On December 26, 2017, defendant Gilead Sciences Inc. filed a petition for certiorari (case number 17-936), requesting the Supreme Court to review a major Ninth Circuit False Claims Act (FCA) ruling on liability in United States of America ex rel. Campie v. Gilead Sciences Inc. The petition argues that the Ninth Circuit adopted an approach to materiality that is inconsistent with the guidelines provided by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, and conflicts with other appellate interpretations of Escobar’s materiality guidance. This is a case with significant implications for the Government contracts community, as the Ninth Circuit’s approach dilutes the protections offered by Escobar to FCA defendants.
The Supreme Court’s June 2016 Escobar decision unanimously held that the implied certification theory of falsity “can be a basis for liability” if (1) “the claim does not merely request payment, but also makes specific representations about the goods or services provided”; (2) “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths”; and (3) the misrepresentation is material to the Government’s decision to pay. Although the Court embraced an expansive approach to falsity, it sought to allay “concerns about fair notice and open-ended liability” by emphasizing the strict application of the scienter and materiality requirements.
Unfortunately, the Supreme Court’s Escobar decision failed to present a clear rule or standard for determining whether an FCA allegation is material. As a result, the materiality requirement has been the subject of active litigation during the past year and a half. Although the Court did not provide a bright line test for determining whether a particular omission of noncompliance is material, the Court provided several illustrations as guidance. For instance, it explained that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”
The courts have generally interpreted this illustration as establishing that continued payment by the Government when agency officials are aware of the alleged non-compliance is sufficient to prove that compliance was not material, or at the very least, places a heavy burden on the relator to provide some explanation or justification why the alleged noncompliance was material to the Government notwithstanding its decision to pay. For instance, in D’Agostino v ev3, Inc., the First Circuit affirmed the district court’s dismissal of allegations that the defendant failed to provide the training it had promised in seeking approval for a medical device on the ground that the FDA was aware of the allegations and failed to take action: “FDA’s failure actually to withdraw its approval . . . in the face of [relator’s] allegations precludes [relator] from resting his claims on a contention that FDA’s approval was fraudulently obtained.” The Third Circuit reached the same conclusion in United States ex rel. Petratos v. Genentech, Inc., affirming the trial court’s dismissal based on the FDA’s “continued . . . approval” of the drug in question despite its knowledge of the facts set forth in the FCA relator’s complaint. The courts of appeal for the Fourth, Fifth, Seventh, Tenth, and D.C. Circuits have dismissed FCA claims in similar circumstances.
In July 2017, the Ninth Circuit became an outlier and departed from the developing consensus. In Gilead, two former employees alleged that Gilead, a pharmaceutical company, made false statements in the course of obtaining FDA approval for several HIV drugs, for which the company later sought reimbursement through federal programs such as Medicare and Medicaid. Among other things, relators alleged that Gilead used ingredients produced by an unregistered source, Synthetics China. Relators also asserted that had the FDA been aware of these regulatory violations, it would have denied approval for these drugs, and Gilead would not have been eligible for payment through any of the federal reimbursement programs. The Government declined to intervene in the relator’s FCA lawsuit. Then, the district court dismissed the case, albeit on grounds that have been largely superseded by Escobar.
In the Ninth Circuit appeal, Gilead pointed out that the FDA was aware of the alleged regulatory violations for years and never retracted its approval or ordered that distribution of the drugs be halted. Instead, the FDA investigated Synthetics China and in 2010, granted supplemental regulatory approval for Gilead’s manufacture of compounds in this facility. And at all times relevant to the relators’ claims, the Government customers consistently paid for the drugs at issue and never sought a refund.
Despite these considerations, the Ninth Circuit revived the relator’s lawsuit, which the appeals court ruled had been dismissed prematurely. The court declined “to read too much into the FDA’s continued approval,” and noted that “there are many reasons the FDA may choose not to withdraw a drug approval.” The court concluded that “relators allege more than the mere possibility that the government would be entitled to refuse payment if it were aware of the violations,” and that the materiality is a “matter of proof” not amenable to disposition on a motion to dismiss.
This decision is at odds with Escobar in several important respects. Most notably, the court misstates the standard for materiality established by Escobar. There, the Supreme Court explicitly rejected as “extraordinarily expansive” the notion that noncompliance “is material so long as the defendant knows the government would be entitled to refuse payment were it aware if the violation.” Rather, courts must look to the “likely or actual behavior of the recipient of the alleged misrepresentation”—i.e., whether the recipient probably would have refused payment or actually has refused payment.
What is more, the Ninth Circuit’s reluctance “to read too much into the FDA’s continued approval” cannot be reconciled with the Escobar Court’s instruction to consider the actual behavior of the recipient. Escobar explained that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” The relators in Gilead cannot dispute that the FDA approved the use of Synthetics China, the Government paid in full for the drugs, the Agency never stopped paying, or that the Government never sought any reimbursement. Finally, the Ninth Circuit’s speculation that the FDA “may” have good reasons not to withdraw approval unrelated to the alleged noncompliance and its conclusion that materiality is a “matter of proof” is contrary to the Court’s instruction (from Escobar) that FCA plaintiffs must “plead facts to support allegations of materiality” with “plausibility and particularity.”
Left in place, the Ninth Circuit’s Gilead decision could greatly expand FCA risks for Government contractors operating in the Ninth Circuit. Government contractors are subject to a myriad of regulatory compliance requirements and contract provisions—many of which are unclear, and others (such as the Government’s Cost Accounting Standards) are notoriously complex. Additionally, even if the alleged non-compliance causes no damage to the Government, the civil penalties for noncompliance can be astronomical. In 2017, the Department of Justice increased the maximum civil penalties for inflation (for the first time since 1999). As a result, the range of penalties that may be assessed for FCA violations soared from $5,500-$11,000 to a new range of $10,781-$21,563 per claim.
For contractors that submit numerous and regular requests for payment to the Government in the course of contract performance, the consequences of this change could be severe. Given the scope of potential FCA liability, Government contractors face tremendous pressure to settle claims made against them—even when such claims lack merit and/or when the Government declines to intervene. To avoid allowing contractors to be unfairly pressured in settlements related to baseless claims, contractors must have a reasonable opportunity to defeat meritless qui tam suits on the pleadings.
The circuit split and salience of the Court’s materiality standard for contractors and grantees provide substantial reason s for the Supreme Court to grant for Gilead’s petition for writ of certiorari. Alternatively, this case could be a strong candidate for summary reversal, given the fact that its ruling cannot be reconciled with Escobar.