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What Is Actual Knowledge? Third Circuit to Weigh in on Post-Escobar Materiality Question

Client Alert

Authors: Robin P. Sumner and Allison DeLaurentis

7/06/2017
What Is Actual Knowledge? Third Circuit to Weigh in on Post-Escobar Materiality Question

FCA litigants are anticipating the Third Circuit’s decision, with the hope that it will add clarity and predictability to the government knowledge defense.

One year after the Supreme Court changed the False Claims Act landscape, FCA litigants continue to grapple with the “demanding” materiality standard set forth in Universal Health Services v. United States ex rel Escobar. Now the U.S. Court of Appeals for the Third Circuit will take up the issue on  interlocutory appeal.

In Escobar, the Court did not adopt a bright-line rule for whether a statute, regulation or contractual provision is material to the government’s decision to pay a claim. Instead the Court identified factors that bear on materiality. One factor is whether the government regularly pays a particular type of claim despite “actual knowledge” that certain requirements were violated.

But what is actual knowledge? Since Escobar, several courts have invoked this factor to dismiss cases at the pleading stage. But questions remain. Is the government’s knowledge of allegations of noncompliance enough? Or does the government need knowledge of actual noncompliance? The Eastern District of Pennsylvania recently asked the Third Circuit to take on this issue when it certified three questions for interlocutory appeal in United States ex rel. Brown v. Pfizer, Inc. Among them: Is it possible for allegations to satisfy the FCA’s demanding materiality requirement when the government learned about the allegations more than a decade ago, conducted a multiyear investigation, and continues to pay the relevant claims?

In the Brown case, which has been ongoing since 2005, the relators allege that Pfizer knowingly presented false or fraudulent claims for payment or approval by concealing clinical trial data about its antifungal drug, Vfend. The relators claim that these alleged concealments resulted in false or fraudulent implied certifications of compliance with the Federal Food, Drug, and Cosmetic Act.

Pfizer moved to dismiss the relators’ second amended complaint on May 6, 2016 — a month before the Supreme Court’s Escobar decision. The district court denied the motion. In the time between Pfizer’s motion and the court’s decision, Pfizer filed multiple notices of supplemental authority related to Escobar.

In one of its notices, Pfizer cited Escobar and the First Circuit’s decision in D’Agostino v. ev3, Inc. In D’Agostino, the First Circuit affirmed dismissal of the relator’s complaint, which alleged that the defendants secured regulatory approvals by concealing information from the FDA, but, after an investigation and declination, CMS continued to reimburse the claims. Pfizer argued that, as in D’Agostino, federal and state governments have continued to pay and approve claims for Vfend’s on-label uses, even though they were aware of the relators’ allegations. As a result, the alleged concealment was not material.

In denying Pfizer’s motion to dismiss, the district court said the facts of this case were different from D’Agostino. Here, the relators provided factual allegations demonstrating how Pfizer’s alleged misrepresentations caused the FDA to approve Vfend and, therefore, pled sufficient facts to show that Pfizer’s alleged false statements were material.

The district court relied instead on the First Circuit’s older decision in Universal Health Services, Inc. v. United States (Escobar II). In Escobar II, the First Circuit noted that “mere awareness of allegations concerning noncompliance with regulations is different than knowledge of actual noncompliance” and ultimately held that the relators satisfied the FCA’s materiality requirement. Likewise, in the Pfizer case, the district court concluded that the government’s payment of claims after the relators filed their complaint was insufficient to establish materiality because there is a difference between actual knowledge and knowledge of allegations:

[K]nowledge of allegations regarding noncompliance is insufficient to prove actual knowledge of noncompliance. . . . Absent evidence that the government had actual knowledge of Defendant's fraud, we find the government's continued payments . . . insufficient to establish that Relators' claims fail for lack of materiality.

Pfizer then filed a motion to certify questions for interlocutory review and for a stay. It argued that the district court erred in relying on Escobar II instead of D’Agostino, the more recent First Circuit decision. Pfizer also argued that the Third Circuit’s May 1, 2017 decision in United States ex rel. Petratos v. Genentech, Inc., called the court’s order into question because it said that a misrepresentation is not material if the government would have paid the claims with full knowledge of the alleged noncompliance.

In Petratos, however, the relator conceded that the government would have paid the claims with full knowledge of actual noncompliance, and thus the district court did not appear to rely on Petratos in certifying the issue for appeal, noting instead that there is no controlling authority in the Third Circuit.

In its decision certifying the questions for interlocutory review, the district court explained that there are competing theories about what constitutes “actual knowledge,” even within the First Circuit. The court concluded that the “lack of controlling authority from the Supreme Court or Third Circuit, combined with the conflicting conclusions in the First Circuit, demonstrates a substantial ground for difference of opinion as to whether allegations of noncompliance demonstrates ‘actual knowledge’ of the noncompliance.” Further, the court explained that an immediate appeal may materially advance the ultimate termination of the litigation because, if the relator’s second amended complaint does not satisfy the FCA’s materiality requirement, the “vast majority of Relator’s claims will be eliminated.”

FCA litigants are surely anticipating the Third Circuit’s decision, with the hope that it will add clarity and predictability to the government knowledge defense. Although not squarely within the questions certified for appeal, there appears to be room for the Third Circuit to address the relevancy of the government’s declination in Brown. The Third Circuit’s decision in Petratos shined some light on the significance of a government declination when the court noted the DOJ’s declination as evidence that the alleged violations were not material. Soon after,  in United States ex rel. Badr v. Triple Canopy, Inc., the Fourth Circuit considered the fact that the government “immediately intervened in the litigation” as evidence that the defendant’s falsehood was material. Whether the Third Circuit will take the opportunity to reinforce or clarify the significance of a government declination is another issue all eyes will be watching.

Robin Sumner is a partner in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum. Allison DeLaurentis is an associate in the Health Sciences Department.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.