Third Circuit joins other circuits in enforcing Escobar's strict materiality requirement

Litigation Alert


The Third Circuit has affirmed the district court's dismissal of a relator's claims in United States ex rel. Petratos, et al. v. Genentech Inc, et al, a False Claims Act (FCA) case alleging that the defendants-appellees suppressed data that caused doctors to certify incorrectly that Avastin, a multibillion-dollar cancer drug, was "reasonable and necessary" for certain at-risk Medicare patients. No. 15-3805, 2017 WL 1541919, at *1 (3d Cir. May 1, 2017).

According to the relator, Genentech's conduct caused the submission of "false" claims to Medicare. The Third Circuit affirmed based on the Supreme Court's decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), concluding the complaint failed to satisfy the FCA's heightened materiality requirement.

Avastin is a widely prescribed cancer drug, developed by Genentech, that has accounted for $1.13 billion a year in Medicare reimbursements. FDA approved Avastin to treat several types of cancer. Relator Petratos was the head of healthcare data analytics for Genentech. After leaving the company in 2011, Petratos filed a qui tam action alleging that Genentech concealed information about Avastin's health risks.

Petratos alleged such information would have required Genentech to file adverse-event reports with the FDA, which could have resulted in changes to Avastin's FDA label. Petratos further alleged that Genentech's data suppression was part of a formal campaign, designed to avoid certain analyses and data sets that might yield negative results with the objective of mitigating "business risk." Petratos alleged that, as a result of this data-suppression strategy, Genentech caused physicians to submit Medicare claims that were not "reasonable and necessary."

The district court dismissed the relator's complaint for failure to satisfy the "falsity" element of an FCA cause of action. The court reasoned that "medically 'reasonable and necessary' is a determination made by the relevant agency, not individual doctors." Because Avastin was approved by 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 that decision.

Relying on CMS guidance, other Medicare provisions and regulations, and canons of statutory construction, the Third Circuit rejected the district court's interpretation and concluded the "'reasonable and necessary' determination is a process involving the FDA, CMS, and individual doctors." Id. at *2–4 (emphasis in original). While the Third Circuit disagreed with the district court's reasoning, the court nonetheless affirmed the judgment on another ground supported by the record: that Petratos could not establish materiality, which the FCA defines as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money." Id. at *4 (quoting 31 U.S.C. § 3279(b)(4)). Relying on the Supreme Court's interpretation of the materiality requirement in Escobar, the court held that Petratos's allegations did not satisfy that "high standard." Id. at *4.

The court found that Petratos's failure to allege facts showing that CMS would not have reimbursed the claims had the alleged reporting deficiencies been cured "doom[ed] his case." Id. at *5. The court provided that "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." Id. at *5 (quoting Escobar, 136 S. Ct. at 1996) (emphasis in original). Similarly, the court held that, 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. Id. at *5.

The court found that Petratos not only failed to plead that CMS "consistently refuses to pay" claims like those alleged, but also essentially conceded that CMS "consistently reimburse[d] these claims with full knowledge of the purported noncompliance." Id. at *5 (emphasis in original). The court found that "Petratos's allegations are much like the sort of 'minor or insubstantial' noncompliance that the Supreme Court explained should not be litigated under the [FCA]." Id. at *5.

Further, the court highlighted that Petratos had disclosed evidence of Genentech's alleged campaign of misinformation to the FDA and the Department of Justice in 2010 and 2011. Id. at *5. Since that time, the FDA not only continued its approval of Avastin for those "at-risk populations" Petratos claimed were adversely affected by the undisclosed data, but "added three more approved indications for the drug." Id. at *5 (emphasis in original). The FDA did not initiate proceedings to enforce its adverse-event reporting rules or require changes to Avastin's FDA label, and the DOJ similarly took no action and declined to intervene in Petratos's suit. Id. at *5. The court held that "[s]ince Petratos concedes that the expert agencies and government regulators ha[d] deemed these violations insubstantial (or at least would do so if made aware), we do not think it appropriate for a private citizen to enforce these regulations through the [FCA]." Id. at *6. 


Following Petratos, the Third Circuit has "join[ed] the many other federal courts that have recognized the heightened materiality standard after [Escobar]." Id. at *7. These cases reflect an emerging consensus 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. See, e.g., D'Agostino v. ev3, Inc., No. 16-1126, 2016 WL 7422943 at *5 (1st Cir. Dec. 23, 2016); U.S. ex rel. McBride v. Halliburton Co., No. 15-7144, 2017 WL 655439, at *5-6 (D.C. Cir. Feb. 17, 2017); Abbott v. BP Exploration & Production, Inc., 851 F. 3d 384, 388 (5th Cir. 2017); U.S. ex rel. Nelson v. Sanford-Brown Ltd., 830 F.3d 445, 447 (7th Cir. 2016); U.S. ex rel. Kolchinsky v. Moody’s Corp., No. 12-1399, 2017 WL 825478, *5 (S.D.N.Y. Mar. 2, 2017). 

Petratos also demonstrates that, consistent with the Supreme Court's instructions in Escobar, the materiality analysis is not "too fact intensive" to resolve at the motion to dismiss stage of qui tam litigation. See Escobar, 136 S. Ct. at 2003, 2004 n.6. When conducting this analysis in pharmaceutical cases, the post-filing conduct of CMS, FDA, and DOJ are highly relevant.

Find out more about this decision by contacting any of the authors.