A recent circuit court decision will be a welcome development for False Claims Act defendants because it reinforces a significant pleading hurdle for claims to proceed, with the court citing lack of government intervention as a relevant factor. On May 1, the U.S. Court of Appeals for the Third Circuit, in United States ex rel. Petratos v. Genentech Inc., joined several other circuits in recognizing the heightened False Claims Act materiality standard set forth in last year’s landmark Supreme Court case Universal Health Services v. Escobar. Confirming predictions that Escobar’s heightened materiality standard would have a significant impact on False Claims Act litigation, particularly at the pleading stage, the court affirmed the dismissal of Petratos’ complaint because it did not allege sufficiently that Genentech’s noncompliance was “material” to the government’s decision to pay the claims at issue.

Parties involved in False Claims Act litigation should pay attention to the Third Circuit’s decision as it provides guidance on what relators need to do in their pleadings, as well as how defendants can challenge claims at the motion to dismiss stage.

Background

Relator Gerasimos Petratos, former head of health care data analytics for Genentech, alleged that Genentech suppressed data related to its highly prescribed cancer drug, Avastin, in what Petratos described as a formal campaign to avoid analyses and data that might yield negative results and thereby increase business risk.

Petratos alleged that this data would have shown that Avastin’s side effects were more common and severe than reported, that the data would have required the company to file adverse-event reports with the FDA, and that the data could have resulted in changes to Avastin’s label.

Petratos said that claims submitted to the Medicare program for Avastin reimbursement were “false” because Genentech’s failure to disclose the adverse data rendered the claims not “reasonable and necessary for the diagnosis and treatment of illness or injury” under 42 U.S.C. § 1395y(a)(1)(A). But for Genentech’s alleged conduct, Petratos claimed, physicians would have prescribed Avastin less frequently, at lower doses or not at all.

District Court Dismissal

The district court dismissed Petratos’ complaint because it concluded that the disputed Medicare claims were not false because they were “reasonable and necessary” as a matter of law. The Third Circuit disagreed. It found that the district court improperly conflated the requirement that treatment be “medically accepted” — which requires only that it be approved by the FDA for the condition — with the requirement that treatment be “reasonable and necessary.” While the Third Circuit agreed that whether treatment is reasonable and necessary may be a material condition of payment, it found that determination to be a multistep process involving the FDA drug approvals and Centers for Medicare & Medicaid Services (CMS) coverage determinations, as well as the professional judgment by individual doctors that treatment is reasonable and necessary for individual patients in specific circumstances.

Third Circuit Opinion

The Third Circuit upheld the district court’s dismissal on alternative grounds, concluding that Petratos’ allegations did not meet the “demanding” and “rigorous” materiality standard imposed by Escobar. Crucial to the decision was the district court’s finding that “there are no factual allegations showing that CMS would not have reimbursed these claims had these [alleged reporting] deficiencies been cured.” Petratos did not dispute this finding, which the Third Circuit said “dooms his case.”

Citing Escobar, the Third Circuit reiterated that a “misrepresentation is not ‘material to the Government’s payment decision,’ when the relator concedes that the Government would have paid the claims with full knowledge of the alleged noncompliance.

The Third Circuit also drew on evidence of the government’s actual conduct in response to learning of Genentech’s alleged data suppression. Petratos admitted that he disclosed evidence of Genentech’s conduct to the Department of Justice and the FDA in 2010 and 2011. Since that time, the FDA not only left undisturbed its approval of Avastin for the at-risk populations Petratos claimed were adversely affected, but it also approved three more indications for the drug. The FDA did not take any action pursuant to its adverse-event reporting rules nor did it require label changes. The Third Circuit also noted that the DOJ took no action against Genentech and declined to intervene in the suit. That inaction, the Third Circuit found, amounted to a concession that the FDA and the DOJ had deemed any violation insubstantial, further undercutting Petratos’ ability to plead the requisite materiality.

Finally, the Third Circuit made clear that the focus in determining materiality must be on the impact the alleged falsity has on the government’s decision to pay. It expressly rejected Petratos’ arguments focusing on the impact of the alleged misconduct on the intermediary’s decision to prescribe or to bill. That argument, the Third Circuit said, amounted to nothing more than an argument that the alleged fraud was the but-for cause of the submitted claim, and it rejected Petratos’ attempt to conflate causation with materiality. Moreover, the Third Circuit endorsed the Ninth Circuit’s view that causation under the False Claims Act requires something more than but-for causation, i.e., a showing that the falsity is “integral” to causing the payment.

Implications

Petratos stands as one of several examples of courts engaging in a rigorous materiality assessment post-Escobar. Its core message — that to be actionable under the False Claims Act, the relator must plead plausibly that the alleged fraud deceived the government, not merely an intermediary — is a welcome development for defendants, especially when, as in Petratos, it comes at the motion to dismiss stage.

Perhaps most noteworthy is the Third Circuit’s brief mention of the DOJ’s declination as evidence that the alleged violations were not material to the government. The DOJ’s position has long been that a declination is not, in itself, probative of the merits of a relator’s claim because the government may decline for a multitude of reasons, including departmental resources. One reason, of course, may be questions about the materiality of the alleged implied clam. However, the government will not expressly state this, and did not here. Broad adoption of the Third Circuit’s approach of considering declinations as probative of the merits of a False Claims Act claim at the pleadings stage could significantly reduce a relator’s chance of success in a non-intervened case when there are otherwise substantial materiality questions. Further, it could also turn the tide of steadily increasing qui tam recoveries in non-intervened cases.