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Ninth Circuit Issues Expansive Reading of Escobar

By Sean J. Hartigan, Iris E. Bennett, Lidiya Kurin

The Supreme Court’s June 2016 decision in Universal Health Servs., Inc. v. United States ex rel. Escobar provided guidance on when an implied certification can be the basis of liability under the Civil False Claims Act (FCA).[1] Specifically, Escobar held that an implied certification theory can succeed when 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 … statutory, regulatory, or contractual requirements makes those representations misleading half-truths;” and 3) the misrepresentation is material to the government’s payment decision.[2] Although Escobar set out these requirements, questions have remained as to how they would be interpreted at the trial court level, including what constitutes “specific representations about the goods or services provided,” when an omission makes these representations “misleading half-truths,” and how precisely to analyze materiality. A recent opinion, which reinstated a case dismissed for failure to state a claim prior to the Escobar decision’s issuance, sheds light on the Ninth Circuit’s expansive interpretation of each of these factors. 

In United States of America ex rel. Campie v. Gilead Sciences, Inc., two former employees accused Gilead of a fraudulent course of conduct related to the Food and Drug Administration (FDA) approval process for drugs for which the company later sought reimbursement under federal programs such as Medicare and Medicaid.[3] According to the complaint, Gilead used ingredients from unapproved Chinese facilities, and obscured and augmented labeling and paperwork to ensure that its medications received or retained FDA approval, which in turn made the drugs eligible for such reimbursement. The relators alleged several different theories of liability, including nonconforming goods, fraud in the inducement, and implied certification. The Ninth Circuit found that each such theory of liability was viable and analyzed implied certification under the Escobar test described above.[4]

First, the court explained its view that inclusion of the specific drug names at issue in claims for payment was a sufficient “specific representation[] about the goods or services provided” to meet this element of the Escobar test: “Just as payment codes correspond to specific health services, Escobar, 136 S. Ct. at 2000 … these drug names necessarily refer to specific drugs under the FDA’s regulatory regime.”[5] The court further found sufficient the relators’ allegation that these “specific representations” were false or misleading because Gilead requested payments for drugs that “fell outside of that approval and omitted critical information regarding compliance with FDA standards.”[6] Finally, the court agreed that relators’ arguments on materiality were sufficient, despite the fact that 1) the false statements were not made to the payor agency; and 2) the government allegedly continued to pay for the medications (which retained their FDA approval at all relevant times) after it became aware of the FDA violations that formed the basis of the alleged fraud.

Although each of these determinations may be appropriate given Gilead’s specific facts, together they seem to establish a low bar in the Ninth Circuit to meet Escobar’s implied certification test. First, it remains difficult to see when a claim for payment does not contain the “specific representations” required by Escobar, if the very name of the product is such a representation. Although the drug names in Gilead referenced FDA-approved items, product identifications in other circumstances could easily be converted into “specific representations” by referring back to a contract specification or other requirement. It is also unsettling that the court found these falsehoods could have been material to the payment decision, despite the fact the statements were not made to the payor agency making that decision.[7] The Ninth Circuit, while recognizing that “it is not the purpose of the False Claims Act to ensure regulatory compliance,” asserted its view that the relators had alleged “more than the mere possibility that the [Center for Medicare & Medicaid Services] would be entitled to refuse payment” if it were aware of the earlier false statements to the FDA, thus “sufficiently pleading materiality at this stage of the case.”[8] Again, one can envision a number of regulatory violations, about which implied representations are made to non-payor agencies, which would allow relators to plead “more than the mere possibility” the government would be entitled to refuse payment if it knew of those violations.

The current posture of Gilead should also be kept in mind. Specifically, as a reconsideration of a Fed. R. Civ. P. 12(b)(6) dismissal at the district court level, the Ninth Circuit took all factual allegations as true and examined only whether those allegations support a cause of action. As the facts of this case are developed in the trial court, the application of the Ninth Circuit opinion could be cabined in some ways. Nevertheless, we believe this opinion's broad reading of Escobar’s requirements reflects the increased risk for companies doing business with the government to be subject to FCA liability on an “implied certification” theory in the post-Escobar era.

 

[1] Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).

[2] See Escobar, 136 S. Ct. at 1996, 2001. The misrepresentations must also be made with the requisite scienter.

[3] United States of America ex rel. Campie v. Gilead Sciences, Inc., No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017).

[4] Although the government had not intervened in the case, it filed a Statement of Interest with the court, describing several of the positions the court ultimately adopted.

[5] Gilead, 2017 WL 2884047 at *7.

[6] Id.

[7] The Ninth Circuit noted that because the FDA and the Center for Medicare & Medicaid Services are both part of Health and Human Services (HHS), the “fraud was, at all times, committed against” HHS. Id. at *8. The court further explained, however, that this was not necessary for potential liability to attach: “But more importantly, the False Claims Act imposes no such limitation. … It is not the distinction between the agencies that matters, but rather the connection between the regulatory omissions and the claim for payment.”  Id. (citation omitted).

[8] Id. at *11. With respect to whether the government had knowledge of the false statements, the court noted this was a factual question to be developed at trial.