United States ex rel. Campie v. Gilead Sciences, Inc.
Anne K. Walsh & Andrew J. Hull
Why This Case Made the List
The Supreme Court’s 2016 decision in Universal Health Services. v. United States ex rel. Escobar1 renewed the focus on the strict materiality standard contained in the False Claims Act (FCA), and has been applied by numerous courts to find that materiality does not exist if the government failed to take regulatory action on the conduct underlying an FCA claim. Although several circuit courts have cited Escobar to affirm dismissals of cases against life sciences companies, the Ninth Circuit’s decision in United States ex rel. Campie v. Gilead Sciences., Inc.2 deviated from its sister circuits. This uneasy circuit split is why Gilead made the list, and the U.S. Supreme Court ultimately may settle the issue.3
In the mid-2000s, Gilead Sciences, Inc. (Gilead) sought and received approval for three new drug applications (NDAs): Emtriva, Truvada, and Atripla. Each of these anti-HIV drugs contained the active ingredient emtricitabine, commonly referred to as FTC. Before approval, Gilead told FDA that it would source FTC from certain suppliers located in Canada, Germany, South Korea, and the United States.
Jeff and Sherilyn Campie, who were married and, at the time, former and current Gilead employees, respectively, filed a qui tam complaint4 alleging that Gilead obfuscated the actual place of manufacture of the active ingredient for the three drugs. Specifically, the relators claimed that Gilead actually contracted with an unregistered Chinese company, Synthetics China, to manufacture FTC, and that Gilead stopped using Synthetics China as a supplier in October 2011 after a number of contamination issues resulted in recalls of the drug product. Relators also alleged that Gilead falsified or covered up data in statements to FDA. According to the relators, had FDA been aware of these issues, the agency never would have approved Gilead to use FTC supplied by the Synthetics China facility. Because Gilead sold drugs containing unapproved FTC, and because the drugs were reimbursed by federal healthcare programs, relators contended that Gilead’s actions resulted in Gilead submitting, or causing to be submitted, false claims to the federal government in violation of the FCA.
District Court Dismissals
The United States declined to intervene in the case, and relators proceeded with litigation on their own. The District Court dismissed the first amended complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim under the FCA. Relators filed a second amended complaint, which contained an implied false certification theory. Under this theory, relators claimed Gilead was liable because the company had impliedly certified that it had complied with a statute or regulation, and that compliance was a condition to payment by federal healthcare programs. Relators also alleged a factually false certification theory—that Gilead misrepresented the goods or services provided to the government because the drugs at issue were “nonconforming.” The court did not address the FCA materiality requirement specifically, but determined that relators had failed to state a plausible claim and dismissed the case with prejudice in June 2015.5
Ninth Circuit Reversal
In July 2017, the Ninth Circuit reversed. The court rejected the lower court’s finding that relators had not adequately pled the FCA elements, and specifically addressed the materiality standard in Escobar, which had been issued in the interim. The Ninth Circuit acknowledged that the “materiality standard is demanding,” that materiality “cannot be found where noncompliance is minor or insubstantial,” and that it is not “sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.”6 The Ninth Circuit also stated that it is “undisputed that at all times relevant, the drugs at issue were FDA-approved, and that the government continues to make direct payments and provide reimbursements for the sale of the three drugs.”7 As such, relators faced “an uphill battle” in sufficiently alleging materiality.8
The Ninth Circuit was unconvinced, however, by Gilead’s argument that the government’s inaction (i.e., continued reimbursement) with full knowledge of the alleged violations demonstrated that those violations were not material to the government’s payment decision. The court distinguished the government’s continued payments upon Gilead’s change to an approved supplier as not as significant as if the government had “continued to pay despite continued noncompliance.”9 The Ninth Circuit noted that the parties disputed “exactly what the government knew and when”: “Although it may be that the government regularly pays this particular type of claim in full despite actual knowledge that certain requirements were violated, such evidence is not before us.”10
The court also expressed skepticism over the First Circuit’s analysis in D’Agostino v. ev3, Inc.,11 in which that court concluded that FDA’s failure to withdraw approval of a medical device upon learning that approval was fraudulently obtained crippled any attempt to state a claim that the fraud on FDA was material to the government’s payment decision. The Ninth Circuit stressed that “mere FDA approval cannot preclude [FCA] liability” where false claims “procured certain approvals in the first instance.”12 Thus, the Ninth Circuit reversed and remanded the case to the district court, concluding that the “issues raised by the parties here are matters of proof, not legal grounds to dismiss relators’ complaint.”13 The court noted that the lower court had not addressed whether relators’ complaint met the heightened pleading standards under Federal Rule of Civil Procedure 9(b), but declined to address that question, thus leaving open the door that the case could separately be dismissed on that ground—a basis that other courts have used to throw out similar cases.14
Impact of the Decision
The Gilead decision created a split among the circuit courts regarding the application of Escobar’s materiality standard. As discussed below, the First, Second, and Third Circuits, at least, have found that no materiality exists when FDA (or the Centers for Medicare and Medicaid Services (CMS)) failed to take action despite knowledge of the alleged regulatory violation. Whether an FCA complaint can survive the pleading stage now depends on the circuit in which the complaint is filed. The First Circuit’s decision in D’Agostino was the first significant post-Escobar case to address the effect of Escobar on routine claims by relators that a drug or device manufacturer obtained product approval by FDA through fraudulent statements (i.e., a “fraud-on-FDA” theory). The First Circuit affirmed the dismissal of a qui tam complaint alleging that a device manufacturer’s fraudulent representations to obtain FDA’s approval caused the submission of false claims. The First Circuit emphasized that the government’s decision to continue reimbursement of procedures using these devices despite knowledge of the alleged fraud, along with the fact that FDA had not withdrawn approval of the device, “preclude[d]” the relator “from resting his claims on a contention that the FDA’s approval was fraudulently obtained.”15 In the court’s words: “To rule otherwise would be to turn the FCA into a tool with which a jury of six people could retroactively eliminate the value of FDA approval and effectively require that a product largely be withdrawn from the market even when the FDA itself sees no reason to do so.”16
In another decision from the same circuit issued after Gilead, United States ex rel. Nargol v. DePuy Orthopaedics, Inc.,17 the First Circuit reconfirmed its position in D’Agostino and criticized the Ninth Circuit’s reasoning in Gilead. DePuy was another fraud-on-FDA case in which relators argued FDA would not have approved the medical devices absent the alleged misrepresentations. The First Circuit agreed that relators had failed to adequately state a claim because FDA did not take the device off the market even after learning of the alleged misrepresentations. The court highlighted that the Gilead decision did not offer a solution to the observation in D’Agostino that “six jurors should not be able to overrule the FDA,” or to the “problems of proving that FDA would have made a different approval decision in a situation where a fully informed FDA has not itself even hinted at doing anything.”18
The Third Circuit similarly found no materiality in United States ex rel. Petratos v. Genentech Inc.19 The relator claimed that a manufacturer’s alleged concealment from FDA of an approved drug’s health risks resulted in the submission of false claims that did not meet the Medicare statute’s “reasonable and necessary” requirement.20 The Third Circuit held that because the complaint “essentially concede[d] that CMS would consistently reimburse these claims with full knowledge of the purported noncompliance,” relator could not meet Escobar’s materiality threshold.21 The court also explained that FDA’s continued approval of the drug after learning of the alleged misinformation more than seven years prior, combined with FDA’s approval of three new indications for the drug during that time, the lack of any FDA enforcement action, and DOJ’s inaction and declination to intervene, all supported the lack of materiality. An unpublished decision by the Second Circuit, Coyne v. Amgen, Inc.,22 reiterated that a relator must plausibly claim that alleged misrepresentations—in this case, a manufacturer’s misrepresentations on a drug’s packaging and marketing materials about increased quality of life—”caused the government to make the reimbursement decision.”23 The Second Circuit affirmed dismissal because, despite learning that the manufacturer eventually changed its labeling with FDA, CMS “did not alter its reimbursement practices . . . or exercise any independent discretion from the presumption of FDA approval.”24
Petition for Certiorari
Seizing on this split, and the uncertainty regarding Escobar’s materiality standard, Gilead filed a petition for certiorari with the Supreme Court at the end of 2017.25 The company presented the following question: “Whether an FCA allegation fails when the Government continued to approve and pay for products after learning of alleged regulatory infractions and the pleadings offer no basis for overcoming the strong inference of immateriality that arises from the Government’s response.”26
A number of groups have submitted briefs in support of Gilead, including the U.S. Chamber of Commerce, America Health Care Association, Pharmaceutical Research and Manufacturers of America, Biotechnology Innovation Organization, and the Washington Legal Foundation. Relators filed their brief in opposition in early March 2018, arguing that there is no circuit split and that the Ninth Circuit’s decision was correct.27 The Supreme Court should make a determination on whether to grant Gilead’s petition in the coming months. The circuit split and differing interpretations of the Court’s decision in Escobar make this case, in Gilead’s words, an “excellent vehicle” for providing clarity and certainty among the federal courts.28
Uncertainty in a Post-Escobar World
The clear trend among the circuits is that FDA inaction—i.e., allowing products to stay on the market, even in the face of a government investigation—is a materiality hurdle that relators cannot overcome at the pleading stage.29 The Supreme Court should adopt that approach. To rule otherwise would conflict with the Court’s concern in Escobar that the FCA not be turned into a “vehicle for punishing garden-variety breaches of contract or regulatory violations.”30 And it would subvert the role of the FCA as a tool for protecting the federal government from fraudulent claims for money by using it in place of agency regulatory enforcement to ensure compliance. As the First Circuit noted in the D’Agostino decision: “The FCA exists to protect the government from paying fraudulent claims, not to second-guess agencies’ judgments about whether to rescind regulatory rulings.”31
Anne K. Walsh is a director at Hyman, Phelps & McNamara, P.C., where she investigates, negotiates, and litigates cases brought under the Federal Food, Drug, and Cosmetic Act and the False Claims Act.
Andrew J. Hull is an associate at Hyman, Phelps & McNamara, P.C., where he defends clients facing False Claims Act suits and other enforcement actions initiated by the Department of Justice (DOJ), the Food and Drug Administration (FDA), and the Drug Enforcement Administration (DEA).
- 136 S. Ct. 1989 (2016). For an in-depth analysis of the Escobar decision, see Mark E. Haddad & Naomi A. Igra, Universal Health Services v. Escobar, in Food & Drug Law Institute, Top Food and Drug Cases, 2016 & Cases to Watch, 2017, at 67 (Gregory J. Wartman ed., 2017).
- 862 F.3d 890 (9th Cir. 2017).
- Petition for Certiorari, Gilead Scis., Inc. v. United States ex rel. Campie, No. 17-936 (Dec. 26, 2017).
- United States ex rel. Campie v. Gilead Scis., Inc., No. C-11-0941 (N.D. Cal.) (date of original complaint under seal).
- Order Granting Defendant’s Motion to Dismiss, United States ex rel. Campie v. Gilead Scis., Inc., No. C-11-0941, 2015 U.S. Dist. LEXIS 77261 (N.D. Cal. June 12, 2015).
- Gilead, 862 F.3d at 905 (quoting Escobar, 136 S. Ct. at 2003).
- Id. at 906.
- Id. at 906-07.
- 845 F.3d 1 (1st Cir. 2016).
- Gilead, 862 F.3d at 905.
- Id. at 907.
- See, e.g., United States ex rel. Higgins v. Boston Sci. Corp., No. 11-cv-2453, 2017 WL 3732099 (D. Minn. Aug. 29, 2017).
- D’Agostino, 845 F.3d at 8.
- 865 F.3d 29 (1st Cir. 2017).
- Id. at 36.
- 855 F.3d 481 (3d Cir. 2017).
- See 42 U.S.C. § 1395y(a)(1)(A).
- Genentech, 855 F.3d at 490.
- No. 17-1522-cv, 2017 WL 6459267 (2d Cir. Dec.18, 2017).
- Id. at *6.
- Id. at *7.
- Petition for Certiorari, Gilead Scis., Inc. v. United States ex rel. Campie, No. 17-936 (Dec. 26, 2017).
- Id. at i.
- Brief in Opposition, Gilead Scis., Inc. v. United States ex rel. Campie, No. 17-936 (Mar. 5, 2018).
- Petition for Certiorari at 28, Gilead Scis., Inc. v. United States ex rel. Campie, No. 17-936 (Dec. 26, 2017).
- See United States ex rel. Ruckh v. Salus Rehabilitation, LLC, No. 8:11-cv-1303, 2018 WL 375720 (M.D. Fla. Jan. 11, 2018) (dismissing a $350 million judgment awarded by jury because there was no evidence that the non-compliance was material to the government’s payment decision).
- Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003 (2016).
- D’Agostino v. ev3, Inc., 845 F.3d 1, 8 (1st Cir. 2016).