(Alleged) False Statements to FDA Do Not Necessarily a False Claim Make

Lynn C. Tyler*

In connection with an FDA pre-approval inspection of a pharmaceutical manufacturing facility, a company makes false statements and provides false records to FDA inspectors. The company passes the inspection, which allows it to manufacture and sell the product, including to government healthcare programs. Sounds like the makings of a good False Claims Act case, right? Although making false statements and providing false records to FDA can have a variety of serious adverse consequences, the answer in this case is “not necessarily” based on the Second Circuit’s decision in United States ex rel. Yu v. Grifols USA, LLC.

I. Why It Made the List

In light of the eye-popping recoveries that sometimes arise out of False Claims Act (FCA) cases, they often garner a lot of attention and it is important to know the metes and bounds of their elements. This case illustrates some of the limitations that can stand in the way of (or prevent) one of those recoveries.

II. Discussion

A. Factual Background

Because the case was dismissed for failure to state a claim, the facts are taken from the Amended Complaint as summarized in the district court’s opinion. The relator, Allen Timothy Yu, was a resident of California and a former employee of the defendants. The defendants (collectively, “Grifols”) were commonly-owned suppliers of plasma-derived products and pharmaceuticals. Specifically, Yu worked for Grifols Biologicals, LLC, which manufactures intravenous immunoglobulin (IVIG).

In 2011, Grifols converted a manufacturing facility in Los Angeles to produce Gamunex, a pharmaceutical for treating chronic inflammatory demyelinating polyneuropathy and other autoimmune disorders. The Los Angeles plant conversion required Grifols to have FDA conduct a pre-approval inspection of the facility and its equipment and also review Grifols’ manufacturing validation records for IVIG products. Grifols hired Yu in 2011 during the plant approval process to serve as a quality assurance project manager. His job was to perform routine and ad hoc quality assurance reviews of qualifications, investigations, documentation, audits, protocols, and final reports on topics that FDA would review.

In January, 2014, months before FDA planned to inspect the Los Angeles plant, Yu discovered a discrepancy in the signed Installation Qualification (IQ/OQ) Final Report for CIP-14, one of thirteen Clean-In-Place (CIP) systems used to clean IVIG manufacturing equipment. During his examination of CIP-14, Yu noticed that a specific diaphragm control valve, which controlled the emission of certain cleaning chemicals, had been validated as stainless steel when in fact it was made of plastic. After raising that discrepancy with his supervisor, Yu inspected the CIP-14 further and found at least another nineteen signed and dated entries in the CIP-14 IQ/OQ Report that did not agree with the actual equipment on the cleaning system. He told his supervisor about those discrepancies and was asked to investigate other CIP systems.

In the course of his inspections, Yu found over one hundred “discrepancies” in the CIP systems’ hardware, components, and utilities. These errors consisted primarily of incorrectly validated amperage for various parts; parts that had been previously validated with incorrect part numbers and model numbers that were either not specified, not documented, or were documented but not actually found on the equipment; and missing, incorrectly documented, or undocumented identification tags on various parts. For instance, a phase reactor that supplied power to a pump motor drive “had 18 fundamental amps and not the 25 fundamental amps as required” by relevant protocol specifications. In addition, three large valves were “incorrectly documented as having been tri-clamped, but Yu found that they were actually welded.”

According to Yu’s Amended Complaint, those and other discrepancies “may lead to contamination of the IVIG equipment;” “may lead and [are likely] to lead to inaccurate testing results;” “may lead to contamination;” and “could impact [the CIP systems’] maintenance, service and, [sic] overall performance, thereby reducing the systems’ efficacies, and leading over time to adulterated IVIG product and the significant risk of patient harm.”

Yu presented his findings to his supervisor again and they were reported to at least three others further up the chain. The Director of Validation reported that the department might have been understaffed and the validation engineers probably did not do their work correctly. The Vice-President of Quality Assurance stated that he did not want Yu’s findings to be documented as a deviation or a corrective and preventative action, though Grifols’ validation procedures required such documentation. Yu was never interviewed by anyone at Grifols about his findings, nor was he aware of any investigation conducted by Grifols after he presented his findings.

In March, 2014, Yu was asked to approve various IQ/OQ reports that allegedly had been corrected. Because the updated reports attributed the current Good Manufacturing Practice (cGMP) discrepancies to “inadvertent error,” Yu refused to approve them. Later, during employment litigation Yu brought against Grifols, Yu saw both 1) reports that appeared to contain his forged initials indicating his approval, and 2) errors that he had originally identified that had still not been corrected. “To the best of Yu’s knowledge,” Grifols made these falsified Final Reports available to FDA for its pre-approval inspection of the Los Angeles plant and used them to create the summaries that were submitted to FDA.

Further, Yu “learned about significant fraud” regarding rabbit bacterial endotoxin tests. Rabbits that had been injected with Gamunex had developed a fever. In a conversation with his supervisor, Yu came to believe that Grifols had concealed the results of these rabbit tests. According to Yu, two of his superiors were apparently successful in fraudulently deleting data sets regarding the rabbit testing from Grifols’ laboratory information management system and thereby concealed them from FDA. FDA approved the Los Angeles plant in January 2015. Several confidential witnesses also reported ongoing cGMP violations at the Los Angeles plant, some of which were allegedly related to a 2019 recall. Nevertheless, Yu did not allege that FDA had ever withdrawn the plant’s approval.

B. Legal Framework

To manufacture and sell a drug in the United States, a company must submit a new drug application (NDA) to FDA. An NDA asks FDA to approve a new drug for sale and marketing in the United States based on information submitted from the drug manufacturer, including clinical trial data and test results establishing the quality of the drugs manufactured at a specified facility. One element of an NDA requires the manufacturer to identify the production facilities and certify that they comply with the cGMP regulations set forth in 21 C.F.R. Parts 210 and 211.

The Federal Food, Drug, and Cosmetic Act (FDCA) provides that FDA “shall issue an order refusing to approve the application” if:

the methods used in, or the facilities or controls used for, its manufacture, processing, packing, or holding do not conform to or are not operated or administered in conformity with current good manufacturing practice to assure that such drug meets the requirements of this chapter as to safety and has the identity and strength, and meets the quality and purity characteristics, which it purports or is represented to possess.[1]

The FDCA’s definition of an adulterated drug uses this same language.[2] In addition, FDA may withdraw its approval of an NDA if the NDA “contains any untrue statement of material fact.”[3] FDA’s regulations also provide that the failure of a drug to comply with cGMP regulations, “shall render such drug to be adulterated” under the FDCA.[4]

C. Court’s Analysis

The district court dismissed Yu’s Amended Complaint because it did not adequately allege that the false statements or falsified records were material to a claim for payment from a government healthcare program. Thus, the Second Circuit applied the standards under Fed. R. Civ. P. 12(b)(6) when reviewing the district court’s decision. Under Rule 12(b)(6), a complaint must plead enough facts to “state a claim to relief that is plausible on its face.” The requirement to accept all factual allegations as true does not extend to allegations that are “naked assertions” or “conclusory statements.”[5] In addition, when alleging fraud, a plaintiff must meet both the plausibility standard of Fed. R. Civ. P. 8 and satisfy the heightened pleading standard of Fed. R. Civ. P. 9(b), which requires the complaint to state with “particularity the circumstances constituting fraud.”

The False Claims Act imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”[6] The Supreme Court has held that in some circumstances “implied false certification” can amount to a false or fraudulent claim.[7] In particular, at least where a claim for payment makes specific representations about the goods or services provided, but then fails to disclose noncompliance with material statutory, regulatory, or contractual requirements, the omission may render the representations “misleading half-truths.”[8]

In addition to alleging a particular misrepresentation, a plaintiff must plead sufficient facts to allege plausibly that the misrepresentation is material.[9] The FCA defines materiality as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”[10] The Supreme Court has identified three factors relevant to the materiality assessment: “(1) whether the government expressly designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment; (2) the government’s response to noncompliance with the relevant contractual, statutory, or regulatory provision; and (3) whether the defendants’ alleged noncompliance was ‘minor or insubstantial.’”[11]

As to the first Escobar factor, the court said a contract that merely incorporates by reference and lacks a provision that “specifically identifies any of the contractual or regulatory requirements” that Grifols allegedly violated as an express condition of payment, “at most, weighs neutrally in the materiality analysis” for this factor.[12] The court found Yu did not identify any provisions in the contracts that expressly conditioned payment by the government healthcare programs on Grifols’ compliance with any specific cGMPs.

On the second Escobar factor, the Supreme Court has explained that evidence the government “consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement” at issue can prove materiality.[13] The court found that Yu had failed to support his claims with any non-conclusory factual assertions plausibly alleging that in other cases with comparable cGMP violations, the government healthcare programs declined to pay claims, or that in cases with comparable cGMP violations, FDA declined to approve, or withdrew approval of, the manufacture of a drug.

Finally, the third Escobar factor is the degree of the defendants’ non-compliance. In this case, the court found that Yu failed to allege plausibly that the alleged violations substantially comprised the government’s goal to obtain safe and effective Gamunex or, in other words, that Yu had only alleged the cGMP violations “may” or “could” cause negative consequences, in part because he mostly alleged errors in documentation. The court concluded that Yu did not suggest that Grifols’ alleged violations have resulted in “significant financial cost to the government” or demonstrate that the violations go to the “heart of the bargain,” this factor weighed against a finding of materiality.

In short, Yu’s allegations did not move the needle on any of the three materiality factors identified in Escobar, so the Second Circuit affirmed the district court’s dismissal of the case.

III.   Impact of the Case

As is often true of Supreme Court decisions, there has been debate about the breadth of the Escobar decision construing the False Claims Act. The Second Circuit’s decision in this case shows that at least in that jurisdiction, the Act’s materiality requirement will be strictly construed. It is a meaningful requirement that a plaintiff must allege, and ultimately be prepared to prove, with particularity in the words of Fed. R. Civ. P. 9(b). Not every misrepresentation at some point in the process of securing FDA approval for a drug will sustain a claim under the False Claims Act. The case is also a powerful reminder of the impact of the Supreme Court’s decisions in Twombly and Iqbal. It is unthinkable that Yu’s Amended Compliant would have been dismissed under the notice pleading standards that prevailed before Twombly and Iqbal.


* Lynn C. Tyler is a partner in the Indianapolis office of Barnes & Thornburg LLP. He concentrates his practice in FDA counseling and intellectual property litigation and opinions.

[1]   21 U.S.C. §§ 351(a), 355(d).

[2]   21 U.S.C. § 351(a).

[3]   21 U.S.C. § 331(a).

[4]   21 C.F.R. § 210.1.

[5]   Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). See also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

[6]   31 U.S.C. § 3729(a)(1)(A).

[7]   Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176, 186 (2016) (“Escobar”).

[8]   Id. at 190.

[9]   United States ex rel. Foreman v. AECOM, 19 F.4th 85, 109 (2d Cir. 2021) (“Foreman”).

[10]  31 U.S.C. § 3729(b)(4).

[11]  Foreman, 19 F.4th at 110.

[12]  Id. at 110.

[13]  Escobar, 579 U.S. at 195.