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False Claims Act Statistics, News & Analysis

A Cure for the Common Qui Tam? Escobar’s Materiality Standard and Government Inaction has Pharma Defendant Feeling Good Again

The Third Circuit recently joined the growing number of circuits refusing to find materiality where the government fails to act or intervene in the face of alleged noncompliance. See United States ex rel. Petratos v. Genentech, No. 15-3805 (3rd Cir. May 1, 2017). The D.C. CircuitFirst Circuit; and Seventh Circuit all have reached similar conclusions. The Ninth Circuit will address this issue in the coming months in United States ex rel. Rose v. Stephens Institute.

Relator Petratos was the former head of healthcare data analytics for Genentech, a pharmaceutical company that developed a multi-billion dollar cancer drug called Avastin, which is approved by the FDA and has accounted for $1.13 billion a year in Medicare reimbursements. He alleged that the company concealed information about Avastin’s health risks and argued that, had Avastin’s full risks been made known, many doctors would have limited, or stopped, prescribing Avastin. He claimed that Genentech’s failure to disclose the adverse information resulted in doctors prescribing Avastin in greater quantities and submitting claims for Medicare reimbursement that were not “reasonable and necessary” in contravention of Medicare’s statutory requirement to only pay for such items and services. 42 U.S.C. § 1395y(a)(1)(A). 

The district court dismissed the lawsuit for lack of falsity. The Third Circuit disagreed with the district court’s analysis, but affirmed the dismissal, finding that Petratos had failed to sufficiently plead facts showing materiality.

Specifically, Petratos failed to allege the government would not have reimbursed Medicare claims for Avastin had it known about Genentech’s allegedly withheld information. Petratos did not dispute this shortcoming and, in fact, acknowledged that the FDA would not have acted differently had Genentech told the truth. Genentech, No. 15-3805, at 15. Similarly, he essentially conceded that the government would consistently reimburse claims for Avastin even if it had full knowledge of the health risks. Id. at 14. The Court of Appeals found these admissions doomed his case because, in order for a misrepresentation (here, withholding the adverse health risks) to be material, it must go “to the very essence of the bargain.” Id. at 13 (quoting Escobar). Instead, the Court likened Petratos’s allegations to the sort of “minor or insubstantial” noncompliance that the Supreme Court said should not be litigated under the False Claims Act. Id. at 15. Petratos’s inability to link the withheld information to the government’s decision whether to pay a reimbursement claim meant that his allegations failed to meet Escobar’s “‘demanding’ and ‘rigorous’” materiality standard. Id. at 13, 14 (quoting Escobar).

Further undermining his materiality argument was the fact that Petratos provided the government with non-public information to support his allegations as early as 2010 and 2011, yet neither the FDA nor the DOJ had taken any action against Genentech during the intervening years. The Court concluded that this government inaction provided additional evidence of immateriality. As such, the ailments in Petratos’s lawsuit were simply incurable from the start.

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Ryan D. Stalnaker Associate