DOJ Defends Viability of Fraud-on-the-FDA Theory in Statement of Interest

Over the past decade, relators have attempted to expand the long-established “fraudulent inducement” theory of liability into a novel “fraud-on-the-FDA” theory. The fraudulent inducement theory posits that when a defendant’s fraudulent conduct induces a government entity to enter into a contract with the defendant, the claims for payment submitted under that contract are false. However, the fraud-on-the-FDA theory stretches this causal chain by contending that fraudulent conduct directed at FDA can render false the claims for payment submitted to an entirely different government entity, such as CMS.  Courts have been divided as to the viability of this theory (as we have discussed here and here).

Relators have led the charge in advancing and litigating this theory of liability, with DOJ largely watching from the sidelines. Indeed, in 2019, DOJ moved to dismiss a fraud-on-the-FDA case over the relator’s objections. However, in a recently filed Statement of Interest, DOJ offered a vigorous defense of the theory. In the underlying case, the relator alleged that a blood glucose test manufacturer knowingly distributed defective test strips after discovering and concealing manufacturing deficiencies, and that these test strips were accordingly rendered adulterated or misbranded in violation of the Food, Drug, and Cosmetic Act (“FDCA”). As a result, the complaint alleged that the defendant caused federal healthcare programs “to reimburse dangerous and worthless glucose testing products.”

DOJ declined to intervene but submitted a Statement of Interest to the district court. DOJ briefly addressed the worthless services theory of liability that was the focal point of the relator’s complaint, explaining that “in some situations, manufacturing deficiencies violating the FDCA or FDA regulations could materially affect the safety, efficacy, or performance of a device such that the product is essentially ‘worthless’ and not eligible for payment by the government.”

However, DOJ devoted the majority of its brief to addressing how the fraud-on-the-FDA theory might also be viable in this case. In its motion to dismiss, the defendant had argued that to identify a false claim based on violations of the FDCA, the relator “must link the alleged conduct, i.e., the violations of the FDCA, with a (1) a ‘false statement or fraudulent course of conduct’ to the government payor; and (2) show that the conduct impacted the government’s decision to pay.” (internal citations omitted).

DOJ disagreed, arguing that when “a manufacturer perpetrates a fraud on the FDA by hiding material information concerning the safety or efficacy of a device—either during or after the approval process or to avoid a recall—and federal healthcare programs then pay for that device, that fraud may be ‘integral to a causal chain leading to payment’ and can be actionable under the FCA.” DOJ reasoned that federal healthcare programs, in deciding whether to pay for a drug or device, rely on FDA to determine whether that drug or device is safe and effective, and FDA relies on manufacturers’ compliance with the FDCA, including adverse event reporting obligations, to assess safety and efficacy. Thus, DOJ took the position that where a defendant’s false statements “masked problems” that “would have prompted the FDA to institute or require a product recall, subsequent claims relating to the affected devices could be rendered ‘false or fraudulent,’ because the government would not have paid the claims for those affected devices but for the defendant’s conduct.”

The district court has yet to rule on the defendant’s pending motion to dismiss. A copy of DOJ’s Statement of Interest can be found here.

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