Ninth Circuit Applies Escobar to Assess Materiality in False Claims Act Case

The Ninth Circuit applied the materiality requirement for claims under the False Claims Act (“FCA”) and provided guidance for the application of the Supreme Court’s seminal decision on the FCA’s materiality requirement in Universal Health Servs., Inc. v. United States ex rel. Escobar.[1]

The False Claims Act’s Materiality Requirement

Under the FCA, “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.”[2]   Put differently, a defendant’s misrepresentation must actually affect or be likely to affect the Government’s payment decision to be actionable under the FCA.

In 2016, the Supreme Court issued its seminal decision on the materiality requirement in Esocbar. As we addressed in a previous blog entry, while Escobar did not necessarily change the law on materiality, it did provide important guidance for relators and lower courts moving forward.  For example, the Supreme Court explained that “proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.”[3]

The Materiality Requirement in Campie

In United States ex rel. Campie v. Gilead Scis., Inc.,[4] the Ninth Circuit clarified the FCA’s materiality requirement in light of Escobar.  In Campie, the Government purchased large quantities of anti-HIV drugs from a drug manufacturer.  Two relators filed a lawsuit under the FCA alleging that the manufacturer made misrepresentations to the Food and Drug Administration (“FDA”) in connection with its application to get the drugs approved.

Specifically, the relators alleged that the manufacturer told the FDA that it would procure one of the main ingredients for the drugs from Canada, Germany, the United States, and South Korea, when in reality it was obtaining the ingredient from an unapproved facility in China.

The relators also alleged that the manufacturer eventually obtained FDA approval to obtain the ingredient from the facility in China, but in doing so misrepresented to the FDA that testing established that the ingredient performed just as well when acquired from China as from the other countries.  In reality, the relators alleged that the manufacturer’s internal testing revealed substantial problems when using the ingredient from China.

Many of the relator’s allegations suggested that the FDA did not withdraw its approval of the drugs even after it learned of the manufacturer’s alleged misrepresentations. Thus, in relevant part, the manufacturer moved to dismiss the relators’ claims on the basis that the misrepresentations to the FDA were not material to the FDA’s continued approval of the drugs.

Before the Supreme Court issued Escobar, the district court granted the manufacturer’s motion to dismiss upon concluding (in relevant part) that the manufacturer’s misrepresentations to FDA were immaterial to the Government’s decision to purchase and pay for the drugs.[5]

On appeal and with the benefit of the Supreme Court’s intervening decision in Escobar, the Ninth Circuit reversed.  The Ninth Circuit rejected the manufacturer’s argument that the FDA’s apparent continued approval of the drugs after learning of the manufacturer’s alleged misrepresentations conclusively precluded a finding of materiality for two reasons.

First, the court noted that this reasoning “would allow [the manufacturer] to use the allegedly fraudulently-obtained FDA approval as a shield against liability for fraud.”[6]  Second, the court explained that “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government paid out billions of dollars for nonconforming and adulterated drugs.”[7]

In sum, the Ninth Circuit concluded that “the issues raised by the parties here are matters of proof, not legal grounds to dismiss relators’ complaint.”[8] Accordingly, the Ninth Circuit reversed the district court’s dismissal of the relators’ claims.

Conclusion

In conclusion, decisions like the Ninth Circuit’s decision in Campie will continue to provide guidance to lower courts, relators, and attorneys as to the proper application of the FCA’s materiality requirement in light of Escobar.

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[1] 136 S. Ct. 1989 (2016), available at https://www.supremecourt.gov/opinions/15pdf/15-7_a074.pdf.

[2] Id. at 2002.

[3] Id. at 2003.

[4] 2017 WL 2884047 (9th Cir. July 7, 2017), available at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/07/07/15-16380.pdf.

[5] United States ex. rel. Campie v. Gilead Scis., Inc., 2015 WL 3659765 (N.D. Cal. June 12, 2015), rev’d and remanded sub nom. United States ex rel. Campie v. Gilead Scis., Inc., No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017).

[6] 2017 WL 2884047 at *11.

[7] Id.

[8] Id.