Understanding Escobar: Gilead to petition SCOTUS to address circuit split

On October 3, Gilead Sciences, Inc. filed a motion to stay a Ninth Circuit Court of Appeals’ decision pending the filing of Gilead’s petition for a writ of certiorari with the United States Supreme Court. In a unanimous decision announced on July 7, the Ninth Circuit reversed and remanded a trial court’s dismissal of a qui tam action against that the South San Francisco-based biotechnology company.

In the initial suit of 2015, two former Gilead employees brought a qui tam suit against Gilead. They accused the biotech company of retaliation, hiding information about adulterated and misbranded active ingredients, and alleging that the noncompliant drugs, on which the Government spent billions in 2008 and 2009, were not eligible for payment by federal health care programs because the company knowingly made false statements that the drugs passed internal testing in violation of the Federal False Claims Act. Gilead argued that the Government’s continued reimbursement for medications in light of knowing of Gilead’s regulatory violations proved that the discretions did not meet the “materiality” prong required to implicate the FCA. In the 2016 landmark case Universal Health Services v. Escobar, SCOTUS held that, “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” 136 S. Ct. 1989, 1995 (2016). While the Ninth Circuit conceded the existence of issues involving the Government’s continued payments to Gilead, notwithstanding, “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government paid out billions of dollars for nonconforming and adulterated drugs.”

The present issue is whether Gilead breached the FCA by covertly changing to a Chinese active ingredient supplier after winning approval for several HIV drugs and by concealing information about contaminated ingredients when it later sought approval to use that supplier.

In this latest attempt at petitioning SCOTUS to further discern the parameters of its decision in Escobar, Gilead announced that its petition for writ of certiorari will present two questions: (1) whether, under Escobar, a complaint fails the materiality requirement of the False Claims Act when the allegations demonstrate the Government continued paying claims despite knowledge of the alleged misconduct; and (2) whether the Food and Drug Administration’s continued approval of a drug after learning of alleged regulatory violations is fatal to an FCA complaint premised on those violations. Gilead contends that the Ninth Circuit created a Circuit split by virtue of its reversal, stating that the appellate court, “expressly acknowledged its departure from three circuits [interpretations of Escobar].’”

Enacted in 1863, the Federal False Claims Act combatted the influx of fraudulent claims submitted to the federal Government during the Civil War. To aid the Government in its fight against fraud and abuse, Congress empowered whistleblowers to bring suit on behalf of the Government, known as qui tam actions, offering individuals a percentage of the amounts recovered from FCA violators. The FCA imposes liability on persons who: make false or fraudulent statement; with requisite scienter (having actual knowledge, acting in deliberate ignorance, or acting with reckless disregard); that is material; and that caused the Government to pay out money.

In fiscal year 2016, the United States Department of Justice recovered over $4.7 billion in settlements and judgments from civil cases involving fraud and false claims against the federal Government. About $2.5 billion came from the health care industry, including drug companies, medical device companies, hospitals, nursing homes, laboratories, and physicians – this number does not reflect the settlements and judgments from cases filed under similar state FCA causes of action.

If Gilead’s writ of certiorari petition is denied, and the trial court finds for the plaintiffs, the biotech company could be required to pay as much as three times the amount of damages plus $10,957 to $21,916 per claim for violations of the FCA.

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