On July 7, 2017, the Ninth Circuit Court of Appeals issued an opinion in United States ex rel. Campie v. Gilead Sciences, Inc., holding that violations of Food and Drug Administration (FDA) regulations could create liability under the False Claims Act (FCA). Relying on the Supreme Court’s June 2016 ruling in Universal Health Servs., Inc. v. United States (“Escobar”), the Ninth Circuit found that Gilead Sciences, Inc. (Gilead, a large drug manufacturer) had both factually and impliedly certified compliance with FDA regulations pertaining to its HIV antiretroviral drugs. Overturning the district court’s grant of Gilead’s motion to dismiss, the Court determined that pursuant to Escobar, Gilead’s alleged noncompliance with the relevant regulations, if proven, would have been material to the government’s decision to pay reimbursement claims related to the drugs. As such, said the Court, if the company had indeed failed to comply with applicable FDA regulations, such noncompliance could render its reimbursement claims “false” under the FCA.

The Drug Approval Process and Relators’ Claims

In the United States, when a drug manufacturer intends to manufacture and sell a drug product, it must obtain approval from FDA by submitting a “new drug application” (NDA). The NDA must specify the chemical composition of the drug, the facilities where it will be manufactured (which must also receive approval from FDA and comply with FDA’s “good manufacturing standards”), and the methods and controls used in the manufacturing process. If the manufacturer later seeks a major change to the drug’s manufacturing process, it must submit, prior to distribution, a separate application known as a Prior Approval Supplement (PAS). Importantly, “[b]oth an NDA and PAS require the applicant to certify that all statements in the application are true and agree to comply with all applicable laws and regulations.”

In their Complaint, the qui tam Relators, two former Gilead employees, alleged that Gilead failed to disclose FDA violations pertaining to the production of three anti-HIV drug therapies: Atripla, Truvada, and Emtriva. Specifically, Relators claimed that in the NDAs for these antiretroviral medications, Gilead had represented to FDA that it would obtain the active ingredient for these drugs – emtricitabine, commonly known as FTC – from FDA-registered facilities in the U.S., Canada, Germany, and South Korea. Yet, Relators contended, as early as 2006, Gilead had contracted with Synthetics China to purchase and use FTC produced in an unregistered facility.

Although Gilead ultimately filed a PAS and received FDA approval to use Synthetics China’s FTC in 2010, Relators alleged that Gilead failed to disclose its use of Synthetics China’s FTC for the prior two years. Moreover, Relators further alleged that Gilead had falsified or concealed data in submitting its PAS to get Synthetics China approved by failing to disclose that two of the three batches of FTC received from Synthetics China for internal testing purposes were impure or contaminated. According to Relators, Gilead never notified FDA of the bad test results and, despite knowledge of Synthetics China’s manufacturing issues, allegedly released 77 lots of FTC from Synthetics China prior to receiving FDA’s approval to use Synthetics China. Indeed, Relators contended that Gilead “actively concealed its use of illicit FTC” by importing it through its Canadian facilities, fraudulently obscuring or augmenting the FTC’s labels and relevant paperwork to disguise the location of the FTC’s production, and expressly claiming that the Synthetics China FTC had been produced by one of Gilead’s registered FTC manufacturers.

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Thus, Relators articulated their theory of FCA liability as follows: Gilead’s deceitful conduct – both its alleged false statements regarding the source of its FTC and its alleged introduction of “adulterated” or “misbranded” drugs into interstate commerce (in violation of the Food, Drug, and Cosmetic Act (FDCA)) – resulted in government payments for anti-HIV drugs, payments which were contingent upon FDA approval. “[H]ad FDA been aware of these issues, it would not have approved the use of the Synthetics China manufacturing facility,” and Gilead’s drugs would therefore not have been reimbursable.

However, in an order issued the year before the Supreme Court’s ruling in Escobar, Judge Chen of the U.S. District Court for the Northern District of California granted Gilead’s motion to dismiss. In so ruling, Judge Chen found that Relators had failed to state a claim under either the implied false or factual false certification theories (as detailed below) because, in pertinent part, “Relators have failed to cite to, e.g., a statute, rule, or regulation that makes payment conditioned on supplemental approval by FDA (as opposed to NDA approval).”

Background: Escobar’s “Materiality” Standard

Prior to the Escobar decision, although a majority of circuit courts had accepted the viability of the implied certification theory, the courts had long been split as to the proper scope of the theory. Specifically, many courts followed the Second Circuit’s decision in Mikes v. Strauss, which held that implied certification of compliance with a particular statute, regulation, or contractual provision creates a “false or fraudulent” claim for purposes of the FCA only if the government expressly conditions payment on such compliance. Others, however, followed the First Circuit’s decision in United States ex rel. Hutcheson v. Blackstone for the proposition that such conditions of payment did not need to be expressly enumerated in the text of a relevant statute, regulation, or contract in order to find that a provider of services to the government had implicitly certified compliance with such statute, regulation, or contractual provision.

The Supreme Court held in Escobar that FCA liability for failing to disclose violations of legal requirements does not hinge on whether those requirements were expressly designated as conditions of payment. Instead, such determinations turn upon whether compliance with the relevant statute, regulation, or contractual provision was material to the government’s decision to pay. Under the FCA’s “materiality” requirement, “statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment.”

Importantly, the Court held that materiality “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Indeed, it is insufficient for a finding of materiality “that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Thus, it would not be enough for the government merely to show that, for example, Medicare could have denied reimbursements to a healthcare provider if it had known that the provider was not in substantial compliance with a relevant statute, regulation, or contractual provision. Instead, the government must demonstrate that such noncompliance would have affected the government’s decision to pay.

The Ninth Circuit’s Decision in Campie

In overturning Judge Chen’s order in favor of Gilead, the Ninth Circuit held that Relators had sufficiently pled viable theories of liability under the FCA. Specifically, Relators had adequately articulated three viable bases for FCA liability:

First, Gilead charged the government for approved drugs, knowing that it had delivered unapproved “knock offs” (factually false certification). Second, by selling its drugs to the government and causing others to seek reimbursement for them, Gilead implicitly certified that the drugs were approved for distribution when it knew otherwise (implied false certification). Third, Gilead lied to FDA to secure approval of Chinese facilities, making them eligible for government payments (promissory fraud).

With respect to the factual false certification claim, the Court found that the district court had applied the incorrect legal sub-theory. Indeed, although the lower court had analyzed the factual false certification claim under the “worthless services” theory of FCA liability – dismissing Relators’ claims because, regardless of any regulatory violations, the government had received some value in its purchase of Gilead’s anti-HIV medications – the Ninth Circuit held that the Relators’ claim is actually one of “nonconforming goods.” As such, whether the drugs were “worthless” or not played no role in the analysis. Instead, the Court likened the Relators’ claims to a Fifth Circuit case in which the defendants had sold the United States Navy engine bearings different from the ones contracted for, “admitting that they both reworked and renumbered the bearings to appear compliant with their contract.”

Contrary to the position taken by Gilead, a claim for nonconforming goods is not limited to situations where there is an express specification in a payment contract between a supplier and the government regarding the disputed aspect of the product to be supplied. Such a circumscribed view of [FCA] liability was expressly rejected by the Supreme Court in [Escobar], a case decided after the district court had ruled in this case.

Thus, said the Court, “Gilead committed factually false certification by supplying ‘misbrand[ed]’ goods.” Indeed, “Gilead represented to FDA that its active ingredients had been manufactured in approved facilities that had been registered therewith.”

The Court further upheld the Relators’ implied false certification claim. Citing to Escobar, the Court found that Gilead had not merely requested payment from the government, but had made “specific representations about the good or services provided.” Specifically, by submitting claims for payment for its anti-HIV drugs, “Gilead represented that it provided medications approved by FDA that were manufactured at approved facilities and were not adulterated or misbranded.” The Court noted that Escobar further required that “Gilead’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements must ‘make[] those representations misleading half-truths.” Yet, Relators satisfied this threshold as well in alleging that Gilead misled the government by obtaining unapproved FTC from a Chinese supplier, then re-labeling it to make it look as though it had come from an approved facility. Moreover, Gilead had falsified test results to conceal contamination and adulteration of the Chinese-supplied FTC.

The Court then addressed the district court’s assertion that Relators did not state a claim because the alleged fraud was directed at FDA rather than any payor agency, such as Medicare or Medicaid. The Court first noted that both FDA and the Centers for Medicare & Medicaid Services (CMS) are overseen by the Secretary of Department of Health and Human Services (HHS), and that the fraud was, at all times, directed toward HHS. Importantly, however, the Court went on to hold that regardless of that fact, the FCA “imposes no such limitation.” Indeed, “[i]t is not the distinction between the agencies that matters, but rather the connection between the regulatory omissions and the claim for payment.”

Finally, in finding that Gilead’s noncompliance, if proven, would be “material” pursuant to the standard set forth in Escobar, the Ninth Circuit stated simply that “FDA approval is the ‘the [sic] sine qua non’ of federal funding here.” Indeed, “[a]ll of these payment programs look to FDA-approval as a determination of the ‘safety and effectiveness’ of the drugs at issue.” As such, the Relators had sufficiently alleged “more than the mere possibility” that the government could have refused to pay Gilead for any of its anti-HIV medications had it known about its regulatory noncompliance. Although Gilead argued that the violations were immaterial because the government continued to pay for the medications even after learning of Gilead’s FDA violations, the Court noted that FDA may choose not to withdraw a drug application for a number of reasons wholly unrelated to any government payor’s decision to pay for fraudulently approved, adulterated drugs.

Conclusion

The Ninth Circuit’s holding in Campie – that FDA violations can serve as the basis for FCA liability – represents a significant expansion of the Supreme Court’s “materiality” standard established in Escobar. Indeed, prior to Escobar, courts had held, for example, that once a new drug has received FDA approval, a submission to Medicare for reimbursement of that drug cannot constitute a false claim under the FCA solely because the drug has been, e.g., adulterated. Campie addressed such pre-Escobar holdings and distinguished Gilead’s allegedly deceitful conduct from simple regulatory violations. As such, the extent to which Campie either creates a circuit split or serves as guidance for future courts implementing the Escobar standards in a similar context remains to be seen.