Since Escobar, FCA defendants have aggressively litigated materiality. They have asked courts to define when materiality can be defeated by a showing that the government knew of an alleged problem but paid anyway, which Escobar called “strong evidence” of immateriality. The Ninth Circuit in United States ex. rel. Campie v. Gilead Sciences, Inc. issued an opinion on July 7 that might make it more difficult for defendants in that circuit to obtain dismissal at the pleadings stage based on this “government knowledge” challenge to materiality. No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017). Fortunately, Gilead’s materiality ruling can likely be limited to the facts before the Court in that case, where the scope and timing of the government’s knowledge was unclear on the pleadings.

In Gilead, relators alleged the defendant made false claims for reimbursement from Medicare, Medicaid, and a number of other federal health care programs for anti-HIV medications. Among several other allegations, relators claimed that Gilead obtained the raw material for its drugs from Chinese manufacturing plants that were not FDA-approved, and that later Gilead manipulated its quality data to obtain FDA approval for using chemicals from those Chinese facilities. Relators argue that as a result; (1) Gilead falsely billed for drugs as FDA-approved that were not in fact the drugs the FDA approved; (2) Gilead impliedly certified that its drugs were FDA approved; and (3) Gilead later fraudulently induced the FDA to approve the drugs manufactured using chemicals from the Chinese facilities.

After the district court dismissed the case for failure to state a claim, the Ninth Circuit reversed. Putting aside the lengthy falsity discussion for another post, the court rejected Gilead’s materiality arguments. To start its materiality analysis, the court noted that “[i]t is undisputed that at all times relevant the drugs at issue were FDA-approved, and that the government continues to make direct payments and provide reimbursements for the sale of the drugs,” and thus “[r]elators face[d] an uphill battle in alleging materiality.” As evidence the government knew about the allegations while it continued to pay Gilead, Gilead pointed to relators’ allegations that the government had continued to pay after a 2010 FDA warning letter regarding impurities, a 2012 inspection and noncompliance letter regarding product from the Chinese facility, 2012 and 2013 inspections of a specific facility, and two recalls in 2014. We agree with Gilead’s arguments that these facts weigh against a finding of materiality since they show that the government was aware of the regulatory non-compliance, yet continued to reimburse Gilead’s claims. The court, however, disagreed.

Blithely disregarding Escobar’s instructions on materiality, the court cautioned that reading too much into the FDA’s continued approval and the government’s continued payment “would be a mistake” because: (1) Gilead could use fraudulently-obtained FDA approval as a shield against FCA liability; (2) there were other reasons the FDA could choose not to withdraw a drug, unrelated to the government’s paying for nonconforming drugs; and (3) even though the government continued to pay bills for the drugs, that Gilead stopped selling drugs using chemicals from China calls into question the weight to give that claim. Thus, the court concluded that “relators allege more than the mere possibility the government would be entitled to refuse payment if it were aware of the violations,” and reversed. What this language means is unclear. Even clear evidence that the government “would be entitled to refuse payment”—as opposed to the “mere possibility” of entitlement to refuse to pay—is insufficient to show materiality under Escobar. Also, it is a stretch to suggest that there was “more than the mere possibility” the government actually would not have paid Gilead had it known of the allegations given the relators themselves alleged facts showing the government knew of the allegations while it continued to pay Gilead.

In seemingly undistinguishable circumstances, earlier this year, the Ninth Circuit in United States ex rel. Kelly v. Serco, Inc. (a case cited by Gilead) reached the opposite result on materiality where there was a showing of government knowledge. Kelly held that “the government's acceptance of [the contractor’s] [performance]” and “the government’s payment of [the contractor’s] [bills]” led the court to “conclude that no reasonable jury could return a verdict for [relators].” 846 F.3d 325 (9th Cir. 2017). Gilead seems to treat government knowledge as a defense to materiality differently than Kelly. We also would argue that this result potentially creates an even more direct split at least with the First Circuit in D’Agostino v. ev3, Inc., 845 F.3d 1 (2016), and the Third Circuit in United States ex rel. Petratos v. Genentech, No. 15-3805, which dismissed similar FCA allegations based on the government’s knowing acquiescence to FDA regulatory violations demonstrated through continued payment of claims.

That said, as troubling as this decision is, there appear to be a couple of ways to limit its reach. First, while there was no dispute that the government continued to pay Gilead, “the parties dispute[d] exactly what the government knew and when, calling into question [the government’s] ‘actual knowledge.’” In denying Gilead’s motion, the court said that “[a]lthough it may be that the government regularly pays this particular type of claim in full despite actual knowledge that certain requirements were violated, such evidence is not before us.” This suggests that even after Gilead, a defendant in the Ninth Circuit that can develop a detailed and/or undisputed history of the government’s knowledge of the alleged problems could still prevail on a motion to dismiss. (Gilead also might have been limited in its ability to develop these facts because it had completed briefing prior to Escobar, and the Ninth Circuit did not call for full supplemental briefing to address Escobar.) Second, relatedly, the court seemed reluctant to too readily find the government had knowledge when there were allegations that Gilead had affirmatively misled the government—allegations that will not exist in the run of cases.

Defendants have requested and received an extension until August 21 to seek a panel rehearing or rehearing en banc. We will continue to monitor this case and another pending case in the Ninth Circuit on materiality, which we have written about previously, United States ex rel. Rose v. Stephens Institute, No. 17-15111. [Disclosure: Vinson & Elkins LLP attorneys filed an amicus brief in support of defendants in Rose.]