Vasilios "Bill" Kalogredis. Vasilios “Bill” Kalogredis.

On May 1, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of Petratos v. Genentech, 855 F.3d 481 (3d Cir. 2017) (Petratos), and joined several other circuits in recognizing the heightened False Claims Act (FCA) materiality standard set forth in last year’s landmark Supreme Court case, Universal Health Services v. Escobar, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016) (Escobar). On appeal from the U.S. District Court for the District of New Jersey, the Third Circuit nixed an FCA suit accusing Genentech, Inc. of defrauding Medicare by concealing side effects of its multibillion dollar cancer drug, Avastin, because the relator-whistleblower did not show that Genentech’s alleged failure to report safety information was relevant to government reimbursement for the medication.

The relator-whistleblower, Gerasimos Petratos, was the former head of health care data analytics at Genentech. After leaving the company in 2011, Petratos filed a qui tam action alleging that Genentech concealed information about Avastin’s health risks. Specifically, Petratos alleged that Genentech ignored and suppressed data that would have shown that Avastin’s side effects were more common and severe than reported, that the data would have required the company to file adverse-event reports with the FDA, and that the data could have resulted in changes to Avastin’s label.

Petratos claimed that Genentech’s failure to disclose the adverse data caused doctors to incorrectly certify Avastin as “reasonable and necessary” for certain at-risk Medicare patients. The Medicare statute provides, in relevant part, that “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. Section 1395y(a)(1)(A). As a result, according to Petratos, Genentech submitted false claims for payment to the Medicare program 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 dismissed Petratos’s complaint on the grounds that the disputed Medicare claims were not false because they were “reasonable and necessary” as a matter of law.  Focusing on the “falsity” element of the FCA, the lower court dismissed Petratos’s claims because 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. The lower court stated that agencies, not individual doctors, were better equipped to determine if a drug satisfies the standard. Because Avastin was approved by the FDA and reimbursable under CMS guidance, the relevant prescriptions were “‘reasonable and necessary’ as a matter of law,” and thus could not give rise to “false” claims. Petratos appealed.

The Third Circuit affirmed on alternative grounds, concluding that Petratos’s allegations did not meet the “demanding” and “rigorous” materiality standard imposed by Escobar. The Third Circuit disagreed with the district court’s reading of the Medicare statute and its determination that federal agencies, not individual doctors, retain exclusive authority over the determination of what is “reasonable and necessary” under the statute. Instead, the Third Circuit determined that the “reasonable and necessary” assessment is a complex process involving the FDA, CMS and individual doctors. The court based its decision on two conclusions: “CMS and the FDA are best positioned to make high-level policy decisions–such as issuing national coverage determinations and drug approvals;” and “doctors are best suited to evaluate each patient and determine whether a treatment is “reasonable and necessary for that individual patient,’” citing the Medicare Benefits Policy Manual.

Based on this assessment, the Third Circuit unanimously held that Petratos could not establish materiality under Escobar, which the FCA defines as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” 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,” (citing Escobar, 136 S. Ct. at 1996). This materiality requirement ensures that the FCA does not become “an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract.” Thus, the court reasoned, 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.” Instead, materiality lies 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.

Citing the lower court’s decision, the Third Circuit affirmed dismissal of Petratos’s claims because, “there are no factual allegations showing that CMS would not have reimbursed these claims had these [alleged reporting] deficiencies been cured.” Petratos did not dispute this finding, which the Third Circuit said “dooms his case.” The court went on to explain, “simply put, a misrepresentation is not ‘material to the government’s payment decision,’ when the relator concedes that the government would have paid the claims with full knowledge of the alleged noncompliance.” Thus, the court held, where a relator does not plead that knowledge of the violation could influence the government’s decision to pay, it is, at a minimum, very strong evidence that the misrepresentation is not material.

The Third Circuit also expressly rejected Petratos’s arguments focusing on the impact of the alleged misconduct on the doctor’s decision to prescribe or to bill. That argument, the Third Circuit said, amounted to nothing more than an argument that the alleged fraud was the “but for” cause of the submitted claim, and it rejected Petratos’s attempt to conflate causation with materiality. Moreover, the Third Circuit endorsed the Ninth Circuit’s view that causation under the FCA requires something more than but for causation, i.e., a showing that the falsity is “integral” to causing the payment.

The Third Circuit’s decision in Petratos underscores what many courts, including the U.S. Supreme Court in Escobar, have recently held: that when the government continues to pay claims despite knowledge of an alleged fraud, the relator’s allegations cannot satisfy the FCA’s demanding materiality requirement, seee.g.D’Agostino v. ev3, No. 16-1126, 2016 WL 7422943 at *5 (1st Cir. Dec. 23, 2016); U.S. ex rel. McBride v. Halliburton, No. 15-7144, 2017 WL 655439, at *5-6 (D.C. Cir. Feb. 17, 2017); Abbott v. BP Exploration & Production, 851 F. 3d 384, 388 (5th Cir. 2017); Nelson v. Sanford-Brown, 830 F.3d 445, 447 (7th Cir. 2016); Kolchinsky v. Moody’s., No. 12-1399, 2017 WL 825478, *5 (S.D.N.Y. Mar. 2, 2017).

Petratos makes it clear that a violation will be found material under the FCA if it is likely to impact payment, whether or not the violation is a violation of an express condition of payment. However, relator’s can no longer rely on “but for” causation or statutory compliance requirements to establish materiality under the FCA. Instead, the relator must plausibly plead that the alleged violation affected the government’s decision to pay a claim to survive Escobar’s heightened materiality standard.

—Rachel E. Lusk, an associate with Lamb McErlane, contributed to this article.

Vasilios (“Bill”) J. Kalogredis is Chairman of Lamb McErlane’s Health Law Department. He represents many medical and dental groups and thousands of individual physicians and dentists.