Medical Device “Fraud on the FDA” Theory Might Be Viable in Minnesota, if Properly Pled

Since the Supreme Court issued its False Claims Act (“FCA”) ruling in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016) courts have grappled with Escobar’s concept of FCA “materiality.” Materiality was described by the Supreme Court as a “rigorous” standard, not met where “noncompliance [with a particular requirement] is minor or insubstantial.” Id. at 1996, 2003. Of particular interest is Escobar’s emphasis on government action as a test for FCA materiality. Specifically, the Court stated that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated . . . [o]r, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated . . . that is strong evidence that the requirements are not material.” Id. at 1995.

We have recently blogged on cases (here and here) where courts applied Escobar’s government action/inaction materiality test to FCA claims predicated on “fraud on the FDA,” and reached opposite results. Now the U.S. District Court for the District of Minnesota has weighed in.

The Court evaluated Escobar and its progeny in deciding a motion to dismiss Relator Steven Higgins’ claims against Boston Scientific Corp. (“BSC”) relating to that company’s sale of its Cognis CRT-D and Teligen ICD defibrillators between 2008-2009. Higgins alleged that BSC defrauded FDA by failing to inform the agency of alleged defects in its defibrillator devices that resulted in insecure connection of the device leads to the header and pulse generator, thereby “undermining the devices’ ability to reliably provide shocks.” 2017 U.S. Dist. LEXIS 138767, at *3 (D. Minn. Aug. 29, 2017). The Complaint alleged that BSC failed to supplement its pending FDA pre-market application (“PMA”) to inform FDA when doctors in Europe began to report problems. FDA cleared the devices in May 2008. After launching the devices in the U.S., BSC allegedly took steps to minimize the number of Medical Device Reports (“MDRs”) that reached FDA as a result of issues with the defibrillator devices. When BSC developed revised versions of the defibrillators to address the alleged defects, the company presented those revisions to the FDA as modifications, rather than corrections to address a defect. FDA approved BSC’s PMA supplements for the modified defibrillators, allegedly based on BSC’s misrepresentations or omissions, in March 2009. In July 2009, the Agency ultimately issued a recall for the original versions of the Cognis CRT-D and Teligen ICD based on numerous MDRs relating to the lead connection issue.

In considering BSC’s motion to dismiss, the Court first determined that Higgins’ claims survived an FCA subject-matter jurisdiction challenge, because – despite FDA’s ultimate recall notice for the defibrillators – there had been no public disclosure of key elements of the alleged fraud (e.g., withholding numerous MDRs from FDA, failure to supplement the PMA upon discovery of device malfunctions in Europe).

The Court next evaluated BSC’s motion under Fed. R. Civ. P. 12(b)(6). BSC argued that “fraud on the FDA” had been rejected as a basis for FCA liability, citing (among others) United States ex. rel. Campie v. Gilead Scis., Inc., C-11-0941 EMC, 2015 WL 106255, at *8 (N.D. Cal. Jan. 7, 2015) (Order Granting Defendants’ Motion to Dismiss); United States ex rel. Modglin v. DJO Glob. Inc., 114 F. Supp. 3d 993, 1019 (C.D. Cal. 2015) (holding that even if a defendant was required to file a PMA Supplement, failing to do so did not support the imposition of FCA liability); United States ex rel. Simpson v. Bayer Corp., No. 05-3895 JLL, 2014 WL 2112357, at *2 (D.N.J. May 20, 2014) (“Simpson II”) (“The theory underpinning the first six counts of Simpson’s Complaint is that Bayer’s compliance with the FDCA’s misbranding provisions is, in and of itself, a condition of payment. The Court again rejects this theory.”). Higgins responded that his FCA claims were predicated on theories of fraudulent inducement, false certification, and “defective device.” The Government filed a statement of interest supporting Higgins’ position that those FCA theories are viable, without taking a position on the merits of the case.

Accepting Higgins’ allegations as true, the Court appeared inclined to accept his FCA theories. The court reasoned that FDA approval is required for a Class III medical device (like the defibrillators) to be considered “reasonable and necessary,” and thus eligible for reimbursement by federal healthcare programs. Higgins had alleged that (1) BSC obtained, and maintained, FDA approval by fraud, and (2) once alerted to issues with the BSC devices, FDA had characterized BSC’s removal of those devices from the market as a “recall.” The Court emphasized that the term “recall” applies “only if the Food and Drug Administration regards the product as involving a violation that is subject to legal action, e.g., seizure.” 21 C.F.R. § 7.46(a). The “gist” of these allegations, the Court determined, might be sufficient to state a FCA claim under the theories of implied false certification and/or fraudulent inducement (the Court declined to address Higgins’ “defective device”/worthless services theory). Slip Op. at *23-24, 29.

However, after several pages of exposition on Rule 12(b)(6), ending with a resounding “maybe,” the Court declined to “decide whether the Amended Complaint states a claim as a matter of law, because” it was not plead with particularity as required by Fed. R. Civ. P. 9(b). Slip Op. at 30. While Higgins alleged particular claims that were submitted to CMS and received federal reimbursement, he did not “plead with particularity the acts taken or statements made to allegedly defraud the FDA.” Id. at 31-32. The allegations of actions taken by BSC to mislead FDA failed to identify “the time, place, and content” of BSC’s alleged false representations or omissions. Id. at 32. The Court indicated that it would expect to see identified portions of BSC’s submissions to FDA that constituted misrepresentations or omissions, and specific MDRs that should have been submitted to the Agency but were not. Moreover, and most importantly, the Court noted that Higgins had failed to plead whether any claims had actually been denied by CMS subsequent to the recall FDA issued for BSC’s defibrillator devices.

This final element – CMS’ response to the recall – appears to us to be relevant to both Rules 9(b) and 12(b)(6). Although the Court dismissed Higgins’ complaint without prejudice, giving him another opportunity to amend his complaint (by September 19, 2017), as well as a roadmap to success for his amended complaint, this point could prove extremely sticky. It is the crux of the materiality test set forth in Escobar. Did CMS actually deny payment of any claims submitted after BSC’s recall, based on that recall? Or did it continue to reimburse for procedures that were performed before the recall even after the recall issued? Given the way that hospital and outpatient services are reimbursed by federal programs, we suspect the latter. If and when Higgins is unable to plead nonpayment of claims with specificity, how will the Court respond? We will keep you posted.