Petratos v. Genentech: Escobar’s “Heightened Materiality Requirement” Is Significant Pleading Hurdle in False Claims Act Suits
In a recent False Act Claims (FCA) suit involving the blockbuster cancer drug Avastin, the Third Circuit barred a relator’s qui tam suit because his Complaint lacked sufficient factual allegations that, if true, would establish the FCA’s “materiality” element as defined in Universal Health Services v. Escobar. In Petratos v. Genentech, the court held that the facts pled in the relator’s Complaint did not establish that Genentech’s alleged misrepresentations about Avastin were “material to the government’s [Medicare] payment decisions”–one key element of an FCA claim. 855 F.3d 481 (3d Cir. 2017). By applying the “demanding” and “rigorous” materiality standard to evaluate factual allegations at the pleading stage, the Third Circuit’s decision provides FCA defendants with good news and a blueprint for challenging the sufficiency of a qui tam Complaint at the earliest stage of litigation.
District Court Proceedings: Dismissal Based on Falsity Element
The Complaint in Petratos alleged that Genentech misrepresented and suppressed negative data about its drug Avastin’s side effects during the drug’s FDA-approval process, which then caused physicians to prescribe the drug more frequently and at higher doses than they otherwise would have. According to the relator’s theory, the physicians thus submitted—and the government paid—unnecessary “false” claims through the Medicare reimbursement system. The relator’s theory relied on language in the Medicare statute providing that “no payment may be made for items and services that are not reasonable and necessary for diagnosis and treatment.”
The United States District of New Jersey dismissed the relator’s Complaint for failure to allege facts that satisfy the “falsity” element of an FCA claim. The court rejected Petratos’s theory grounded in the physicians’ false claims based on incomplete information, reasoning that the physicians’ decisions were based on the FDA’s approval and CMS’s guidance, and thus, could not be “false” as a matter of law. This analysis hinged on the finding that under the Medicare program, “medically reasonable and necessary” is a determination made by the relevant agency, not individual doctors.
Third Circuit Reaches Same Result but Takes the Different Path
In the relator’s appeal, the Third Circuit affirmed the district court’s judgment, albeit on a different ground supported by the record: the relator could not establish the FCA element of materiality. The court began by reiterating that the Supreme Court’s decision in Escobar established a “demanding” and “rigorous” standard for showing materiality, explaining that it helps ensure that the FCA does not become a “vehicle for punishing garden-variety breaches of contract.” Id. at 489. The Court in Escobar explained that a misrepresentation is not material within the meaning of the FCA if the government pays claims in full despite its actual knowledge that the company violated statutes, regulations, or contracts. Thus, the Third Circuit found that a Complaint alleging an FCA violation “must contain factual allegations showing that CMS would not have reimbursed these claims had these [alleged reporting] deficiencies been cured.” 855 F.3d at 490 (alteration in original). In other words, an FCA complaint must allege facts that, if established, would prove the government’s knowledge of wrongdoing would have influenced its decision to pay. Because the relator did not plead those facts in the Complaint, the alleged misrepresentations could not meet the statutory definition of materiality. Id.
In this case, the relator conceded that CMS consistently reimbursed claims involving Avastin even with full knowledge of Genentech’s purported non-compliance with FDA reporting requirements. Moreover, Petratos failed to cite a single successful FCA claim predicated on reimbursement claims for drugs prescribed for on-label uses. Petratos also acknowledged that he disclosed the alleged reporting deficiencies to the FDA and DOJ in 2010 and 2011; since then, the FDA continued to approve use of Avastin for patients allegedly impacted by the undisclosed data and added three more approved indications for the drug. Finally, and perhaps most importantly to the court, neither the FDA nor DOJ initiated proceedings against Genentech. In the court’s words, where the “expert agencies,” by their inaction, deemed these violations insubstantial, the court declined to permit a private citizen to enforce the regulations through an FCA suit.
Takeaways: Materiality Standard and Effect of Agency Inaction
In Petratos, the Third Circuit expressly “join[ed] the many other federal courts that have recognized the heightened materiality standard after Escobar.” And by requiring plaintiffs to plead specific facts showing the government would not have reimbursed the claims if the alleged company’s misrepresentations were cured, the court significantly reduces relators’ chances of success. Finally, the Petratos court’s express reliance on the “expert agencies” failure to act or intervene in the case, when considered in the wake of the Supreme Court’s landmark ruling in Escobar, serves as additional proof of the barrier that the FCA’s materiality requirement is likely to serve in future FCA relator suits.