Second Circuit Decision A Reminder that Alleged FDCA Violations Don’t Always Equal FCA Violations

Earlier this year, we posted on the still unsettled state of the law regarding whether “FDCA violations may, in certain circumstances, be material to the government’s decision whether to pay for the affected product, and thus relevant in an FCA case.”  In particular, we noted that a recent statement of interest from the U.S. Department of Justice staked out a position that preserved that possibility.  Last month the United States Court of Appeals for the Second Circuit affirmed  the district court’s decision to dismiss a False Claims Act (FCA) (21 U.S.C 3729) qui tam suit, alleging that Grifols USA, Grifols Biologicals, Grifols, S.A., and Grifols Shared Services as defendants (collectively, “Grifols”) concealed and submitted falsified information to the United States Food and Drug Administration (FDA) to obtain FDA approval for manufacture of Gamunex at its new manufacturing facility in Los Angeles in order to receive reimbursement and contracts with various government healthcare programs for Gamunex.

According to the allegations in the complaint, approval of the new Los Angeles manufacturing facility required a Prior Approval Supplement (PAS) and a Pre-Approval Inspection (PAI) of the facility.  The purpose of the PAI was to determine whether the facility has a quality system that was designed to achieve sufficient control over the facility and commercial manufacturing operations and evaluate the facility’s Good Manufacturing Practice (GMP) compliance. The Relator, a former quality assurance plant manager at the Grifols Los Angeles facility, alleged there were discrepancies in the Clean In Place (CIP) equipment qualification.   According to the Relator, these CIP qualification discrepancies “may lead to contamination” and “…over time [lead to] to adulterated [Gamunex] product and significant risk of patient harm.”  The Relator also found various CIP equipment qualification reports with his initials, indicating his approval even though he had never signed those reports.  These CIP equipment qualification reports were provided to the FDA in support of its PAS and PAI to approve the new facility.  The Relator also alleged that rabbits injected with Gamunex had developed a fever, indicating presence of endotoxin in the product, and that these results were concealed by Grifols from the FDA during the PAI.  In sum, the Relator alleged factual support for potential FDCA violation.  As readers of this blog well know, there is no private right of action to enforce the FDCA.  Therefore, in an attempt to turn FDCA violations into an FCA case, Relator asserted violations of the FCA.  The Relator argued that the government healthcare programs require that drugs not be “adulterated,” which means that Grifols’ manufacturing processes must comply with all applicable GMPs.  In addition, Grifols’s eligibility for government contracts is conditioned on FDA approval of Gamunex and FDA approval is conditioned on compliance with GMPs.

The district court dismissed the complaint, concluding primarily that the Relator failed to sufficiently allege that Grifols’ claims for payment to government programs that contained records or statements material to a fraudulent claim.  On October 14, 2022, the 2^nd Circuit affirmed the district court decision similarly, concluding that the Relator did not plausibly allege that any misrepresentation by Grifols materially impacted the government healthcare programs’ payment determination.

This result follows from the Supreme Court’s observation in Escobar that emphasized “[t]he False Claims Act is not an all- purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations.”  FDA regulated companies should not take too much comfort from this and similar results, though, because while relators cannot enforce the FDCA, the FDA certainly can, and one function of qui tam FCA cases is that they prompt the government to evaluate and investigate the allegations in the complaint and written disclosure of the material evidence that the relator possesses.  If a relator discloses to the government material evidence of previously unknown FDCA violations, those violations likely spell trouble, regardless of whether an FCA complaint survives a motion to dismiss.

This blog will continue to monitor how DOJ and the courts analyze the intersection between the FDCA and the FCA.