We’re back with our second installment on the Ninth Circuit’s decision in United States ex. rel. Campie v. Gilead Sciences, Inc., No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017). If Gilead’s materiality ruling left you scratching your head, then best take a seat now, because the falsity analysis is even more puzzling. But peel back the problematic legal analysis, and what seems to have driven the Ninth Circuit to let this case proceed past the pleadings is that relators alleged specific examples of the defendant having misled the government about the product it was selling. Despite our other criticisms of this opinion, Gilead’s emphasis on alleged specific misrepresentations is a saving grace because it is consistent with Escobar’s two-part implied certification test, which requires (1) a specific representation that (2) is made a misleading half-truth by omission.

A quick refresher on the facts: Relators alleged that Gilead, a pharmaceutical company, violated the FCA by seeking payment from Medicare and other government healthcare programs for drugs it claimed were FDA approved, but which were manufactured using chemicals obtained from non-FDA approved Chinese facilities. Relators also claim that the company fraudulently induced the FDA to approve those previously unapproved facilities by providing incomplete, and potentially fraudulent, quality control data.

Though the court complicates its analysis with the window dressing of three different legal theories of falsity — “factual false certification” (by which we think the court means the claims were factually false or false express certifications), implied false certification, and fraud in the inducement — the court’s analysis can be boiled down to: Relators alleged Gilead affirmatively misled the government about the drugs it was selling, first to get drugs that were not FDA approved paid for and then to get the unapproved drugs approved by the FDA, and that these acts of deception are classic fraud. The court seems to have concluded that these allegations are enough to show falsity, and much of the rest of the opinion is devoted to defending this result.

The court rejected defendants’ (we think persuasive) argument that Gilead potentially conflicts with United States ex. rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2014). Omnicare held in similar circumstances that “once a new drug has been approved by the FDA and thus qualifies for reimbursement . . . [a claim for payment] for that drug cannot constitute a ‘false’ claim . . . on the sole basis that the drug has been adulterated.” The court attempts to distinguish Omnicare, asserting that Gilead, unlike Omnicare, affirmatively misled the government first about the fact that its drugs were not the approved drugs and second to then obtain FDA approval. The court’s distinction seems to us to be a stretch. Both Gilead and Omnicare sold drugs they claimed were FDA approved without disclosing that the drugs were in violation of FDA regulations. Thus, both drugs sold by Gilead and Omnicare could have been characterized as “not FDA approved” under Gilead’s reasoning.

The court also rejected Gilead’s argument that claims for nonconforming goods cannot be false if the goods were not worthless. In essence, the court said a defendant cannot tell the government it is selling an FDA approved drug when it is selling an unapproved drug, even though the unapproved drug works and thus has some value. That result could encourage relators to bring zero damage claims, i.e., claims where the government was misled but suffered no damages, which nonetheless can result in significant penalties for defendants. Still, there is a useful takeaway for defendants because the court again embraced the specific statement requirement from Escobar: “[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.” So, if Gilead had simply sold the allegedly unapproved drugs without specifically certifying that the drugs were FDA approved, perhaps the court would have decided the falsity question differently.

The district court had found that Gilead’s misrepresentations to the FDA to obtain approval did not make its later claims for payment from Medicare and other government payors false because the misrepresentations were made to the FDA and not the payor agencies. The Ninth Circuit disagreed and ruled that what mattered was that it could draw a connection between misleading the FDA to obtain approval and the government paying the claims, not whether the payor agency was misled. This again seems to run afoul of Omnicare’s observation that once a drug is FDA approved, it is FDA approved, and the statement that it is FDA approved is true, even if the FDA should not have approved the drug or if the drug was no longer in compliance with an FDA rule. That said, perhaps this ruling can be limited by the fact that it is really part and parcel with the fraud-in-the-inducement claim. If there was no allegation that the FDA’s approval had been obtained with deception, perhaps the result would have been different.

Last week, defendants filed a petition for rehearing en banc, stating that the Ninth Circuit’s opinion is “flatly inconsistent” with direction from Escobar and the opinion of six circuits. Defendants pointed to the lack of government action post-investigation of the relators’ claims to establish that relators’ allegations were not material to the CMS’s decision to pay the claims or the FDA’s approval of the drug. Finally, defendants caution the court that the current holding will result in “open season for enterprising lawyers to pore over regulations in search of trivial infractions and pour into the Ninth Circuit seeking jackpots,” a result highly inconsistent with the purpose behind the False Claims Act. We will continue to monitor this case. [Disclosure: Vinson & Elkins LLP attorneys filed an amicus brief in support of defendants in Gilead.]