July 14, 2017

Ninth Circuit Finds Materiality in the Face of Continued Government Payment

By Rosie Dawn Griffin

Earlier this month, the U.S. Court of Appeals for the Ninth Circuit revived United States ex rel. Campie v. Gilead Scis., a False Claims Act (FCA) suit against pharmaceutical giant Gilead Sciences and, in doing so, provided the qui tam bar with additional guidance on how the lower courts will interpret the Supreme Court’s emphasis on materiality in Universal Health Services, Inc. v. United States ex rel. Escobar. The suit, brought by two former Gilead employees turned whistleblowers, alleges the company made false statements about its compliance with relevant Food and Drug Administration (FDA) regulations related to certain Gilead-produced HIV drugs. Gilead receives federal reimbursement for the drugs both directly, through the Department of Defense, Department of Veterans Affairs, Federal Bureau of Prisons, USAID, and the Public Health Service, and indirectly via reimbursement programs including Medicare, Medicaid, TRICARE, FEHBP, and the Ryan White Program. In 2008 and 2009 alone, the government paid Gilead more than $5 billion for the three relevant medications: Atripla, Truvada, and Emtiva.

When a pharmaceutical manufacturer seeks necessary FDA approval of a new medication, it must submit a “new drug application” (NDA), in which it reveals the drug’s chemical composition; specifies the facilities where the medication, and its component compounds, will be manufactured; and states the methods and controls used in the manufacturing process. Federal law and regulation empower the FDA to deny an NDA or revoke a previously approved application if it finds facilities or methods inadequate. Any major changes to the manufacture of an approved product require similar approval based on the submission of a “prior approval supplement” (PAS).

The heart of the whistleblowers’ claims is that Gilead’s alleged false statements rendered its drugs unapproved, and therefore ineligible for government payment or reimbursement. The allegedly false statements at issue involved representations Gilead made in its NDAs and PASs about the origin facilities for a key ingredient—FTC—in the three anti-retroviral drugs. The whistleblowers further allege that Gilead failed to notify the FDA about negative test results, contamination, and adulteration problems related to FTC sourced from the undisclosed facilities.

The Ninth Circuit reversed the district court’s 12(b)(6) dismissal of relators’ claims, and taking the relators’ allegations as true for purposes of evaluating Gilead’s motion to dismiss, concluded the whistleblowers had succeeded in presenting three actionable theories of liability under the FCA: factually false certification, implied false certification, and fraud in the inducement.

As for materiality, the Ninth Circuit, applying Escobar’s “demanding” standard, concluded that although “at all times relevant, the drugs at issue were FDA-approved,” and in spite of the fact that the government “continues to make direct payments and provide reimbursements” for the drugs, a determination that such approval and continued payment would preclude FCA liability would be inconsistent with Escobar. In reaching its ruling, the court noted that “to read too much into the FDA’s continued approval—and its effect on the government’s payment decision—would be a mistake” given, among other factors, the “many reasons the FDA may choose not to withdraw a drug approval,” unrelated to concerns about fraud.

The case is the latest in a series of False Claims Act decisions we’ve covered here—including in the FirstSeventhEighth and Ninth Circuits—wrestling with Escobar’s materiality holding.

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