Third Circuit Adopts Heightened Materiality Standard under False Claims Act

On May 1, 2017, the Third Circuit issued a decision in United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481 (3d Cir. 2017) narrowing the ability of qui tam relators to show materiality under the False Claims Act (FCA). In essence, the court held that to be material, a misrepresentation or omission by a drug company must relate to the United States’ decision to pay a claim, not a doctor’s decision to prescribe a drug that would lead to a reimbursement claim to the United States. This is, of course, good news for life sciences companies that may be facing FCA claims.

An FCA violation occurs when a person submits a knowingly false claim for payment to the United States, such as when a claim is submitted to Medicare for services or items that are not “reasonable and necessary for the diagnosis and treatment of illness or injury.” In Genentech, the relator had sued Genentech under the FCA alleging that the drug company had suppressed certain data regarding the severity of side effects when it sought approval of its anti-cancer drug Avastin. The theory of the relator’s claim was that had Genentech not suppressed the data on side effects, physicians would prescribe lower doses or less frequent doses of Avastin, or not prescribe Avastin at all. Thus, argued the relator, the suppression of the data led to over-prescription and therefore claims for payment that were not reasonable and necessary. Essentially, the relator argued that the data was material to the government’s decision to pay Medicare claims for Avastin prescriptions because it would have paid less had the data been known.

The New Jersey District Court dismissed the claim on the basis that the FDA’s approval of Avastin meant that the drug was medically accepted for the indicated treatment, and therefore its prescription and claims made for payment were reasonable and necessary. The Third Circuit affirmed the dismissal, but on different grounds. It rejected the District Court’s holding, clarifying that FDA approval by itself did not insulate a drug manufacturer from an FCA claim. Instead, the Third Circuit held that in determining the reasonableness and necessity of a claim, a court must look at both the FDA approval and the circumstances surrounding the physician’s decision to prescribe.

The Third Circuit based its affirming of dismissal on the relator not adequately pleading the materiality of Genentech’s omissions. It rejected the relator’s theory that had Genentech disclosed the data on side effects, physicians would have prescribed less Avastin and the government would pay less in claims because the relator’s argument describes the materiality of the omission to the physician, not to the government. Relying on the Supreme Court’s 2016 decision in United Health Services v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016), the Third Circuit held that the omission must affect the government’s decision to pay a claim, not the physician’s decision to prescribe a service or drug. Here, there was no allegation that CMS would not have reimbursed the claim if it had known of the suppressed data. In addition, the relator had himself disclosed the data to CMS, which had since paid Avastin-related claims. The Third Circuit held that the government’s post-disclosure payments to be very strong evidence the omission was not material.

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