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From Health Law Daily, July 27, 2017

Allegations of FCA violations based on manufacturer’s misrepresentations to FDA not sustainable

By Jeffrey H. Brochin, J.D.

Relators’ qui tam claims against manufacturer of hip replacement device were properly dismissed to the extent that they relied on the falsity of statements to the FDA; however, the allegations that the manufacturer caused doctors to bill Medicare for latently defective versions of the FDA-approved device were properly pleaded under the False Claims Act (FCA), the U.S. Court of Appeals for the First Circuit has ruled (U.S. ex rel. Nargol v. Depuy Orthopaedics, Inc. July 26, 2017, Kayatta, W.).

Background. The relators were doctors who were experts in hip replacement techniques and devices who filed a qui tam lawsuit in May 2012 against Depuy Orthopaedics, Inc. (manufacturer) alleging that the manufacturer made a series of false statements to the FDA without which the FDA would not have approved their ‘Pinnacle MoM’ metal-on-metal hip replacement device or would have withdrawn such approval, and, that the manufacturer ‘palmed off’ devices to doctors for implant which due to latent manufacturing defects, materially deviated from the design specification of the FDA-approved device. The manufacturer allegedly made direct claims to the federal government and various state governments seeking payment for some of the defectively manufactured devices, and, the complaint alleged that the manufacturer caused claims to be made by healthcare providers for defectively manufactured devices.

The district court dismissed the complaint with prejudice, however, upon appeal, the appellate court affirmed the dismissal of the FCA direct claims but reversed and remanded as to the indirect claims filed by third parties.

FDA piggyback approval of manufacturer’s device. The complaint alleged that in December 2000, the manufacturer received FDA approval under section 510(k) of the Federal Food, Drug, and Cosmetic Act (FDC Act) to market and sell the Pinnacle MoM device. Ordinarily, such a medical device would be required to undergo an extensive premarket approval process, however the device was approved by way of a different, less arduous process because they represented to the FDA that the device was ‘substantially equivalent’ to an earlier hip replacement device for which they already had premarket approval. The FDA does not independently assess the safety and effectiveness of a medical device that qualifies for approval under section 510(k), but rather that section allows a device manufacturer to piggyback on the full-scale review and approval of the earlier device.

Payment of claims and materiality. The court noted that the FDA possesses a full array of tools for detecting, deterring, and punishing false statements made during approval processes, and its decision not to employ such tools in the wake of the relators' allegations so as to withdraw or even suspend its approval of the Pinnacle MoM device left the relators with a break in the causal chain between the alleged misstatements and the payment of any false claim which renders a claim of materiality implausible.

The court further noted that the FCA’s materiality standard is a demanding one, and that even in an ordinary situation not involving a misrepresentation of regulatory compliance made directly to the agency paying a claim, when 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. Furthermore, such very strong evidence becomes compelling when an agency, such as the FDA, which is armed with robust investigatory powers to protect public health and safety is told what the relators have to say, yet sees no reason to change its position. In such a case, it is not plausible that the conduct of the manufacturer in securing FDA approval constituted a material falsehood capable of proximately causing the payment of a claim by the government. Ruling otherwise would turn the FCA into a tool with which a jury could retroactively eliminate the value of FDA approval. Accordingly, the appellate court held that the circuit court did not err in dismissing the realtors’ claims based on the alleged falsity of statements in securing FDA approval for the device.

Indirect false claims. The relators alleged that based on data representative of the outcomes of the manufacturer’s manufacturing process, the relators’ statistical analysis suggested that the manufacturing process produced a surface-roughness defect in the device which consequently failed to produce explant heads within specification 14.93 percent of the time and 50.41 percent of the time for the device liner. The theory basically was that the manufacturer received FDA approval for a device and then palmed off a defective version of that device both directly on the government itself and on unsuspecting doctors and patients, who then submitted claims for payment to unsuspecting government payors. The question then became one of whether the relators pleaded that theory with the requisite particularity required under the FCA.

The complaint contained a description of one actual sale of such a defectively manufactured product to a provider which sought government reimbursement. The device failed as a result of manufacturing defects, and, not knowing that the device was defectively manufactured, the provider submitted a claim to Medicaid for the patient’s Pinnacle MoM implant surgery. The court ruled that the "more flexible" standard of pleading applied in actions of the indirect type, where the manufacturer induced a third party to file a false claim with the government. In addition, the court found that it was very likely that every sale of the device was accompanied by an express or plainly implicit representation that the device being supplied was the FDA-approved product rather than a materially deviant version.

Based on the foregoing, the appellate court vacated the dismissal of the relators’ claim that the manufacturer caused physicians to submit claims to the U.S. and New York for payment for Pinnacle MoM devices that did not materially comport with the specifications of the FDA approval; however, it affirmed the dismissal of all other claims as well as the request to further amend the complaint.

The case is No. 16-1442.

Attorneys: Russell L. Kornblith (Cohen Kinne Valicenti & Cook, LLP) for the United States. Mark D. Seltzer (Nixon Peabody LLP) for DePuy Orthopaedics, Inc., DePuy, Inc. and Johnson & Johnson, Services, Inc.

Companies: DePuy Orthopaedics, Inc.; DePuy, Inc.; Johnson & Johnson, Services, Inc.

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