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. Circuit; First 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
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.