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Third Circuit Affirms Dismissal of FCA Suit against Genentech Based on Supreme Court’s Materiality Standard

On May 1, 2017, the US Court of Appeals for the Third Circuit affirmed the dismissal of United States ex rel. Petratos, et al. v. Genentech, Inc., et al., No. 15-3801 (3d. Cir. May 1, 2017). On appeal from the US District Court for the District of New Jersey, the Third Circuit reinforced the applicability of the materiality standard set forth by the US Supreme Court in Universal Health Services v. Escobar. Per the Court, the relator’s claims implicate “three interlocking federal schemes:” the False Claims Act (FCA), Medicare reimbursement, and US Food and Drug Administration (FDA) approval.

The relator, Gerasimos Petratos, was the former head of health care data analytics at Genentech.  He alleged that Genentech suppressed data related to the cancer drug Avastin, thereby causing physicians to certify incorrectly that the drug was “reasonable and necessary” for certain Medicare patients. This standard is drawn from Medicare’s statutory framework: “no payment may be made” for items and services that “are not reasonable and necessary for the diagnosis and treatment of illness or injury.” 42 U.S.C. § 1395y(a)(1)(A) (emphasis added).  In turn, the Centers for Medicare and Medicaid Services (CMS) consider whether a drug has received FDA approval in determining, for its part, whether a drug is “reasonable and necessary.” Petratos claimed that Genentech “ignored and suppressed data that would have shown that Avastin’s side effects for certain patients were more common and severe than reported.” Petratos further asserted that analyses of these data would have required the company to file adverse-event reports with the FDA and could have triggered the need to change Avastin’s FDA label.


Supreme Court Vacates First Circuit’s Expansive View of Implied Certification Liability

On June 16, 2016, the Supreme Court of the United States issued an important decision regarding the implied certification theory of liability under the False Claims Act (FCA) in which it vacated a decision of the US Court of Appeals for the First Circuit and remanded the case for further proceedings in accordance with the opinion.  A copy of the decision can be found here.

Because of McDermott’s ongoing role in this active matter, we will not be providing extensive public analysis at this time.  However, we are pleased that the Supreme Court has vacated the opinion of the First Circuit Court of Appeals ruling against Arbour Counseling Services. The Court expressly and unanimously “disagree[d] with” the lower court’s view and stated that “[t]he False Claims Act does not adopt such an extraordinarily expansive view of liability.” It is significant that the Court remanded to the lower court to reconsider the case under the new, rigorous standard of materiality stated by the Supreme Court.  Our client looks forward to litigating the case on remand and is confident of prevailing under the new Supreme Court standard.

Condition of Payment Limitation on Implied Certification Cases is Alive and Well in the D.C. Circuit

To the extent there was ever any doubt about the vitality the “condition of payment” limitation on “implied certification” False Claims Act (FCA) cases in the D.C. Circuit, the court put that doubt to rest on Friday, July 10 in United States ex rel. Davis v. District of Columbia, No. 14-7060, 2015 WL 4153919 (D.C. Cir. Jul. 10, 2015).

Davis involved a relator’s allegations that the District of Columbia failed to maintain records to support the cost reports it submitted to the D.C. Medical Assistance Administration, in violation of recordkeeping regulations. The court reversed the district court’s award of summary judgment for the relator, on the grounds that the relator had not shown a “knowing” violation of the regulations. However, in doing so, it took the opportunity to clarify its stance on implied certification cases under the FCA:

To establish knowledge on the basis of an implied certification, Davis had to prove that the District… knew both that it violated a legal obligation and that its compliance was a condition of payment (emphasis added).

The court went on:

Not all failures to comply with a federal statute or regulation expose a provider to liability under the False Claims Act. “[A] false certification of compliance with a statute or regulation cannot serve as the basis for a qui tam action under the [False Claims Act] unless payment is conditioned on that certification.” United States ex rel. Siewick v. Jamieson Sci. & Eng’g, Inc., 214 F.3d 1372, 1376 (D.C. Cir. 2000).  In other words, a defendant may be held liable under the False Claims Act for falsely certifying it complied with a statute or regulation only if “certification was a prerequisite to the government action sought.” Id. The parties dispute whether the regulations the District allegedly violated are conditions of payment, rather than conditions of participation in the Medicaid program. Several of our sister circuits have recognized the difference and cautioned against treating all Medicare and Medicaid regulations as conditions of payment.

The D.C. Circuit chose not to decide whether the regulations at issue were, in fact, conditions of payment, grounding its decision in resolution of the knowledge question. Accordingly, it did not need to say all that it did about the necessity of a condition of payment in an implied certification case.  But the fact that it addressed this issue—and answered it in the affirmative—is a welcome development for FCA defendants, given the court’s decision several years ago in United States v. Sci. Applications International Corp., 626 F.3d 1257, 1266 (D.C. Cir. 2010) (“SAIC”). SAIC contained expansive language onto which some relators have seized, interpreting that case as a rejection of the condition of payment requirement in favor of a more amorphous and fact-driven materiality standard. Davis silences those erroneous interpretations.

FCA Defendant Secures Post-Trial Directed Verdict in Implied False Certification Case

In United States of America ex rel. Ortolano v. Amin Radiology, a Florida federal court recently vacated a jury’s verdict for a Relator, providing another example of the critical importance of the distinction between a “condition of participation” and a “condition of payment” when assessing a False Claims Act (FCA) suit involving an implied false certification theory.

Following a five day trial in May 2014, civil FCA defendant Amin Radiology (Amin) was hit with a $1.47 million jury verdict, with the jury finding that the practice had submitted 426 false claims to the government for PET/CT scans. The Relator was a former employee who filed suit in 2010 under both the federal and Florida False Claims Acts. The case hinged on evidence that Amin billed to the government scans that had been performed by general radiographers, rather than nuclear radiological technologists. In 2011, the federal government chose not to intervene in the case. Supported by uncontroverted testimony from a Florida state employee, Relator successfully argued at trial that, as a matter of Florida law, only licensed and certified nuclear medicine technologists were authorized to conduct PET/CT scans.

Nevertheless, upon consideration of Amin’s post-trial Rule 50(b) motion for judgment as a matter of law, the Middle District of Florida vacated the jury’s verdict on January 28, 2015, and directed judgment for Amin. The Court’s ruling turned on the absence of any direct fraud evidence (i.e., evidence to show that services billed to the government were not provided or were medically unnecessary) and the critical distinction between conditions of participation and conditions of payment in government health care programs. The absence of any evidence to show a violation of a condition of payment ultimately proved fatal for the Relator’s case. These arguments proved successful even though they had never been raised by Amin’s attorneys until after trial began.

The Court first rejected the Relator’s argument of direct fraud, finding that there was no legal support for the assertion that Medicare requires PET/CT scans to be performed in toto by nuclear medicine technologists. Regardless of Florida law, the Court was persuaded that Medicare has no such requirement for physician practice groups such as Amin Radiology, and that therefore there was no per se false claim under the FCA.

Turning to the Relator’s express and implied false certification theories, the Court quickly disposed of the express false certification theory, finding a “conspicuous – and fatal – lack of evidence establishing that Amin ever made any written, express certification to Medicare, Medicaid or Tricare that its PET/CT scans were performed in compliance with Florida licensing requirements.” This left the Relator’s FCA action with only an implied false certification theory, which required establishing that Amin’s violation of the Florida licensing requirement was a violation of a condition of payment (i.e., that the paying government agency would not have paid for the PET/CT scans had it known of Amin’s lack of compliance with that particular state law).

Relator relied fully on two authorities to support his implied [...]

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