The Second Circuit Court of Appeals emphasized, in affirming a district court’s ruling on a motion to dismiss, that a contract merely incorporating a statutory or regulatory payment provision by reference, without more, does not make all terms of the statutory and regulatory scheme material, express conditions of payment in False Claims Act cases.
An Express Condition of Payment Must Be Express
Defendant pharmaceutical manufacturers applied for and received approval from the FDA to manufacture Gamunex at a facility converted for that purpose. United States ex rel. Yu v. Grifols USA, LLC, 2022 WL 7785044, at *1 (2nd Cir. Oct. 14, 2022). Plaintiff’s Second Amended Complaint alleged that as quality assurance project manager during that approval process, he witnessed deviations from the “current Good Manufacturing Practices.” Id., at *1 & fn. 3. FDA regulations require current Good Manufacturing Practices [cGMP] to be met or the drug shall be deemed adulterated and prohibited from sale. Id. Plaintiff alleged that only by misrepresenting the conditions present during the conversion of the manufacturing facility were Defendants able to obtain FDA approval and subsequently provide Gamunex pursuant to contracts with the Veterans Administration, TRICARE, and CMS. Id., at *1 & fn. 2.
The District Court dismissed, finding that Plaintiff had not alleged that Defendants made any false statements that were material to a fraudulent claim. Id, at *2. The Second Circuit undertook a materiality analysis as set forth in Escobar and analyzed each of the three factors in turn. Id., at *2. The Second Circuit first considered and rejected Plaintiff’s two similar arguments that Defendants’ alleged cGMP failures were material:
(1) That the government payors cannot purchase adulterated drugs and therefore the manufacture of Gamunex must comply with all cGMPs; and
(2) That the government payor contracts “incorporate by reference and require compliance with cGMP standards,” because FDA approval requires cGMP compliance and the contracts with government payors require FDA approval.
Id., at *2-3. The Second Circuit found this attenuated incorporation-by-reference theory held little weight.
Relying on precedent, it held:
[A] contract that merely incorporates by reference and lacks a provision that “specifically identifies any of the contractual or regulation requirements” that [Defendants] allegedly violated as an express condition of payment, “at most, weighs neutrally in the materiality analysis” for this factor. As the Escobar Court noted, “if the government were to designate every legal requirement an express condition of payment, it would make it difficult for would-be defendants to anticipate and prioritize compliance obligations because billing parties are often subject to thousands of complex statutory and regulatory provisions.”
Id., at *3. Because Plaintiff did not identify any provisions in the government payor contracts that “expressly condition payment” on “compliance with any specific cGMPs,” Plaintiff failed to allege that any misrepresentations were material to the government’s payment decision. Id.
Practical Takeaways
The Second Circuit has reiterated that FCA cases require an allegation that the underlying fraud was material to the government’s decision to issue payment. The Second Circuit has further emphasized that the Supreme Court identified whether the alleged fraud impacted an expressly identified condition of payment and reiterated that a contract that merely incorporates a statutory or regulatory scheme by reference does not identify it as an express condition of payment.
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