Third Circuit Applies Escobar’s Heightened Materiality Standard to Affirm Dismissal of FCA ClaimsMay 11, 2017 – Articles
In United States ex rel. Petratos v. Genentech, Inc., Case No. 15-3805, U.S. Dist. LEXIS 7667 (3d Cir. May 1, 2016) (Petratos), the Third Circuit affirmed dismissal of False Claims Act (FCA) claims pursuant to the heightened materiality requirement articulated by the Supreme Court in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016) (Escobar). By requiring the relator plead an alleged violation or misrepresentation was “material to the Government’s payment decision,” the court rejected FCA claims based on noncompliance with statutory conditions of payment alone and reinforced the FCA’s stringent materiality standard.
Petratos involved a multi-billion dollar cancer drug, Avastin, developed by defendant Genentech. Relator Gerasimor Petratos, former head of Genentech’s health care data analytics team, claimed Genentech suppressed data regarding Avastin’s health risks that caused doctors to incorrectly certify Avastin as “reasonable and necessary” for certain at-risk Medicare patients. As a result, according to Petratos, Genentech submitted false claims for payment to the Medicare program. The Medicare statute provides “no payment be made” for items and services not “reasonable and necessary for the diagnosis and treatment of illness or injury.” 42 U.S.C. § 1395(a)(1)(A). According to Petratos, Genentech submitted false claims to Medicare because the doses of Avastin prescribed were not “reasonable and necessary” and therefore failed to comply with a statutory condition for payment. The district court disagreed. Focusing on the “falsity” element of the FCA, the lower court dismissed the claims on the grounds the FDA approved Avastin, which is a significant factor the Centers for Medicare and Medicaid Services (CMS) use to determine the “reasonable and necessary” status of a drug, and held agencies, not individual doctors, were better equipped to determine if a drug satisfies the standard. Petratos appealed.
The Third Circuit first disagreed with the district court’s reading of the Medicare statute and the determination federal agencies, not individual doctors, retain exclusive authority over the determination of what is “reasonable and necessary” under the statute. The circuit court nonetheless affirmed dismissal on other grounds, holding Petratos could not establish materiality under Escobar. As the court explained, a “misrepresentation about compliance with statutory, regulatory, or contractual requirements must be material to the Government’s payment decision in order to be actionable under the False Claims Act.” Petratos, U.S. Dist. LEXIS 7667, at *12 (citing Escobar, 136 S. Ct. at 1996). This materiality requirement ensures the FCA does not become “an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract.” Id. Quoting Escobar, the Third Circuit explained a misrepresentation is not material “merely because the Government designates compliance with particular statutory, regulatory, or contractual requirements as a condition of payment . . . or because the Government would have the option to decline to pay if it knew of the defendants’ noncompliance.” Materiality lies instead where “the Government consistently refuses to pay claims” based on such noncompliance. In addition, the government’s willingness to pay claims in full despite actual knowledge certain statutory requirements were violated is strong evidence against materiality.
The court affirmed dismissal of Petratos’s claims because, “there are no factual allegations showing that CMS would not have reimbursed these claims had these . . . deficiencies been cured.” Id. at *13. “[A] misrepresentation is not ‘material to the Government’s pay decision,’ when the relator concedes that the Government would have paid the claims with full knowledge of alleged non-compliance.” Id. at *13-*14 (quoting Escobar, 136 S. Ct. at 1996) (emphasis in original). Petratos failed to plead that knowledge of the violation could even potentially influence the Government’s pay decision, let alone actively impacted the Government’s decision to play Genentec’s claims. The mere fact a drug must be “reasonable and necessary” under the Medicare statute as a condition for payment, without more, does not establish materiality.
The court rejected Petratos’ argument materiality existed because, had doctors prescribed less or no Avastin according to the suppressed data, the government would have paid less claims. Id. at * 16. The court found his argument conflated materiality with causation, a separate element under the FCA, and noted materiality cannot be established with simple “but for” causation. Otherwise, “Collapsing the materiality analysis into a causation inquiry would render the materiality element ‘surplussage’ and fail to ‘give effect . . . to every clause and word of the statute,’ which we are loathe to do.” Id. at *16-*17 (internal citations omitted).
In Petratos, the Third Circuit aligned itself with sister circuits applying the heightened materiality requirement under Escobar. See, e.g., United States ex rel. Garzione v. PAE Gov't Servs., Inc., 2016 U.S. App. LEXIS 19814, 2016 WL 6518539, at *1 (4th Cir. Nov. 3, 2016) (“The relevant question is whether the defendant knowingly violated a requirement that the defendant knows is material to the government’s decision to pay a claim”); United States v. Sanford—Brown, Ltd., 840 F.3d 445, 447 (7th Cir. 2016) (dismissing claim where there was “no evidence that the government’s decision to pay would likely or actually have been different had it known of [the violation]”). Relators can no longer rely on “but for” causation or statutory compliance requirements to establish materiality under the FCA. Instead, an alleged violation must affect the government’s decision to pay a claim. Companies responding to an FCA complaint should look to Petratos and its materiality analysis as a potential blueprint for dismissal. If the alleged violation does not impact the government’s payment decision, under Escobar, the claims are vulnerable.