United States: Gilead Seeks Supreme Court Review Of Outlier Ninth Circuit FCA Ruling

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.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions