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.

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

The U.S. Court of Appeals for the Fourth Circuit has agreed to hear an interlocutory appeal on the use of statistical sampling as a means of proving liability under the False Claims Act (FCA). While statistical methods of proof have been used with respect to damages, relatively few courts have considered whether such methods are ever appropriate to establish liability under the FCA. Thus, the court’s ruling has the potential to shape practice in this area moving forward.

The case, United States ex rel. Michaels v. Agape, concerns allegations that a network of 24 nursing homes throughout South Carolina submitted fraudulent claims to Medicare, Medicaid and Tricare for care that was not medically necessary. Due to the large volume of potentially fraudulent claims—over 50,000 claims were submitted during the relevant time period—relators sought to use statistical sampling to prove that defendants had submitted false claims. Specifically, the relators sought to have their experts review a small percentage of the claims, determine what percentage of those claims were fraudulent and extrapolate over the entire universe of submitted claims. The district court rejected the approach but certified the question for interlocutory appeal.

The district court was correct to be skeptical of statistical sampling to prove liability, and the relators will have an uphill battle to convince the appeals court that their proposed method of proof is sound.

First, as the district court noted, this is not a case where the relevant evidence is unavailable and statistical sampling presents the only possible method of proof.  In fact, all the documentation concerning the allegedly fraudulent claims exists and is fully accessible. The relators’ argument is simply that it would take too much time to review such a large volume of data. As the district court stated, such shortcuts are inappropriate in a case where the alleged fraud is that services provided were not medically necessary—a “highly fact intensive inquiry involving medical testimony after a thorough review of the detailed medical chard of each individual patient.”

Second, the use of statistical sampling is not guaranteed to shorten the trial because the defendants still retain the right to present evidence on each individual claim. To force the defense to also rely on a sample of the claims and prevent the presentation of evidence on the remainder of the individual claims would, as the defendants argued, deny them of their constitutional right to a jury trial on the facts.

The Fourth Circuit’s ruling on this issue has the potential to either settle the law in this area or open the door to speculative methods of proof in a number of areas of FCA litigation.

In U.S. ex rel. Boise v. Cephalon, Inc. (July 21, 2015), the U.S. District Court for the Eastern District of Pennsylvania held that relators stated a claim under the 31 U.S.C. 3729(a)(1)(G)—otherwise known as the “reverse false claims” provision of the False Claims Act (FCA)—based on alleged violations of a Corporate Integrity Agreement (CIA).

Cephalon’s CIA provided that failure to comply with its obligations “may” lead to monetary penalties, and that the Office of the Inspector General (OIG) could demand penalties (which were stipulated at various dollar amounts in the CIA) after determining that penalties were appropriate. The relators alleged that Cephalon promoted medications off-label and paid unlawful kickbacks in violation of the CIA, entitling the OIG to stipulated penalties. They further claimed that by failing to report the violations and making false certifications of compliance, Cephalon improperly avoided its obligation to pay penalties in violation of § 3729(a)(1)(G).

The court denied Cephalon’s motion to dismiss, in which it argued that the penalty obligations in the CIA were contingent, inasmuch as the OIG could choose whether or not to demand payment of penalties. As such, Cephalon argued they could not give rise to reverse false claims because, absent a demand from OIG, there was no “obligation” to avoid within the statute’s meaning. After comparing other district courts’ treatment of this issue, the court concluded that Cephalon’s obligation to pay stipulated penalties was not contingent, and instead existed regardless of OIG’s payment demand. In reaching this conclusion, the court emphasized that in stipulating penalties, “Cephalon and the government have already negotiated and contracted for the remedies that arise upon a breach of the CIA.”

The result in this case is unsound, as it sets up a potentially endless cycle of FCA liability. Defendants often must enter into CIAs with the OIG in connection with settling FCA claims.  CIAs impose onerous and expensive obligations, typically for five years, as part of the price of resolution and avoiding exclusion.  Under the reasoning of Cephalon, a CIA serves not just as a compliance mechanism but is itself a potential source of new FCA allegations by enterprising relators. Thus, a defendant may close one FCA door while at the same time opening another.

Moreover, in Cephalon, the alleged off-label promotion and kickbacks that the relators say give rise to the CIA violations are, according to the relators’ complaint, also a basis for “non-reverse” false claims under other provisions under the FCA (e.g., presentment, false records, conspiracy). In these circumstances, expanding the scope of potential FCA liability based on the same underlying conduct through a CIA-based reverse false claims theory is unduly expansive and at the same time unnecessarily duplicative. Indeed, to prevail on whether Cephalon failed to properly report or certify compliance under the CIA, the relator still needs to prevail on whether the off-label promotion or kickbacks occurred in the first place.

Cephalon is by no means the only, or the last, word on this issue. In U.S. ex rel. Booker v. Pfizer, Inc., 9 F. Supp. 3d 34 (D. Mass. 2014), the U.S. District Court for the District of Massachusetts came to the opposite conclusion in a case involving similar allegations and a similarly worded CIA. The Booker court focused on the discretionary nature of the language in the CIA—i.e., the fact that violations “may” lead to penalties if the OIG demands them—and held that the CIA did not give rise to an obligation under the FCA’s reverse false claims provision. The court concluded that “[t]he discretion retained by the OIG here is thus the discretion whether to impose a penalty and thereby create an obligation to pay, rather than the discretion whether to enforce and existing obligation to pay.”

The result in Booker prevents CIAs from creating a new set of FCA landmines for providers who are seeking to resolve FCA claims. But as Cephalon demonstrates, the issue is far from settled.