly speaks to awareness that statutory, regulatory, or contractual “requirements were violated,” and not knowledge of specific false claims that were submitted.

In the case at issue, defendants argued the case should be dismissed on materiality grounds because FDA was aware that a particular drug was allegedly not effective in 30% of the population and changed the label in response, while CMS continued to pay all claims for the drug even after the labeling change.  DOJ took the position that in order for this continued payment to defeat materiality at the motion to dismiss stage, the pleadings would need to reveal that CMS was aware of “a specific patient [that] had been prescribed [the drug] despite being one of the alleged 30% of patients who were non-responders.”  At the same time, DOJ points out in a footnote that CMS does not directly pay claims for drugs prescribed to Medicare or Medicaid beneficiaries.  DOJ’s standard thus seems to demand evidence that CMS would not in the normal course receive.  The cumulative effect is a standard that would be very difficult to meet at the motion to dismiss stage.  This is consistent with DOJ’s stated view that materiality “is normally not appropriate” to decide on a motion to dismiss, which contradicts the Supreme Court’s assurance in Escobar “reject[ing]…[the] assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss.”

We will continue to monitor this case and will post updates on the court’s ruling on DOJ’s interpretation when it is available.

A copy of DOJ’s Statement of Interest is available here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.