Employment Law Daily Drug maker may have FCA liability after seeking payment for noncompliant drugs
Wednesday, July 12, 2017

Drug maker may have FCA liability after seeking payment for noncompliant drugs

By Paige Arnold, J.D.

A drug manufacturer may be liable under the False Claims Act (FCA) for alleged false statements to the FDA relating to payments and reimbursements for noncompliant drugs, the Ninth Circuit decided. The court found that an employee properly alleged the drug manufacturer made false claims, that the false statements were known and intentional, and that the fraudulent conduct was material to the government’s payments or reimbursement to the drug manufacturer (U.S. ex. rel. Campie v. Gilead Sciences, Inc., July 7, 2017, Malloy, D.).

Two former employees (relators) brought a cause of action against their former employer, Gilead Sciences, Inc., under the FCA. The employees both worked in quality control at Gilead. Gilead developed and manufactured anti-HIV drugs and sold these drugs to federal and state healthcare programs. Gilead submitted and received FDA approval for these drugs.

Contamination. The employees alleged that although Gilead represented in its application that it would source an active ingredient from specific registered facilities, Gilead actually contracted with an unapproved source in China. Also, although Gilead ultimately sought approval from the FDA to use the source supplier from China, Gilead allegedly produced and sold its drug to the government for two years using the unapproved source supplier. On many occasions the supplier’s products were contaminated with various materials, Gilead discovered the contamination during tests of the product, and Gilead failed to notify the FDA regarding the contaminated batches and other manufacturing problems.

Adulteration. Moreover, the relators alleged that Gilead introduced the adulterated or misbranded drugs into commerce, concealed its use of the contaminated source manufactured in an unregistered facility, and received payment from the government of the noncompliant drugs. The district court granted the drug manufacturer’s motion to dismiss the claims under the FCA and the employees appealed (see Court shuts down FCA suit against HIV/AIDS drug manufacturer, June 16, 2015).

Nonconforming goods. The Ninth Circuit found that the employees alleged sufficient facts to support claims under the FCA. First, the court held that the employees alleged a claim for nonconforming goods in that Gilead made false statements because it manufactured the drugs in an unapproved facility then received payment for those drugs from the government. The court reasoned that liability was based on fraudulent conduct for nonconforming goods regardless of the underlying contractual or statutory relationship. In other words, the court rejected Gilead’s argument that there was no liability alleged because there was no contract between its supplier and the government. Because Gilead represented to the FDA that the active ingredients on the drugs were manufactured in an approved facility and it received reimbursement based on these statements, falsity of the claims was alleged.

Implied certification. Next, the court held that the employees alleged a claim under the implied certification theory. They alleged that when the manufacturer submitted claims for payment and reimbursement for the nonconforming or contaminated drugs, it implied compliance with federal requirements and regulations. The court reasoned that the connection between the causal-chain leading to the connection of the payment was relevant. Specifically, false claims were alleged in that the nonconforming drugs were mislabeled, misbranded, misrepresentations regarding FDA approval were made, and other improper actions were undertaken by Gilead.

Fraud. Finally, the relators alleged promissory fraud in their assertion that Gilead made false claims when it provided false information to the FDA to eventually secure approval of use of its facility in China. The court further found that the facts alleged showed Gilead made knowing and intentional false statements. Specifically, it was alleged that Gilead engaged in activities that hid fraud and deceived the government and acted fraudulently by altering test results, batch results, test numbers, and represented that the active ingredient came from an approved facility. The court rejected Gilead’s argument that there was no materiality pleaded because the government continued to make payments for the nonconforming drugs after it knew of the FDA compliance regulations. The parties raised as issue as to the FDA’s continued knowledge and the court ruled that this was a matter of proof not of dismissal. Because all the elements needed to state a claim under the FCA were alleged, the district court’s order of dismissal was reversed.

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