Experiments in Materiality: Escobar, the Recent Decision in Pfizer, and the Problem of Continued Payment
The U.S. Supreme Court perplexed health care fraud aficionados last summer with dicta listing a number of enigmatic factors for determining when fraud under the False Claims Act (“FCA”) counts as material; a requirement for liability. Universal Health Services v. United States ex rel. Escobar, 136 S. Ct 1989, 2003-04 (2016). Since then, the lower courts are predictably being faced with this issue in almost every litigated False Claims Act, with defendants arguing that for various reasons their alleged misconduct, even if true (or assumed to be true), was not material, and thus they should not be held liable. Defendants’ arguments hinge on the use of a counterfactual touched on by several of the Supreme Court’s factors: the question of whether the government would have paid an (allegedly) false or fraudulent claim, had it known of the fraud.
A recent case out of the Eastern District of Pennsylvania rejected two such arguments by defendant Pfizer. United States ex rel. Brown v. Pfizer, Inc., No. 05-6795 (E.D. Pa., Apr. 11, 2017). In that case, relators Catherine Brown and Bernard Vezeau, a former marketing manager and sales representative/product manager for Pfizer, are alleging that Pfizer made fraudulent representations to the Food and Drug Administration (“FDA”) when applying for approval for its antifungal medication Vfend to treat Candida infections. In specific, Relators alleged that in 2002 the FDA refused to approve Vfend to treat Candida infections because a study showed it was not as effective as another antifungal medication. But then, in 2004, Pfizer misrepresented that same study as showing Vfend was effective, even though the study showed the opposite, and won approval. Id. at 21.
In an attempt to dismiss the case, Pfizer argued that the relators failed to state a claim under the False Claims Act because the relator’s allegations that Pfizer’s representations “‘could have’ influenced the FDA [was] insufficient to make the false representations material.” Id. at 20-21 (citing to the holding in D’Agostino v. ev3, Inc., 845 F.3d 1 (1st Cir. 2016)). The Brown court disagreed, holding that the relators pled materiality successfully because they alleged the misrepresentations “did in fact cause the FDA to approve Vfend for Candida infections.” Brown, No. 05-06795, at 21. The relators were able to do this because they had access to the perfect controlled experiment: the 2002 application in which there was no fraud, and the drug was not approved, compared with the 2004 application in which there was a misrepresentation and the drug was approved. There was no need to speculate about the counterfactual (what the government would have done, had it known of the fraud) because the controlled experiment proved the fraud’s materiality to the government approval (as well as, presumably, casting light on Defendant’s motive, see id. at 24 (discussing scienter)).
Pfizer’s second argument, that the (alleged) falsity was not material because the government had continued to pay claims for the drug even after it had learned of the relator’s allegations in its qui tam complaint in 2005, fared no better. The court demonstrated how hard it is to establish the defense that the government’s continued payment of claims shields a defendant from liability. Taking its lead from the First Circuit’s post-remand opinion in Escobar, the Brown court held that “[t]he mere fact that the government has continued to pay and approve claims for Vfend even after Relators’ allegations in 2005 is insufficient to establish that Relators’ claims lack materiality.” Brown, No. 05-06795, at 23; see also U.S. ex rel Escobar v. Universal Health Services, 842 F.3d 103, 112 (1st Cir. 2016). That is because “mere knowledge of allegations regarding noncompliance is insufficient to prove actual knowledge of noncompliance” Brown, No. 05-06795, at 23 (emphasis added). This accords with the Supreme Court’s stringent language in Escobar, where the court says that continued payment weighs against materiality only in the case of “actual knowledge.” Escobar, 136 S. Ct at 2003-04 (comparing “evidence that the defendant knows that the Government consistently refuses to pay claims . . . based on noncompliance”—which weighs in favor of materiality–with evidence that “the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated” –which weighs against).
Moreover, as a practical matter, do defendants really want the government to stop paying all their claims just because there are allegations by a relator (not the government) of fraud? We don’t think so; if this happened, it would go in the category of “be careful what you wish for” and have the potential to wreak havoc with government contractors and programs.