The Northern District of California recently dismissed for a second time a complaint brought against Gilead Sciences, Inc. that alleged, in part, that Gilead violated the False Claims Act, 31 U.S.C. § 3729 (“FCA”), by submitting or causing to be submitted false claims for payment to the Government under Medicare and Medicaid programs.  See United States ex rel. Campie v. Gilead Sciences, Inc., No. C-11-0941 (N.D. Cal. June 12, 2015).   Specifically, the Relators who brought the lawsuit against Gilead maintained that Gilead violated the FCA by failing to seek supplemental approval from the Food and Drug Administration (“FDA”) for a drug product, as purportedly required.

To provide some brief background, the Food, Drug and Cosmetics Act (“FDCA”) requires that drug companies like Gilead obtain initial approval in the form of a new drug application, or NDA, prior to distribution of the drug.  If there are later major changes to the drug product, the company is then required to seek further approval in the form of a “prior approval supplemental”, or PAS.  According to the Relators, Gilead received an NDA from the FDA, but thereafter changed its manufacturing source to an unapproved company and continued to distribute the drug without seeking a PAS.  As such, the Relators claim, the drugs were not approved under the FDCA and were, therefore, not eligible for payment under the Medicare and Medicaid programs.  According to the Relators, this rendered all claims submitted for Medicare and Medicaid reimbursement “false” claims under the FCA.

There are two main theories through which courts have analyzed the falsity of claims under the FCA.  First, a claim may be factually false, meaning that the claimant actually misrepresents the goods or services that were provided to the Government.  Second, a claim may be legally false, meaning that there is a false certification of compliance with an applicable statute, regulation, or contract and Government payment is conditioned upon that compliance.  A claim may be legally false either expressly or impliedly, with the latter circumstance arising when a claimant seeks payment without disclosing that it has violated a condition that would affect its eligibility for Government payment.  Courts have also more recently applied a “fraud-in-the-inducement” theory of liability, which imposes liability for claims submitted under a contract entered into by the Government and a defendant, when the contract was induced by fraud.

In the case before the Northern District of California, the Relators sought to charge Gilead with FCA violations based on an implied certification theory, as well as a factual falsity theory.   Relators based their implied certification theory on the argument that, because a condition of payment for Medicare and Medicaid is FDA approval, Gilead’s failure to seek supplemental approval for its drug via a PAS meant that any Medicare or Medicaid claims submitted to the Government were false. The Court, however, disagreed, noting that the only condition for payment was NDA approval, so Gilead’s failure to get supplemental approval did not preclude eligibility for Government payment.   Interestingly, the Court also supported its position from a policy perspective, noting that were it to allow an FCA claim based on the failure to seek supplemental approval (the need for which is based on the more ambiguous “major manufacturing change”), the Court would have to involve itself in interpreting the quite complex FDCA regulatory process – a “daunting task.”

When addressing the Relators’ “factual falsity” claim, the Court was similarly skeptical.  While the Court quickly dispensed of the Relators’ first theory of factual falsity as duplicative of their legal falsity claims, the Court notably addressed the Relators’ second theory—that the drug was not approved by the FDA and was therefore “worthless”—in a far more detailed fashion.  Importantly, the Court explained that “[t]o have a factually false certification claim based on worthless services, the services must be medically worthless.”  While the Relators had made allegations that suggested a reduced medical value, the Court found that they had failed to plead no medical value at all.  This, the Court held, effectively put an end to their claims.

In light of other recent case law dismissing or affirming the dismissal of FCA claims that were based on allegations that the defendant violated a condition of payment, the Gilead decision is particularly compelling for companies looking to defeat FCA claims.