Ninth Circuit Revives False Claims Act Case Applying Escobar Materiality Standard

Courts continue to wrangle over last year’s Supreme Court decision in United Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), and as reported here and here, there appeared to be an emerging trend of courts narrowing the types of False Claims Act (FCA) theories that could survive the more stringent test for materiality established by Escobar.  On July 7, 2017, the Ninth Circuit bucked the trend, reversing the lower court’s dismissal of an FCA case against Gilead Sciences, Inc.

In United States ex rel. Campie v. Gilead Sciences, Inc., the Ninth Circuit revived a complaint that the district court had twice dismissed in 2015 for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).  The United States had declined to intervene in the matter, but submitted an amicus curiae brief supporting reversal of the district court decision.  In its opinion, the Ninth Circuit set forth an in-depth interpretation of the Escobar materiality standard, which was issued post-dismissal, but declined to decide whether the complaint satisfied the heightened pleading standard under Rule 9(b).

The relators alleged that their former employer, Gilead, made false statements to FDA about its compliance with regulations for its HIV drugs. Namely, the allegations concerned Gilead’s concealed use of unapproved ingredients in its drugs, and a failure to report manufacturing problems to FDA.  According to the relators, had FDA been aware of these regulatory violations, it would not have permitted Gilead to market these products.

The court analyzed the three alleged bases for potential FCA liability and determined that the relators alleged sufficient facts to state a claim for relief under all three theories. First, relators alleged that Gilead made false statements that its products were FDA-approved when they were not in fact FDA-approved (“factually false certification” theory); the court confirmed that “a claim for nonconforming goods must include an intentionally false statement or fraudulent course of conduct that was material to the government’s decision to pay.”

The second theory, “implied false certification,” was based on relators’ allegations that by submitting, or causing others to seek, claims for reimbursement for its drugs, Gilead represented that it provided medications approved by FDA that were manufactured at approved facilities and were not adulterated or misbranded. Under Escobar, this theory can be a basis for FCA liability only if (1) the claim makes specific representations about the goods or services provided, and (2) the failure to disclose noncompliance with material requirements makes those representations misleading half-truths.  In determining the first prong, the Ninth Circuit confusingly equated the company’s use of the drug’s names in its reimbursement claims as a representation of regulatory compliance (“these drug names necessarily refer to specific drugs under the FDA’s regulatory regime”).  The court also “assuaged to some degree” the lower court’s concern that the fraud was directed at the wrong agency (FDA rather than the payor agency, CMS), by noting that both agencies fall under the Department of Health and Human Services so that “the fraud was, at all times, committed against [HHS].”

It was undisputed that the government continued to make direct payments and provide reimbursement for the drugs after knowledge of the manufacturing issues. Nevertheless, in determining whether FDA approval was material to the payment decision, the court was persuaded by the United States and relators’ arguments that it should not read too much into FDA’s continued approval of the drugs, and concluded that the issues are matters of proof, not legal grounds for dismissal.  In doing so, the Ninth Circuit reached the opposite conclusion from the First Circuit, which also recognized the practical problems for proof regarding FDA’s actions or inactions, but dismissed the FCA case for a lack of materiality.

The court characterized the relators’ third theory as “promissory fraud,” also known as a “fraud-in-the-inducement” theory. Relators alleged that FDA approval for the HIV drugs was obtained through false statements or fraudulent conduct (i.e., that Gilead lied to FDA regarding manufacturing issues), and thus that each subsequent claim submitted was false due to the original fraud.  The court cursorily concluded that the allegations contained in the complaint supported this theory.

This decision was only the second time the Ninth Circuit has had occasion to apply Escobar; earlier this year, the court affirmed summary judgment in United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) (here), on the grounds that the alleged regulatory violations were not material to the government’s decision to pay.  The Gilead court sought to justify its departure from precedent by describing Gilead’s alleged regulatory violations as affirmative false statements that were intended to conceal noncompliance (altering inventory codes, mislabeling or altering shipping and tracking information) or to obtain FDA approval.  In Kelly, the court was convinced that “there [was] no evidence that [the defendant’s] public vouchers contained any false or inaccurate statements.”  The Kelly court concluded that there was no false claim on which FCA liability could attach.

The Gilead case may be an outlier in the post-Escobar world that can be distinguished by the bad facts alleged in the Complaint.  The standard of review applied by the Ninth Circuit required the court to assume the facts as alleged to be true.  Gilead had no opportunity to respond or rebut these allegations.  It remains to be seen whether those facts are pled with the requisite specificity required for FCA cases, no less proved at trial.