United States: DOJ Announces To The Supreme Court That It Will Seek To Dismiss False Claims Act Case, And Affirms Position On Materiality Under Escobar

Last Updated: December 6 2018
Article by Brian P. Dunphy and Laurence J. Freedman

The United States Department of Justice (DOJ) filed an amicus curiae brief with the Supreme Court on November 30, 2018 in a closely watched False Claims Act (FCA) lawsuit, after the Supreme Court asked for the Solicitor General's views. In the brief, DOJ explained its position on the FCA's frequently litigated "materiality" standard. But DOJ also stunned observers by advising the Supreme Court that, if the Supreme Court agrees with its view that the case should not be dismissed on materiality grounds but remands the case to the district court, DOJ will seek to dismiss the long-running qui tam FCA lawsuit because the case is "not in the public interest."

DOJ's amicus brief is particularly notable because it addresses two developing areas of FCA law and practice: the evolving analysis of "materiality" under Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) ("Escobar"), which we previously discussed, and DOJ's statutory right to seek dismissal of declined FCA cases. To our knowledge, DOJ has never invoked this authority, or signaled it would, initially at the Court of Appeals or Supreme Court level. In January 2018, DOJ signaled in a new policy memo that it would more routinely consider invoking this authority at the time qui tam filing are declined, but few expected this dramatic move.

Relators' FCA allegations

Relators filed this qui tam FCA lawsuit in 2010. According to relators, defendant Gilead Sciences, Inc. allegedly represented to the FDA in its New Drug Applications for three HIV drugs that it would obtain an active ingredient for these drugs, called FTC, from specific, approved facilities. Relators contend that defendant obtained FTC from an unapproved manufacturing facility in China. Relators further allege that when defendant later sought supplemental approval from FDA to use the facility to manufacture FTC, which FDA granted, the submission to FDA seeking approval purportedly contained false information. Defendant stopped using the facility in 2011.

Relators allege that drugs that contained FTC sourced from the Chinese facility from the outset were not eligible for reimbursement from government health care programs. Further, Relators allege that, even though FDA later approved the facility, FDA would not have approved it absent the allegedly false information.

Gilead argues that the alleged misstatements are immaterial, as the government know about the allegations since at least 2010, issued a warning letter, and inspected its facilities. With this knowledge, FDA never withdrew its approval of the drugs, and the government continued to pay for the medications. At the least, these facts should provide a strong presumption of immateriality that the Relators have failed to overcome in pleadings.

Prior decisions in the case

DOJ declined to intervene in the FCA lawsuit, and relators pressed forward with the FCA case on their own. Defendant moved to dismiss relators' claims, and the district court dismissed relators' FCA complaint (before the Supreme Court decided Escobar). Relators appealed to the Ninth Circuit Court of Appeals. DOJ submitted a brief to the Ninth Circuit as amicus curiae supporting reversal of the district court.

The Ninth Circuit reversed the district court, thus allowing relators' FCA claims to proceed to discovery. Among other reasons, the Ninth Circuit found that relators had adequately alleged "materiality" under the FCA.

Under the FCA, "a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable." Escobar, 136 S. Ct. at 2002. Whether a misrepresentation is material turns on its "effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Id.

Defendant asserted that the alleged FDA violations were not material to the government's decision to pay for the drugs because the government continued payment for the medications, even after it purportedly knew of defendant's alleged violations. But the Ninth Circuit disagreed, finding that "to read too much into the FDA's continued approval—and its effect on the government's payment decision—would be a mistake." In addition, the court identified a dispute over the extent and timing of the government's "actual knowledge" of defendant's alleged violations.

Gilead asked the Supreme Court to take the case, and the Supreme Court in April 2018 sought the Solicitor General's views. In its brief, DOJ urged the Supreme Court not to take the case because the pleadings "do not contain many of facts that would be relevant to the materiality inquiry," so it is therefore is unclear "exactly what the government knew and when." In addition, DOJ asserted that the Supreme Court "decided Escobar after briefing had concluded in the Ninth Circuit, [so] the facts and arguments relevant to the materiality analysis were less developed than they would be in a case pleaded and litigated after that decision."

DOJ also staked out the government's view of the widely litigated materiality standard under the FCA, particularly the significance of the government's continued payment after being made aware of a defendant's purported misconduct. DOJ supported the Ninth Circuit's decision, and asserted that "the government's continued payment for a product, after learning that the manufacturer has made misrepresentations to the government regarding that product, can be strong evidence that the misrepresentations were not material to the government's payment decisions," but also that "under the circumstances of this case," "continued government payments did not by itself require dismissal of respondents' claims at the pleading stage." DOJ advocated that courts should not put too much weight on the government's continued payment of claims. DOJ argued that the Ninth Circuit properly "recognized that the determination whether a misstatement is material 'turns on a number of factors,' including the government's payment decisions." According to DOJ, "[m]ost significantly, the court of appeals recognized that, under Escobar, the relevance of a government payment decision turns on whether the government had "actual knowledge" of violations at the time of payment." (emphasis added).

DOJ will seek to dismiss relators' case if remanded

Although DOJ supports the Ninth Circuit's decision—which would have allowed relators' FCA case to move forward—DOJ advised the Supreme Court that further review of this case is not warranted on the Escobar materiality issue, and that DOJ will seek to dismiss relators' claims on remand under its rarely-invoked statutory power to dismiss declined qui tam FCA cases.

Under the FCA, the United States is authorized to dismiss qui tam suits over a relator's objection. 31 U.S.C. 3730(c)(2)(A). DOJ explained in its amicus brief that "the government's authority to dismiss qui tam suits is not limited to circumstances where the defendant is entitled to dismissal on legal or factual grounds, but may be exercised whenever the government concludes that continued prosecution of the suit is not in the public interest."

Under this authority, DOJ told the Supreme Court that "if this case is remanded to the district court, the government will move to dismiss respondents' suit under Section 3730(c)(2)(A)." DOJ made this determination "based in part on the government's thorough investigation of [relators'] allegations and the merits thereof." The burden on the FDA also factored in, with DOJ stating that "if this suit proceeded past the pleading stage, both parties might file burdensome discovery and Touhy requests for FDA documents and FDA employee discovery (and potentially trial testimony), in order to establish 'exactly what the government knew and when," which would distract from the agency's public-health responsibilities.'" DOJ therefore decided that "allowing this suit to proceed to discovery (and potentially a trial) would impinge on agency decision making and discretion and would disserve the interests of the United States." We note that, if this case is remanded (with or without Supreme Court review), and DOJ seeks dismissal, relators are entitled to a hearing on DOJ's request for dismissal, under the Ninth Circuit's Sequoia Orange standard.

Observations

DOJ's amicus brief highlights the continued FCA litigation over the meaning of "materiality," which has resulted in somewhat different standards. As more FCA materiality cases reach the Supreme Court, we anticipate that the Court will eventually weigh in (though DOJ has asserted that this is not the right case).

DOJ's notification to the Supreme Court that it will seek to dismiss relators' case—particularly at this stage of the appeal—shocked observers. We are beginning to observe, and do expect, that under the so-called "Granston memo," issued in January 2018, DOJ will use its authority more often in district court at early stages of litigation. As we explained, DOJ's Civil Fraud section instructed in the "Granston memo" that all government FCA litigators consider whether declined qui tam actions should be dismissed under the Department's authority in Section 3730(c)(2)(A) of the FCA. The central theme of this policy is that dismissal of qui tam actions is warranted when it is in the federal interest to do so, and the policy clearly sets out seven federal interests.

At this point, it remains to be seen whether the Supreme Court will grant certiorari in this case and grapple with materiality under Escobar, or if it will decline to do so, as DOJ suggests, resulting in remand of the case. In any event, the statement by DOJ appears to reflect DOJ's increasing willingness to seek to dismiss declined cases and that DOJ is mindful of the discovery burden on the agency of a relator trying to prove an FCA case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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