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Escobar in Action – Materiality is a Tall Hurdle to Clear

In the recent Third Circuit decision United States of America, ex rel. Gerasimos Petratos, et al. v. Genentech Inc; et al., No. 15-3805, 2017 WL 1541919 (3d Cir. May 1, 2017), the Third Circuit addressed a “false certification claim” as defined by the Supreme Court in its False Claims Act decision Universal Health Servs., Inc. v. United States ex rel. Escobar, __ U.S. __, 136 S. Ct. 1989, 1996 (2016).  Petratos involved a multi-billion dollar cancer drug, Avastin, developed by Genentech.  Petratos, bringing suit as a qui tam relator, alleged that Genentech suppressed data about the drug’s risks that caused doctors to incorrectly certify it was “reasonable and necessary” for certain at-risk Medicare patients.  According to Petratos, Genentech’s motive for suppression of the risk data was to avoid potential FDA action that could have resulted in far less use of the drug, including by Medicare patients.

The core of the court’s analysis focused on whether the district court used the correct standard for measuring what is medically “reasonable and necessary.”  While disagreeing with district court’s standard for evaluating “reasonable and necessary,” the Third Circuit found another ground justifying affirmance.

Relying on Escobar, the court put strong emphasis on the materiality requirement to state a False Claims Act claim for false certification:

Just last year in Universal Health Services v. United States ex rel. Escobar, the Supreme Court confirmed that “[a] misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.” 136 S. Ct. 1989, 1996 (2016). The Court described this standard as “demanding” and “rigorous,” id. at 2002–03, and explained that a material misrepresentation is one that goes “to the very essence of the bargain,” id at 2003 n.5 (citations omitted). This requirement helps ensure that the False Claims Act does not become “an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract.” Id. at 2003 (citation and internal quotation marks omitted).

The Supreme Court also provided guidance as to how the materiality requirement should be enforced. It explained that a misrepresentation is not material “merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment … [or because] the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Id. Materiality may be found where “the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.” Id. On the other hand, it is “very strong evidence” that a requirement is not material “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated.” Id. Finally, materiality “cannot be found where noncompliance is minor or insubstantial.” Id.2

Petratos’s allegations do not meet this high standard. As the District Court noted: “there are no factual allegations showing that CMS would not have reimbursed these claims had these [alleged reporting] deficiencies been cured.” App. 18. Petratos does not dispute this finding, which dooms his case. Simply put, a misrepresentation is not “material to the Government’s payment decision,” when the relator concedes that the Government would have paid the claims with full knowledge of the alleged noncompliance. See Universal Health Servs., 136 S. Ct. at 1996 (emphasis added). Similarly, we think that where a relator does not plead that knowledge of the violation could influence the Government’s decision to pay, the misrepresentation likely does not “have [ ] a natural tendency to influence … payment,” as required by the statute. See 31 U.S.C. § 3729(b)(4). At a minimum, this would be “very strong evidence” that the misrepresentation was not material. Universal Health Servs., 136 S. Ct. at 2003.

Petratos, No. 15-3805, 2017 WL 1541919, at *4-*5. Importantly, the Third Circuit noted that the mere fact that certification was a condition of payment, does not satisfy the materiality requirement as set forth in Escobar.

Petratos attempted to argue that while the supposedly false certification of “reasonable and necessary” would not have affected the government’s willingness to pay, it did affect physicians’ willingness to prescribe the drug and the supposedly false certifications were thus material.  The Third Circuit made quick work of this argument and held that the recipient of the false certification must be the government, not a third party.

The Third Circuit concluded its analysis by joining “the many other federal courts that have recognized the heightened materiality standard after” Escobar. The Third Circuit’s Petratos decision is yet another case demonstrating the tall hurdle the government or a qui tam relator must clear in order to even properly plead, let alone prove, a false certification claim under the False Claims Act.

 

by E. Barney Robinson, III

Barney Robinson