Last year in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (discussed on this blog), the Supreme Court reminded litigants that the False Claims Act “is not an all-purpose antifraud statute.” In that case, the Court expanded upon the FCA’s materiality standard, calling it both “rigorous” and “demanding.” How demanding that standard would be in practice, however, depended on the lower courts. Earlier this month, a Ninth Circuit panel issued an opinion appeared to relax that demanding standard.
In United States ex rel. Campie v. Gilead Sciences, relators alleged that Gilead lied to the FDA to secure approval to manufacture three anti-retroviral drugs using certain facilities in China and Canada. (Relators also alleged that Gilead manufactured the drugs in these facilities before getting FDA approval and falsified records to conceal the fact.) Gilead later submitted requests for payment for these drugs through a number of federal programs, each of which makes FDA approval a precondition for payment. Relators argued that the FDA would not have approved these drugs but for Gilead’s misrepresentations. Thus, they argued that Gilead made false claims when it sought payment for FDA-approved drugs. Gilead countered that, in fact, many of the issues it allegedly misrepresented to secure FDA approval became known to the FDA in the years after approval. Despite this knowledge, the FDA never withdrew its approval.
The Ninth Circuit reiterated Escobar’s materiality standard and observed that “[r]elators thus face an uphill battle in alleging materiality.” Nonetheless, the panel found that standard met. It equated Gilead’s submissions to the FDA seeking approval with actionable false claims. Finding that the misrepresentations to the FDA could have impacted the approval decision, the court concluded that those misrepresentations could therefore have affected the government’s decision to pay. The panel also rejected Gilead’s government knowledge defense of materiality, finding that issue to be a factual one. It observed that there could be many reasons why the FDA declined to withdraw its approval after learning of problems. At its core, the decision’s animating concern is preventing FDA approval from being used “as a shield against liability for fraud.”
This decision reduces the rigor of Escobar’s materiality analysis, allowing the relators to claim a more attenuated connection between the materiality of false statements and the government’s decision to pay. As a result, it substantially increases the opportunities to bring FCA claims under a “fraud-on-the-agency” theory. Late last year, the First Circuit rejected this theory of liability, in part because it found that under Escobar, the fraudulent representation must itself be material to the decision to pay. It thus rejected a fraud-on-the-agency theory of liability. Should more courts follow the approach in Gilead, however, FCA defendants in regulated industries may find themselves increasingly re-litigating agency proceedings in FCA cases.