Last summer, the U.S. Supreme Court issued its blockbuster decision on the False Claims Act’s (FCA) materiality requirement in Universal Health Services v. United States ex rel. Escobar. 136 S. Ct 1989, 2003-04 (2016). Materiality under the False Claims Act means that the fraud has a natural tendency to influence the government. Materiality must be pled and proven by the plaintiff. In dicta, Escobar listed facts that help establish when fraud is material. One of these facts was whether the government continued paying claims after it knew of the fraud. Lower courts trying to apply Escobar now regularly face defendants arguing that their misconduct lacked materiality under the False Claims Act. Frequently, the arguments hinge on whether the government would have paid the claims, had it known of the fraud.
U.S. ex rel Brown v. Pfizer Rejects Attack on False Claims Act Materiality
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). The relators, former Pfizer marketing and sales employees, allege that Pfizer made fraudulent representations to the Food and Drug Administration (“FDA”) to obtain approval for Vfend. They alleged that in 2002, the FDA refused to approve Vfend because a study showed it was less effective than another medication. Then, in 2004, Pfizer misrepresented that study and won approval. Id. at 21.
The Brown Court Concludes that The FDA’s Response to the Alleged Fraud Establishes Materiality
Pfizer argued that allegations that it’s representations “‘could have’ influenced the FDA” did not establish FCA materiality. Id. at 20-21. The court disagreed, holding that the misrepresentations “did in fact cause the FDA to approve Vfend.” Id. at 21. This case represented the perfect controlled experiment: the 2002 application in which there was no fraud and the FDA rejected the drug. In contrast, the fraudulent 2004 application received approval. There was no need to speculate about what the government would have done, had it known of the fraud.
The Court Rejects Reliance on Continued Payment Unless the Government Has Actual Knowledge Of Fraud
The court also rejected Pfizer’s argument that continued payment after the government learned of the allegations, precluded materiality. This opinion, therefore, demonstrates the difficulty in relying on continued payment to defeat an FCA case. Taking its lead from the First Circuit, the Brown court held that “mere knowledge of allegations regarding noncompliance is insufficient to prove actual knowledge of noncompliance” Brown, No. 05-06795, at 23 (emphasis added). That is, knowledge of accusations of fraud is very different from actual knowledge of fraud.
This holding accords with Escobar’s analysis that continued payment weighs against materiality only if the government has “actual knowledge.” Escobar, 136 S. Ct at 2003-04 (contrasting refusal to pay claims “based on noncompliance”, with payment of claims “despite actual knowledge” of fraud).
Moreover, do defendants really want the government to stop paying claims due to a relator’s allegations of fraud? This result has the potential to wreak havoc on drug companies. This argument falls firmly in the “be careful what you wish for” camp.
