FDA Law Update

Thoughts on Regulatory Constraints of Business Models

Sheppard Mullin — Fri, 05 Apr 2013 10:47:49 -0800

I am often called upon to address the nature of how regulatory controls may apply to the organization of healthcare companies in their ability to create, deliver, and capture value (their ‘business models’). While no summation could adequately capture all of the complexity inherent in this question, it would seem appropriate to briefly comment on some of the general recent trends I have seen, and how they may be shaped by various regulatory authorities.

Healthcare is on the leading edge of science, applying new technology to the cure and treatment of diseases. Gene therapy, nanotechnology, and personalized medicine are all actively exploited to bring new and exciting advances in healthcare. While healthcare is technologically advanced, in many ways the business models of healthcare companies have been slower to evolve. For example, the distribution of medical services is still largely mired in the traditional models that have existed for decades. The distribution of medical services is still, for the most part, a local affair, and largely dependent upon the regional availability of such services. By contrast, consumers of household goods are capable of shopping on a global scale, taking advantage of companies such as Amazon.com to obtain economies of scale and access to goods produced in every part of the world. Entertainment is now streamed digitally, allowing for instantaneous delivery of music, software and movies.

Government and industry have come to realize the benefits that could be obtained through such business models, and healthcare is poised to enter a period of evolutionary change. The Center for Medicare and Medicaid Innovation is currently evaluating a number of new payment and service delivery models in accordance with the requirements of section 1115A of the Social Security Act, as well as other Congressional legislation, including the Affordable Care Act. These innovation models address a number of different needs, such as transforming primary care to strengthen and increasing access for patients, speed the adoption of best practices, and accelerate the development and testing of new payment and service delivery models.

Products Versus Services

The U.S. Food and Drug Administration (“FDA”) regulates the marketing of medical products (drugs and medical devices), but refrains from the regulation of what it refers to as “the practice of medicine,” or medical services. Regulation of medical services is largely left to the various state agencies and professional boards.[1]

Many healthcare companies, however, are now blurring the line between medical products and medical services by manufacturing products that are primarily designed to offer a service. Pill reminders can be integrated with communication devices to allow users instantaneous access with pharmacists or nurses if they have a question about their medication. Commonly used diagnostic devices such as blood pressure cuffs and blood glucose meters can instantaneously transmit measurements to physicians for remote monitoring. This integration of medicine and technology opens the possibility for companies to profit not just from the sale of the device, but from the associated services. In some cases, an ongoing subscription to a service may be more profitable to a company than the sale of the device.

One of the difficulties faced by companies that move from offering a product to a service is the fractured and inconsistent state regulation of medical services generally. Ideally, the economies of scale are benefitted by providing services from a central location. State licensure and other regulatory requirements may dictate a more diffuse network of service centers.

Related issues arise in the context of cloud computing, which involves the delivery of computing as a service rather than a product. FDA-regulated product manufacturers are required to establish their requirements for cloud computing services, including those related to quality, and ensure that those requirements are being met by the service. If patient records are involved, regulatory compliance with both the Health Insurance Portability and Accountability Act (HIPAA) and Health Information Technology for Economic and Clinical Health (HITECH) Act must be addressed. Further, with shared cloud based systems, controls (including contractual controls) must be established to protect intellectual property.

Contractual Risk Sharing

When a medical product also offers a service, there are questions as to supervision of those services. Of course, if the manufacturer maintains a direct relationship with the patient, such as with services offered through nonprescription devices, the responsibility is clearly on the manufacturer. For devices bundled with a service that are specifically prescribed by a physician or other medical professional, the responsibility over those services may become clouded. For example, a physician that contracts with a device-bundled service on the behalf of a patient may potentially hold some risk of liability when the patient calls the device manufacturer’s service center after hours to report a medical emergency. Contractual relationships must address these risks, and the service provider may need to retain appropriate professional coverage to mitigate the liability for their contracting physicians. In other situations, these contractual relationships may be explicitly mandated by regulatory authorities, such as with electronic health records under HIPAA and HITECH.

Modern Distribution Chains

Drugs and medical devices, particularly those restricted by prescription, are distributed through a heavily regulated network. Software marketed for a specific medical purpose, for example the display of medical images, is regulated by FDA as a medical device, and would traditionally be distributed through the same network used by other medical products.

Software, by its nature, does not need to be shackled to this traditional distribution system. It may be downloaded directly from the manufacturer, or it may be provided through an “application store” such as those servicing the various smartphone platforms. This raises a number of interesting issues that have not fully been resolved.

An example of one of these unresolved issues involves user manuals and other required labeling. FDA has a longstanding policy of requiring manufacturers of medical devices to provide user manuals and other labeling in a hardcopy format. While digital copies of such manuals may supplement the hardcopy version, they may not be provided in place of such manuals. Virtual distribution platforms cannot, by their nature, provide a hardcopy manual at the same time the software is distributed to the user.

Another example of an unresolved issue involves the loss of control that manufacturers face with conducting recalls and collecting information on product complaints. Distribution over an application store may present the most direct route to users by avoiding the need for users to have an “unlocked” smartphone. This access, however, comes at a loss of control. Applications offered through application stores generally must be reviewed and approved by the owner of the platform. This could result in delays when manufacturers need to implement critical device upgrades, as review of updates may extend to over a week or more. Further, complaints with the application may be first reported to the owner of the platform, impairing the ability of the manufacturer to report critical adverse events to FDA in the necessary timeframe.

Until FDA addresses these issues, companies must build in safeguards to ensure that regulatory risks are contained. This involves both developing and implementing internal policies, and using contractual risk sharing. Notwithstanding these hurdles, the medical field is poised to see an evolutionary change in business models over the next few years. While there may be growing pains with adapting to the various regulatory requirements, these should not be barriers to innovation.

If you are interested in learning more about how these regulatory requirements impact and influence business models, I invite you to attend Duke University’s Fourth Annual Informatics Conference. I will be speaking on the topic “Vision for the Future – Business Models,” along with moderator Derek Perkinson, Director, Strategic Planning at Comcast Corporation, and panelists Sam Bastia, General Manager, Global Strategy & Innovation at Verizon, Jimmy Childre, CEO of Washington County Regional Medical Center, and Dr. John Murphy, Head of Clinical Informatics at Quintiles.

[1] Senior FDA officials have publicly stated that “the legislative history of the Federal Food, Drug, and Cosmetic Act shows that Congress did not intend FDA to interfere with the practice of medicine, and FDA – whose Commissioners typically have been medical doctors, and which has many MDs on its staff – has never had such a goal.” Linda A. Suydam, Statement at FDLI Conference on Advertising and Promotion in the New Millennium (Sep. 13, 1999), at http://www.fda.gov/NewsEvents/Speeches/ucm054540.htm

Supreme Court Hears Arguments on "Pay for Delay" Agreements

Sheppard Mullin — Wed, 03 Apr 2013 09:15:08 -0800

By Seth A. Mailhot and Michelle C. Kim

On March 25, 2012, the Supreme Court heard oral argument on the legality of “reverse payment” or “pay for delay” agreements between brand-name and generic drug manufacturers.

Reverse payment agreements settle patent infringement actions brought by a brand-name drug manufacturer against a potential generic competitor under the Hatch-Waxman Act. In contrast to typical settlements of patent infringement actions, it is the patent holder (the brand-name drug manufacturer) that agrees to pay a large sum of money to the accused infringer (the generic) in exchange for an agreement that the generic will not challenge the patent or enter the market for a period of time.

There is a circuit split on the test that courts apply in scrutinizing whether such agreements are anticompetitive. The Second, Eleventh and Federal Circuits have applied a “scope-of-the-patent” test. Under the “scope-of-the-patent” test, a reverse payment agreement is permitted so long as the terms of the agreement do not expand the exclusionary scope of the patent. For example, an agreement that would prohibit a generic from entering the market until after the patent’s expiration would be prohibited under the “scope-of-the-patent” test. The Third Circuit, however, has applied a “quick look” test under which reverse payment agreements are presumed anticompetitive unless proven otherwise. The Supreme Court granted certiorari in Federal Trade Commission v. Actavis to resolve this circuit split over the issue. Drug innovators generally advocate the “scope-of-the-patent” test, while the Federal Trade Commission (“FTC”) has argued for the more rigorous per se approach in which the burden is shifted onto the drug innovator to rebut the presumption that the settlement is anticompetitive.

Prior to the Supreme Court granting certiorari in Actavis, the 11th Circuit followed its own precedent and applied the “scope-of-the-patent” test. The 11th Circuit affirmed the dismissal of the FTC’s complaint, finding that the agreement in Actavis did not expand the scope of the patent at issue. Among other things, the agreement permitted the generic to enter the marketplace five years before the patent’s expiration, and the parties further agreed in a separate agreement that the generic would promote and share profits from the sales of the brand-name drug.

In the oral argument, the FTC opened by arguing that “a payment from one business to another in exchange for the recipient’s agreement not to compete is a paradigmatic antitrust violation,” and that “[r]everse payments to settle Hatch-Waxman suits are objectionable for the same reasons…[t]hey subvert the competitive process by giving generic manufacturers an incentive to accept a share of their rival’s monopoly profits as a substitute for actual competition…”

The justices did not appear to favor the FTC’s “quick look” test. Justice Breyer, along with Justice Sotomayor, suggested that district courts could resolve the question of whether a particular reverse payment settlement is anticompetitive by resort to the traditional antitrust “rule of reason” and that a shifting of the burden onto drug innovators to prove the agreement is not anticompetitive is unnecessary. Indeed, Justice Breyer expressed concerns that such a test would create an “administrative monster” in requiring the courts to decide whether or not the payments are for delay or something else. Justice Scalia took issue with the Hatch-Waxman Act itself, expressing concerns that understood antitrust principles should not be overturned “to patch up a mistake that Hatch-Waxman made.”

The justices also expressed concerns about adopting the opposing “scope-of-the-patent” test, which would, in essence, create a presumption of infringement by the generic product. Justice Sotomayor noted that settling an infringement action would create such a presumption – “I don’t know why we would be required to accept that there has or would be infringement by the product that has voluntarily decided not to pursue its rights.” The justices also expressed concerns that the financial incentives in adopting such a test would weigh in favor of settling cases, thereby reduce competition by generics, as the “scope-of-the-patent” test would in essence, incentivize brand name and generic manufacturers “in every single case . . . to split monopoly profits in this way to the detriment of all consumers.” Justice Kagan observed that “[i]t’s clear what’s going on here is that [the brand and generic firms are] splitting monopoly profits and the person who’s going to be injured are all the consumers out there.”

Stay tuned, as the Supreme Court is expected to issue its ruling before the end of its term in June 2013. This issue will have a significant impact on both brand-name and generic drug manufacturers as they consider their strategies on the transition from patent protection to generic competition. The decision will also likely have an impact for investors seeking to value pharmaceutical intellectual property. Sheppard Mullin attorneys can advise on these issues, including how to handle the uncertainty associated with the upcoming Supreme Court decision.

Ninth Circuit Off-Label Marketing Decision Suggests More Prosecutions Will Be Coming

Sheppard Mullin — Thu, 07 Mar 2013 12:05:38 -0800

By David Douglass

The Ninth Circuit has reopened a door for off-label marketing prosecutions, and it is important to review your compliance and risk management programs in light of this recent decision. Last December, the pharmaceutical and medical device industries exhaled a sigh of relief in response to the influential Second Circuit’s decision in United States v. Caronia, holding that truthful off-label marketing is a form of protected First Amendment speech that cannot form the basis for a criminal prosecution under 21 U.S.C. §333 of the Food, Drug and Cosmetic Act (“FDCA”). The Caronia decision followed the Supreme Court’s decision in Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (June 23, 2011), which held that a Vermont statute prohibiting pharmaceutical companies from engaging in truthful marketing activities offended the First Amendment. The question after Sorell and Caronia became, can the government still prosecute off-label marketing? On March 4, 2013 the Ninth Circuit said yes, albeit in an unpublished opinion.

In United States v. Harkonen, No. 11-10209 D.C. No. 3:08-cr-00164 MHP-1, the Ninth Circuit affirmed the wire fraud conviction of Scott Harkonen, former CEO of Intermune, for issuing a fraudulent press release touting the performance of the Company’s drug Actimune in clinical trials. Harkonen challenged the conviction as an unconstitutional infringement of his First Amendment rights. Harkonen claimed that the press release was misleading but not fraudulent. According to the Court, however, “[a]t trial, nearly everybody actually involved in the [Actimune] clinical trial testified that the Press Release misrepresented [Actimune’s] results.” Opinion at 3. Indeed, “Harkonen himself was “very apologetic” about the Press Releases’ misleading nature,” the Court observed. Id. The court found ample evidence for the jury to conclude that the Press Release was misleading even if “literally true.” Id., quoting United States v. Woods, 335 F.3d 993, 998 (9th Cir. 2003).

Relying on an early 20th century Supreme Court decision, American School of Magnetic Healing v. McAnnulty, 187 U.S. 94 (1902, Harkonen argued that his conviction should be reversed because “genuine debates over whether a given treatment caused a particular effect are outside the scope of the mail and wire fraud statutes.” Id at 6. The Ninth Circuit rejected this argument holding that “McAnnulty does not categorically prohibit fraud prosecutions for statements about the efficacy of a particular drug; indeed, that false and fraudulent misrepresentations made be made with respect to the curative effect of substances is obvious.” Id., quoting Seven Cases v. United States, 239 U.S. 510, 517 (1916).

At first blush, as we old school lawyers like to say, the court’s holding is consistent with established First Amendment law. While the First Amendment does constrain the reach of the criminal laws, it has never been declared a bar to prosecuting harmful, dangerous or fraudulent speech. If so, as the government will no doubt argue, law abiding companies and their executives have no reason to fear. As long as they engage only in truthful marketing, even off-label marketing, they will not subject themselves to prosecution. Unfortunately, the Ninth Circuit’s opinion reveals that, in the real world, the breadth of the term” “to defraud” gives prosecutors wide latitude to investigate and prosecute disfavored speech. “As used in the criminal mail fraud statutes, the term “to defraud” has its common place definition and includes “any sort of “dishonest method or scheme” and any “trick, deceit, chicane or overreaching.” Id. quoting Carpenter v. United States, 484 U.S. 19, 27 (1987) (emphasis added). In fact, according to the Ninth Circuit, “statements are fraudulent if “misleading or deceptive” and need not be “literally false.” Id. at 7, quoting United States v. Woods, 335 F.3d 993, 998 (9th Cir. 2003).

The trouble we foresee is that one man’s lawful promotion is another man’s criminal deception. Who draws the line between constitutional puffery and felonious chicanery? The answer, unfortunately, is prosecutors in the first instance and juries in the second. If the principle articulated by the Ninth Circuit is followed then the First Amendment protections extended by the Supreme Court in Sorrell and followed by the Second Circuit in Caronia will be eviscerated. The Ninth Circuit’s approach will have a chilling effect on speech because any promotional activity will be vulnerable to prosecution for being criminally deceitful, misleading or even tricky. Apart from the risk of conviction, there is the chilling effect of the spectre of criminal investigation that can form an expensive, prolonged and potentially debilitating cloud over an individual’s life and career.

So, what is a company to do? First, don’t panic. The Ninth Circuit’s holding seems to run directly counter to the Supreme Court’s guidance in Sorrel, at least in its potential reach. The fact that the Ninth Circuit issued its decision as an unpublished one means that its holding is limited to the facts of that particular prosecution and signals that the Court is not prepared to apply the holding generally. Second, however, companies need to be thoughtful and deliberate with respect to their marketing activities. Sorrell and Caronia reaffirm the established rule that the First Amendment limits the government’s ability to punish disfavored speech or disfavored speakers. And, with respect to off-label speech, the government is clearly doing both. Strong compliance policies developed and implemented to ensure to the extent possible that promotional activities, especially the activities and statements of the sales force, are truthful, controlled and carefully monitored will not only limit exposure to investigation and prosecution but can also create the record to persuade a prosecutor that prosecution is unwarranted. Where gray areas remain despite a company’s best efforts to implement an effective compliance program advice of counsel can be a key element of risk management. In the event the government initiates an investigation into promotional activities, no doubt biased by a whistleblower, a strong compliance and risk management program can serve as both an effective sword to fight off an investigation as well as an effective shield against prosecution. In those unfortunately inevitable situations in which the government is not so easily dissuaded, it is important to remember the cry of the defense attorney, “It is one thing to proclaim and other thing to prove.” Just because a whistleblower says it, doesn’t make it so. A solid compliance and risk management program also provide a solid foundation for a strong litigation defense.

We are pleased to introduce the newest partner on our health care and life sciences industry teams, David Douglass. David is our Washington D.C. office and brings a wealth of experience advising healthcare and life sciences companies and government contractors on compliance and risk management and representing them in civil and criminal investigations and litigation, including False Claims Act litigation. David is currently Chair of the ABA Health Law Section. He is the former Chair of the Government Enforcement and Corporate Compliance Committee of DRI—The Voice of the Defense Bar. He is also a Fellow of the American College of Trial Lawyers.

The Impact of Cloud Computing on FDA's Regulation of Medical Products

Sheppard Mullin — Thu, 14 Feb 2013 11:07:38 -0800

By Seth Mailhot

The following blog article is drawn from the upcoming book Cloud Computing Deskbook, which is set to be released by Thomson Reuters West next summer. Cloud Computing Deskbook covers the legal and regulatory aspects of cloud computing, including those related to regulation by U.S. Food and Drug Administration. Please contact the author with any questions related to FDA regulation of cloud computing and software in general.

Cloud computing involves the delivery of computing as a service rather than a product. In a cloud computing solution, shared resources, software, and information are provided much like a utility, over a network to computers and other devices. Cloud computing has been embraced by the medical industry, and is used as a vital technology in electronic medical record systems and telemedicine solutions, among other products.

The U.S. Food and Drug Administration (“FDA”), which regulates the vast majority of medical products sold in the U.S., generally applies its existing regulatory scheme when facing new technologies like cloud computing. This is typified by FDA’s approach to nanotechnology that was developed in the last decade.

Cloud computing presents several challenges to FDA’s application of its existing regulatory scheme. For one, FDA, as a regulatory agency, has responsibility over medical products shipped in interstate commerce (specifically drugs, medical devices, and biologics), but lacks authority over the services provided by healthcare practitioners (i.e. “the practice of medicine”). Cloud computing involves the delivery of computing as a service rather than as a product, which complicates the analysis of how a cloud computing solution would be regulated by FDA.

The second challenge for FDA is the increased complexity of cloud computing software solutions. Medical device software has traditionally been very conservative in that it is generally installed on only one platform, with the hardware and operating system parameters “locked down” to limit compatibility issues. Further, communication is generally limited to interactions between a device and the computer system. In a cloud computing system, one or more cloud client software programs communicate with the cloud server software, and all of these software programs may be deployed on various hardware and operating systems. In fact, the strength of the cloud model is this ability to interact with the cloud server through a broad array of hardware and operating system platforms.

The third challenge to FDA’s existing regulatory scheme is in security. Medical information is scrupulously protected by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), numerous state laws, and physician ethical standards. As with financial information, medical information has great value. In a cloud computing software solution, this highly valuable and private medical information is often transmitted wirelessly and through the Internet, exposing it to potential theft. Further, the diffuse nature of cloud computing solutions and the ability to consolidate medical information from thousands of individuals in a single location poses significant liability risk from the loss of a single laptop or USB drive.

FDA does not currently have any specific regulations applicable to cloud computing. Further, FDA’s regulations applicable to computerized systems (21 C.F.R. Part 11) is currently being enforced only in a very limited manner. Despite this, FDA’s existing regulatory scheme has been applied to products and regulated processes that incorporate cloud computing services. Recent guidance has addressed gaps in the existing regulatory scheme, including FDA’s draft guidance on mobile medical applications.

Given the complexity with using cloud computing services in FDA regulated medical products, it is critical to carefully consider the regulatory impact of incorporating such services. Sheppard Mullin has expertise in the legal and regulatory issues surrounding cloud based services, including when using cloud computing in FDA regulated products and activities. Sheppard Mullin’s FDA practice has experience providing companies with advice on cloud computing issues, including counseling medical device software manufacturers.

FDA Issues Two Proposed Rules That Will Significantly Change Regulatory Requirements For Food Safety

Sheppard Mullin — Thu, 24 Jan 2013 12:30:44 -0800

By Peter Reichertz, Seth Mailhot, and Robert Uram

The FDA Food Safety Modernization Act (FSMA), which was signed into law by President Obama on January 4, 2011, proposes the most sweeping reform of U.S. food safety laws in more than 70 years. As part of the changes introduced by the law, Section 103 of FSMA, titled “Hazard Analysis and Risk-Based Preventive Controls,” and Section 105 of FSMA, titled “Standards for Produce Safety,” each amend the Federal Food, Drug and Cosmetic Act by adding new sections 418 (Hazard Analysis and Risk-Based Preventive Controls )and 419 (Standards for Produce Safety ). Section 418 and 419 significantly change the existing legal requirements for food manufacturing and growing. Each section also requires the U.S. Food and Drug Administration (“FDA”) to conduct rulemaking to implement these provisions.

On January 16, 2013, FDA issued two proposed rules to implement the provisions of Sections 103 and 105 of FSMA. The first proposed rule, titled “Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food,” proposes significant changes to the current good manufacturing practice (“cGMP”) requirements applicable to the production of food. The second proposed rule, titled “Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption,” proposes minimum standards for the safe growing, harvesting, packing, and holding of produce (i.e., fruits and vegetables) grown for human consumption. Comments on the proposed rules are due by May 16, 2013.

Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food

The proposed rule implementing section 103 of FSMA would revise FDA’s cGMP requirements in two ways. First, the proposed rule would add new preventive control requirements mandated by FSMA. These preventive control requirements are somewhat comparable to the Hazard Analysis and Critical Control Point (“HACCP”) requirements for manufacturers of seafood and juice products. The preventive control requirements are proposed to include the need to maintain a food safety plan, perform a hazard analysis, and institute preventive controls for the mitigation of identified hazards. Once a plan is developed, facilities would need to follow the plan by monitoring their controls, verifying that the controls are effective, taking any appropriate corrective actions, and documenting these activities. These new requirements generally apply to facilities that are required to register with FDA under FDA’s current food facility registration regulations, with some exceptions.

FDA is also requesting comments on aspects of preventive controls that are not part of the proposed rule. Those provisions include a product testing program, an environmental monitoring program, and a supplier approval and verification program.

Second, the proposed rule will update the cGMP regulations applicable to food (currently codified in 21 C.F.R. Part 110), including clarifying certain requirements. The cGMP regulations were last updated in 1986. The new preventive control requirements and the modified cGMPs are to be placed in a new Part 117, “Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food.”

Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption

The proposed rule implementing section 105 of FSMA would establish minimum standards for the safe growing, harvesting, packing, and holding of produce in its raw or natural (unprocessed) state on farms. In developing the proposed rule, FDA conducted a qualitative assessment of risk of hazards related to produce production and harvesting. FDA’s assessment suggested that microbiological hazard pathways may be grouped into different identified routes of microbial contamination which are generally shared among produce of different types. FDA’s proposed rule is intended to minimize the risks associated with those hazards and provide flexibility by allowing the use of alternative measures if they would provide the same level of public health protection as the proposed standard.

Routes of microbiological exposure identified by FDA include:

Agricultural Water, where FDA proposes specific criteria for water quality when used for certain purposes, along with requirements for periodic testing;
Biological Soil Amendments of Animal Origin (i.e., fertilizer sourced from animals), where FDA proposes requirements for treating biological soil amendments, restrictions on methods of application, and time intervals between the applications, as well as handling and storage of such biological soil amendments of animal origin;
Health and Hygiene, where FDA proposes requiring farm personnel use hygienic practices, including hand washing and maintaining adequate personal cleanliness;
Domesticated and Wild Animals, where FDA proposes controlling contamination introduced by wild and domesticated animals, including contamination through grazing animals and work animals; and
Equipment, Tools and Buildings, where FDA proposes standards for certain equipment and tools, buildings, and sanitation practices.

FDA also proposes introducing training requirements for farm personnel, as well as special requirements for the growing of sprouts. FDA previously sought to address produce safety through guidance. FDA has issued guidance on Good Agricultural Practices (GAPs), as well as commodity-specific guidance on sprouts and draft guidance on tomatoes, melons and leafy greens.

Sheppard Mullin is actively monitoring the comment process on both of these proposed rules, and has extensive experience in counseling food clients on a full range of FDA compliance issues. Those engaged in the food industry should carefully review these proposed rules to evaluate how they might impact their business once they are implemented. Industry should be actively engaged in the comment process, and should prepare contingency plans for the included proposals. Sheppard Mullin can assist clients with participating in the comment process, and advise clients on evaluating what changes may be necessary to come into compliance if and when these proposed rules become effective. The comment deadline is currently set for May 16, 2013.

FDA Issues Final Guidance on Filing PMAs and 510(k)s

Sheppard Mullin — Thu, 03 Jan 2013 12:27:03 -0800

By Seth A. Mailhot and Peter S. Reichertz

On December 31, 2012, the U.S. Food and Drug Administration (FDA) issued two new guidance documents on the minimum threshold of acceptability for medical device premarket submissions, which are titled “Refuse to Accept Policy for 510(k)s,” and “Acceptance and Filing Reviews for Premarket Approval Applications (PMAs).” These guidance documents detail the conditions under which a Premarket Notification [510(k)], or a Premarket Approval application [PMA] will be accepted for substantive review.

The new guidance documents are intended to conserve FDA’s limited resources by focusing FDA review on what FDA considers to be “complete submissions.” FDA believes the changes to the 510(k) and PMA processes will make them more efficient, and help FDA achieve its medical device user fee performance goals.

Changes to the 510(k) Process

FDA modified its 510(k) Refuse to Accept (RTA) policy to include an early review against specific acceptance criteria. According to the guidance, FDA plans to notify submitters within the first 15 calendar days after receipt of the 510(k) about whether it is administratively complete. If the 510(k) is deficient, FDA intends to identify the missing element(s) for submitters by providing a copy of FDA’s checklist.

The 510(k) submitter may respond to the RTA notification by providing the missing information, which will be included in the file under the originally assigned 510(k) number. Providing a response to an RTA notification does not trigger a new submission, or require payment of a second user fee. FDA notes that a response to an RTA notification does not require re-sending the entire 510(k) submission, although in some situations FDA will request that the complete 510(k) submission be re-sent. As is consistent with FDA’s policy on responding to 510(k) deficiencies, if a response to the RTA notification is not received within 180 days of the date of the RTA notification, FDA will consider the 510(k) to be withdrawn and the submission will be closed in the system.

FDA’s review checklist covers three primary areas, which are described briefly below. The checklist will also include a section to confirm that the type of 510(k) submitted is appropriate, if an Abbreviated or Special 510(k) has been submitted. The other areas covered by the checklist are:

Preliminary Questions
- FDA will determine whether the product described in the 510(k) is a medical device appropriate for submission as a 510(k), including evaluating its status as a combination product, and researching to see if a similar device has been submitted under a PMA. FDA will also confirm that the submission is not subject to its Application Integrity Policy, which suspends review of clinical data on the suspicion of fraud, and verify that the 510(k) was sent to the correct Center.
Organizational Elements
- FDA will review the submission to determine if it is appropriately formatted. This involves confirming that a Table of Contents is included, that sections are appropriately titled, that page numbers are provided, and that the type of 510(k) is identified. FDA notes that the failure to follow these formatting conventions would generally not result in an RTA designation.
Elements of a Complete Submission (called “RTA Items” in the guidance)
- FDA breaks these items down into several subsets:
  - Administrative
    - This includes evaluating whether all of the information has been submitted in English, and whether the necessary forms and signatures have been provided.
  - Device Description
    - This includes whether a description of the principle of operation and mechanism of action for achieving the intended effect are described.
  - Substantial Equivalence Discussion
    - This includes whether the 510(k) identifies a predicate(s) device.
  - Proposed Labeling
    - This includes whether the submitted labeling provides a description of the device, its intended use, and directions for use.
  - Sterilization
  - Shelf Life
  - Biocompatibility
  - Software
  - EMC and Electrical Safety
  - Performance Data – General
  - Performance Characteristics (this subset is relevant to in vitro diagnostic devices)

After a response to the RTA notification is received by FDA, FDA will conduct another acceptance review according to the same procedure (including the 15 calendar day timeframe). The subsequent acceptance review will assess whether the new information makes the submission complete according to FDA’s checklists. If the submission is still deficient, FDA will provide another checklist identifying the missing item(s).

The FDA review clock starts once the 510(k) is formally accepted. The start date of the review will be set as the date that the most recent submission resulting in acceptance was received by FDA (provided the user fee has been paid, and the required electronic copy was provided). Once the 510(k) is under substantive review, the time used by FDA to conduct the acceptance review will be included as part of the 60 calendar day timeframe for FDA’s Substantive Interaction goal. The Substantive Interaction goal is communication with the applicant to resolve any outstanding deficiencies through an interactive review, which occurs after the FDA has performed a complete review of the submission.

Changes to the PMA Process

There are fewer changes to the existing PMA filing process, compared to the changes made to the 510(k) process. As the regulations on PMA filing criteria have not changed, the new guidance document is not significantly different from the previous PMA filing checklist and guidance document. The “preliminary questions” remain the same, and the “filing review questions” are now separated into “acceptance decision questions” (i.e., whether the file is administratively complete) and “filing decision questions” (i.e., whether the data are consistent with the protocol, final device design, and proposed indications).

The preliminary review of PMA applications will now take place in two phases. First, FDA will conduct an acceptance review, which involves assessment of the completeness of the application. Under the new guidance, FDA plans to inform applicants in writing within the first 15 calendar days of receipt of the application as to whether any required elements are missing, and identifying them.

Second, FDA conducts a filing review, which determines the basic adequacy of the technical elements of the PMA. In order for the submission to be filed, the application must be sufficiently complete to permit a substantive review. Once the filing review is complete, FDA intends to notify the applicant in writing within 45 calendar days as to whether the PMA has been filed or not.

One additional change in the PMA filing process involves how FDA will handle the manufacturing section. Under the previous guidance, FDA stated that it would still allow a PMA to be filed despite a delay in the submission of the manufacturing section of the PMA. Submission of the manufacturing section could be submitted up to 90 days after the rest of the PMA was sent. Under the new guidance, the manufacturing section is now included in the checklist for original PMAs and panel-track supplements involving a new manufacturing site or substantially different manufacturing procedures.

Sheppard Mullin Richter and Hampton LLP has experience in preparing and prosecuting new product submissions before the FDA, including those for medical devices. Our FDA team can also help to develop regulatory strategies for marketing FDA-regulated products. If you have any questions regarding these new guidance documents, please contact the authors.

FDA Takes Action Against Marketers Making "Cosmeceutical" Claims

Sheppard Mullin — Thu, 01 Nov 2012 09:59:41 -0800

FDA has taken no significant regulatory action with regards to claims made for cosmetics for almost twenty five years. As a result, claims for cosmetics have become aggressive, as new science and ingredients have blurred the line between cosmetics and pharmaceuticals, leading to a class of products generally referred to as “cosmeceuticals”. There is, however, no regulatory definition of a cosmeceutical, and recent regulatory actions by the FDA suggests that they believe claims for such products are drug claims.

In four (4) recent “Warning Letters”, FDA has notified companies, including Avon Products, Inc. and Lancôme USA, that the claims for their products are drug claims, and that the products are new drugs requiring approval by FDA of a New Drug Application prior to marketing. FDA is alleging that these products are drugs, as they are intended – based on label and advertising claims (specifically on websites) – to affect the structure or any function of the human body rendering them drugs under the Federal Food Drug and Cosmetic Act (“FFDCA”). [1]

So what specific types of claims has the FDA targeted in these letters? The Agency has specifically cited claims relating to wrinkle reduction, face lifting, repair and regeneration products, and blemish reduction/elimination. They have focused not so much on the type of product, but how the product is claimed to work. For example, they have focused on claims such as:

“Rebuild collagen to help plump out lines and wrinkles”

“Stimulate elastin to help improve elasticity and resilience”

“…. helps reactivate the skin’s repair process……”

“…. help boost the production of collagen and elastin……”

“… boosts the activity of genes….”

“…. stimulate cell regeneration to reconstruct skin …..”

“…. immediate lifting, lasting repositioning.”

“….helping to repair structural damage to deeper layers of the skin.”

“… repair the structural damage that actually causes those wrinkles.”

“…. stimulate blood flow and cell metabolism to naturally dissolve fat deposits.”

They have also focused on claims that the cited products provide benefits equal to those of drug products, such as:

“…. provides all the muscle relaxing properties of BOTOX®.”

“…. provides all the benefit of BOTOX®.”

“…. provides BOTOX®-like results without needles.”

“…. a safe and effective alternative to BOTOX®.”

Last, they have objected to use of words that describe the method of activity, including:

“anti-inflammatory”

“anti-microbial, antibacterial and antifungal”

“antiseptic and bactericide”

Whether this salvo of Warning Letters is just the beginning of a widening push of enforcement activity remains to be seen. FDA frequently takes such actions in the hope that other companies will note their actions and adjust their promotional activities accordingly, often referred to as “regulation by Warning Letter.” Whether this will lead to actual litigation over the legality of these claims remains to be seen. [2]

In the meantime, manufacturers and distributors of cosmetic products should note the types of claims FDA is objecting to, and review their advertising and promotional materials (in particular websites) in light of these actions. [3]

[1] Under Section 321(g)(1) of the FFDCA, the term “drug” means:

(A) articles recognized in the official United States Pharmacopeia, official Homeopathic Pharmacopeia of the United States, or official National Formulary, or any supplement to any of them; and

(B) articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals; and

[2] FDA took action against “wrinkle removers” and “face lift” type claims in the late 60’s and early seventies. See, United States v. An Article… Line Away, 284 F. Supp. 107 (D. Del. 1968) aff’d, 415 F.2d 369 (3d Cir. 1979); United States v. An Article…Sudden Change, 288 F. Supp. 29 (E.D.N.Y. 1968), rev’d, 409 F.2d 734 (2d Cir. 1969); United States v. An Article … Magic Secret, 331 F. Supp. 912 (D. Md. 1971). In 1987, the Agency sent twenty three (23) regulatory letters pertaining to cosmetics products, alleging that claims such as “cell removal”, “cell recovery”, “cell-repair”, “anti-aging”, “increase collagen production” and similar claims were drug claims. But since then, there has been little or no enforcement action on these types of claims.

[3] The letters were all issued by the Office of Compliance, Center for Food Safety and Applied Nutrition of FDA. The letters are Warning Letter 262337 issued to Avon Products, Inc., on October 5, 2012; Warning Letter 273596 issued to Lancôme USA on September 7, 2012; Warning Letter 262375 issued to Bioque Technologies on October 5, 2012; and Warning Letter 262454, issued to Radcliff Consultants, LLC as agent for Greek Island Labs, on September 7, 2012. All can be found at www.fda.gov/ICE01/EnforcementActions/WarningLetters/2012.

Proposition 37 Permits "Natural" Labeling for Non-GMO Processed Food

Sheppard Mullin — Mon, 08 Oct 2012 09:38:26 -0800

Proposition 37, the California Right to Know Genetically Engineered Food Act ("Prop 37”), if approved by the voters on November 6, 2012, will provide that food offered for retail sale in California produced with genetic engineering (“GMO food”) is misbranded unless clearly labeled to say it is genetically engineered. Prop 37 also provides that GMO “processed food” may not on its label, store signage, advertising or promotional materials state or imply that the food is “natural” or words of similar import.

Ballot materials prepared by the Legislative Analyst’s Office (LAO) state that Prop 37 could be interpreted to mean “processed food” is subject to the prohibition against “natural” labels, even if it is not produced with genetic engineering. In our view, this is not the correct interpretation of Prop. 37.

THE FINDINGS, STATEMENT OF PURPOSE AND LANGUAGE OF PROPOSITION 37 DEMONSTRATE THAT THE LABELING REQUIREMENTS ARE DIRECTED TO FOOD PRODUCED WITH GENETIC ENGINEERING, NOT TO PROCESSED FOOD IN GENERAL

The Findings and Declarations in Proposition 37 state that “California consumers have the right to know whether foods they purchase were produced using genetic engineering," and that "The labeling, advertising and marketing of genetically engineered foods using terms such as 'natural,' 'naturally made,' 'naturally grown,' or 'all natural' is misleading to California consumers.”

The Statement of Purpose provides: “The purpose of the measure is to create and enforce the fundamental right of the people of California to be fully informed about whether the food they purchase and eat is genetically engineered and not misbranded as natural so that they can choose for themselves whether to purchase and eat such foods.”

These statements show concern about misbranding of genetically engineered food as natural, but not about labeling non-GMO processed food as natural.

Section 110809, Disclosure With Respect to Genetic Engineering of Food, provides that "any food offered for retail sale in California is misbranded if it is or may have been entirely or partially produced with genetic engineering and that fact is not disclosed." Subdivision (c) of § 110808 defines “genetically engineered”; and subdivision (d) defines “processed food.”

Section 110809.1, Misbranding of Genetically Engineered Foods as 'Natural,' provides:

In addition to any disclosure required by Section 110809, if a food meets any of the definitions in subdivision (c) or (d) of Section 110808 . . . the food may not in California, on its label, accompanying signage in a retail establishment, or in any advertising or promotional materials, state or imply that the food is "natural," "naturally made," "naturally grown," "all natural," or any words of similar import that would have any tendency to mislead any consumer.

The title of § 110809.1 highlights the fact that it applies to "Misbranding of Genetically Engineered Foods as 'Natural.'" The introductory phrase, "In addition to any disclosure required by section 110809," clarifies that the “natural” labeling restriction in § 110809.1 applies only where disclosure is already required—i.e., for food that "is or may have been entirely or partially produced with genetic engineering."

Basic rules of statutory interpretation require a law to be construed consistently with its purpose and to avoid absurd results. Construing § 110809.1 to prohibit “natural” labels on non-GMO processed food would violate these rules. Under § 110808(d), "processed food" includes any food subject to "canning, smoking, pressing, cooking, freezing, dehydration, fermentation or milling." Prohibiting "natural" labels on "processed food" regardless of whether it is genetically engineered would affect foods such as 100 percent fruit juice, pure nut butters, dried fruit, flour, ice cream, and virtually any food that is not raw, freshly harvested and unprocessed. Such a result would confound consumer expectations, and it is not consistent with Prop 37’s purpose of protecting consumers against undisclosed use of genetic engineering.

STATUTORY INTENT SUPPORTS THE VIEW THAT PROPOSITION 37 IS LIMITED TO FOOD PRODUCED WITH GENETIC ENGINEERING

Background materials for Prop 37 focus on the right to know whether food is genetically engineered, with no expression of intent to regulate "natural" marketing in any other context. In submitting Prop 37 to the Attorney General’s Office for review, the LAO described the measure as "a proposed statutory initiative related to the labeling of genetically engineered (GE) food products," noting: "the measure prohibits the use of terms such as 'natural,' 'naturally made,' 'naturally grown,' and 'all natural' in the labeling and advertising of any food that is genetically engineered." The official Yes on 37 website states that the prohibition on “natural” marketing does not apply to food that is not genetically engineered.

THE SINGLE SUBJECT RULE SUPPORTS THE VIEW THAT PROPOSITION 37 IS LIMITED TO FOOD PRODUCED WITH GENETIC ENGINEERING

Article II, § 8(a) of the California Constitution, the “single subject rule,” provides: "An initiative measure embracing more than one subject may not be submitted to the electors or have any effect." It is settled that courts should construe laws to avoid unconstitutionality. According to the California Supreme Court, "a measure complies with the [single subject] rule if its provisions are either functionally related to one another or are reasonably germane to one another or the objects of the enactment." The object of Prop 37, as expressed in its title and text, is to require disclosure if food sold in California is genetically engineered. A provision that prohibits "natural" labels on nongenetically engineered food would not be germane to the other provisions of Prop 37 or to its object. A court would avoid such a construction because it would violate the single subject rule, rendering the entire measure unconstitutional.

ABOUT THE AUTHORS

The authors are partners in the San Francisco office of Sheppard Mullin Richter & Hampton, LLP, where their practices include food labeling, organic, consumer class action defense, and environmental law.

Peter Hecker, Partner
415.774.3155
phecker@sheppardmullin.com

Neil Popović, Partner
415.774.3156
npopovic@sheppardmullin.com

Robert Uram, Partner
415.774.3285
ruram@sheppardmullin.com

Note: This summary is for informational purposes and is not intended to provide legal or other advice or to create an attorney-client relationship. The opinions expressed herein are those of the authors and may not reflect the opinions of the firm, its clients or any other attorney.

FTC Proposes Amendments to the Premerger Notification Rules to Expand the Reportability of Transfers of Exclusive Patent Rights in the Pharmaceutical Industry

Sheppard Mullin — Wed, 15 Aug 2012 08:54:33 -0800

On August 13, 2012, the Federal Trade Commission (“FTC”) proposed amendments to the Premerger Notification Rules issued under the Hart Scott Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The proposed amendments would expand when a transfer of exclusive rights to a patent in the pharmaceutical industry is potentially reportable under the HSR Act.

The HSR Act requires the parties to an acquisition of assets, voting securities or non-corporate interests meeting certain thresholds to file notifications with the FTC and the Antitrust Division of the Department of Justice and observe a waiting period before they can consummate the transaction. As a patent clearly is an asset, there is no question that the acquisition of a patent is potentially subject to the requirements of the HSR Act. However, it is not so clear as to when an exclusive patent license qualifies as an asset acquisition.

Under the present HSR Rules, the Premerger Notification Office (“PNO”) of the FTC (which provides informal interpretations of the Rules) has taken the position that, in order to qualify as an asset acquisition, the license must grant the licensee exclusive rights to “make, use and sell” under the patent, even against the licensor. Thus, if the licensor retains the right to manufacture under the patent, the transaction is not reportable.

In explaining the rationale for the proposed amendments, the FTC noted that in many exclusive licenses in the pharmaceutical industry, the licensor retains rights in one or both of two categories: manufacturing rights and co-rights. According to the FTC, if the retention of manufacturing rights is solely to manufacture for the licensee, that is substantively the same as giving the licensee the exclusive right to manufacture. As to co-rights, which permit the licensor to assist in the Food and Drug Administration approval process, and in the promotion and marketing of the product, they do not detract from the exclusivity of the license.

Proposed new Section 801.2(g) of the HSR Rules provides that transfers of patent rights in the pharmaceutical industry (NAICS Industry Group 3254) constitute an asset acquisition if and only if “all commercially significant rights” to a patent for any therapeutic area or specific indication are transferred to another entity. However, all commercially significant rights are transferred even if the patent holder retains “limited manufacturing rights” or “co-rights”.

The proposed amendments also add three new definitions to the HSR Rules. The first, “all commercially significant rights” means the exclusive rights to a patent that allow only the recipient to use the patent in a particular therapeutic area or specific indication within a therapeutic area. “Limited manufacturing rights” means the retention of manufacturing rights “solely to provide the recipient of the patent rights with product(s) covered by the patents.” The third, “co-rights”, means “shared rights retained by the patent holder to assist the recipient of the exclusive patent rights in developing and commercializing the product covered by the patent.”

According to the FTC: “The proposed rule thus clarifies the analysis of the reportability of transfers of pharmaceutical patent rights while providing the Agencies with a better opportunity to review the transfers of exclusive rights to a patent in the pharmaceutical industry for competitive concerns.” It estimates that the amendments will result in an increase of 30 HSR filings per year.

The proposed amendments are open to public comments until October 25, 2012. If you would like additional information, please contact Bob Magielnicki at 202-218-0002 (rmagielnicki@sheppardmullin.com) or Malika Levarlet at 202-772-5331 (mlevarlet@sheppardmullin.com).

Congress Contemplates Action on Rolling Machines

Sheppard Mullin — Tue, 03 Apr 2012 12:14:03 -0800

By Seth A. Mailhot

As part of Sheppard Mullin’s monthly blog on tobacco retailer issues, we are taking a look at the possible future of retailer-operated rolling machines. On March 8, 2012, the U.S. Senate adopted an amendment to the federal highway bill “Moving Ahead for Progress in the 21st Century Act” (MAP–21) that included a provision impacting retail establishments that offer rolling machines for use to customers. The provision would have changed the definition of “manufacturer of tobacco products” in section 5702(d) of the Internal Revenue Code of 1986 to “include any person who for commercial purposes makes available for consumer use . . . a machine capable of making cigarettes, cigars, or other tobacco products.”[1]

The bill containing the provision was never passed by the House. Instead, Congress voted on March 29 for another short-term extension of highway funds. This short-term extension lacked the provision changing the definition of a manufacturer of tobacco products. Regardless, retailers should be wary that this provision may reappear again in future legislation, transportation or otherwise.

The provision was offered by Senators Baucus, Murkowski, Bingaman, Crapo, Wyden, Risch, Merkley, Tester, and Bennet as part of an amendment to extend the Secure Rural Schools and Community Self-Determination Act of 2000 for one additional year. The amendment was adopted by the Senate in a vote of 82 to 16, demonstrating clear bipartisan support. There is no suggestion that the provision regarding rolling machines had any bearing on the overall fate of MAP-21.

Reports indicate that Congress views the change to the definition as an easy way to help balance costs associated with a bill or amendment. It is easy to see why. The provision was estimated to raise $99 million in Federal excise taxes. As noted in a recent article by The Washington Post, an aide to the Senate Finance Committee commented that a change to the definition has been considered by both the deficit-reduction supercommittee, and negotiators involved in the extension of the payroll tax cut. [2]

Congress is positioning the change to the definition as the closing of a “tax loophole,” and not a new tax. According to Senator Baucus, the provision:

. . . partially closes a loophole regarding roll-your-own tobacco. Congress raised taxes on tobacco to pay for the reauthorization of the Children's Health Insurance Program in 2009. Tax rates on pipe tobacco were not increased as much as on roll-your-own tobacco; therefore, tobacco companies are selling bags of roll-your-own tobacco and labeling them as pipe tobacco. In other words, the pipe tobacco is masquerading as tobacco to be rolled into cigarettes to avoid the additional tax.[3]

Senator Baucus noted that “[t]he abuse is so prevalent that gas station owners now have cigarette rolling machines to facilitate the loophole. A customer purchases a bag of pipe tobacco and then uses the machine to roll cigarettes."[4]

Despite the intent of Congress to close a perceived tax loophole created by the misuse of pipe tobacco, the provision (in its MAP-21 form) would also impact taxation of roll-your-own tobacco. As the provision only changes the definition of a “manufacturer of tobacco products,” it would draw no distinction between cigarettes rolled using pipe tobacco or roll-your-own tobacco. This could lead to the double taxation of roll-your-own tobacco.

Further, the language is vague enough to include retailers and companies that sell personal roll-your-own machines to consumers as “manufacturers of tobacco products.” Although section 5702(d) of the Internal Revenue Code currently includes an exemption for individuals that make tobacco products for their own personal consumption, this exemption would not apply to retailers and other companies that only sell supplies and equipment to individuals that make their own tobacco products.

Another issue not directly addressed in the language of the provision was how affected retailers would be treated under the Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act). An expansion to the definition in the Internal Revenue Code would not have a direct bearing on the definition of a “tobacco product manufacturer” in the Tobacco Control Act. Despite this, the change to the Internal Revenue Code may prompt FDA to consider broadening its application of the current Tobacco Control Act definition to include rolling machine operations by retailers. If FDA decided to follow the lead of Congress (when and if such a provision is ultimately enacted), affected retailers would be subject to regulatory requirements equivalent to those imposed on cigarette manufacturers. Such regulatory requirements currently include payment of user fees, submitting premarket applications for new tobacco products, and compliance with labeling, good manufacturing practice (GMP), registration and reporting provisions.

If FDA chose to adopt a broader interpretation of “tobacco product manufacturer,” along the lines of the Internal Revenue Code proposal, it is not currently known how FDA would implement such a change. For example, FDA may determine such a change requires notice and comment through the traditional administrative rulemaking process. Alternatively, FDA may consider the current definition of “tobacco product manufacturer” in the Tobacco Control Act sufficiently broad enough to include retailers affected by the proposed Internal Revenue Code.

The Senate’s action last month leaves a number of unanswered questions that have a direct impact on the business of many retailers and other companies. Most immediate among these questions is the potential impact such a change would have on the taxation of retailers, and how the government might assess those taxes. Such a change would also undoubtedly have an impact on the taxes paid to states for the manufacture of cigarettes.

Sheppard Mullin is actively monitoring this provision, as it is an important issue for many retailers. Updates will be posted on our blog as they develop. Retailers and other companies seeking further clarity on this provision may contact the author directly.

[1] 158 Cong. Rec. S. 1544, 1548 (Mar. 8, 2012).

[2] Rosalind S. Helderman, “Amendment to highway bill sideswipes Little Tobacco,” The Washington Post (Mar. 17, 2012), available at http://www.washingtonpost.com/politics/2012/03/14/gIQAKoCBJS_story.html.

[3] 158 Cong. Rec. S. 1645, 1652 (Mar. 14, 2012).

[4] Id.

Mandatory Debarment for FCPA Violations? A Bad Idea Whose Time Should Never Come

Sheppard Mullin — Wed, 28 Mar 2012 09:53:57 -0800

By Mike Emmick

In the fervor of the U.S.'s current anti-foreign-corruption efforts, a particularly misguided proposal has occasionally reared its ugly head: Requiring “mandatory debarment” for any company that violates the Foreign Corrupt Practices Act (“FCPA”).

On the merits, such a proposal is completely wrong-headed. Debarment is a severe, forward-looking administrative remedy – the corporate “death penalty” – not a vehicle to “boost” the penalties for past criminal FCPA violations.

Nonetheless, in 2010, such a “mandatory debarment” bill was passed by the House, only to die in Congress due to Senate inaction. Optimistic multinational contractors might therefore have concluded, “Whew, we dodged that bullet.”

However, a recent law-review article has sought to resurrect the debarment idea, contending that no other remedy will deter large global companies from violating the FCPA.

Below is a snapshot of the relevant law, recent developments, and pertinent arguments. As will be explained, despite the recent article, the notion of “mandatory debarment” is unlikely to gain traction – even the Department of Justice (“DOJ”) opposes it – but the article and the current anti-corruption frenzy may cause authorities to reconsider the idea. Any multinational company that does substantial government contract work should therefore monitor and resist such efforts.

As nearly everyone who operates in this market knows by this time, the FCPA prohibits U.S. companies from paying bribes to foreign officials in order to obtain or retain business. The FCPA also requires accurate books and records and meaningful internal accounting controls. Violations of the FCPA can result in huge criminal and civil fines, disgorgement of profits, and payment of interest, not to mention a wide range of collateral consequences. The FCPA is enforced by DOJ and the SEC.

Over the past five years DOJ has been extremely aggressive in its prosecution of FCPA violations. Eight of the ten largest FCPA fines in history occurred in 2010, and multi-million-dollar fines have now become routine. There are currently dozens of pending FCPA investigations – many more than in previous years. Indeed, DOJ has dubbed this “the new era of FCPA enforcement.”

Congress attempted to climb aboard this FCPA-enforcement bandwagon when, on September 15, 2010, the House unanimously passed a “mandatory debarment” bill – H.R. 5366, known as the 2010 Overseas Contractor Reform Act. The bill would have created a government-wide policy that no contracts be awarded to companies or individuals that violated the FCPA. H.R. 5366, § 3. Procedurally, the law would have required the contracting agency to propose for debarment all contractors found to be in violation of the FCPA.

The bill was flawed in many ways. It did not define a “finding” of an FCPA violation, so it was unclear whether the debarment would be triggered by a non-prosecution or deferred prosecution agreement. The bill failed to differentiate between major and minor FCPA violations, or between different kinds of violations (i.e., bribe payments versus “books and records” or accounting violations). The bill did not require or permit consideration of how the violation occurred, whether the company self-reported the violation, or whether the company dramatically improved its anti-corruption compliance program thereafter.

Shortly after the bill was passed, DOJ answered questions about the FCPA generally, as the Chamber of Commerce was proposing FCPA amendments. DOJ expressed its opposition to “mandatory debarment,” stating that mandatory debarment “would likely be counterproductive, as it would reduce the number of voluntary disclosures and concomitantly limit corporate remediation and the implementation of enhanced compliance programs.” According to DOJ, such a debarment program could also hurt the government's ability to investigate and prosecute transnational corruption. Linking debarment to criminal conviction would “fundamentally alter the incentives of a contractor-company,” because an FCPA resolution would then cause the company to suffer a dramatic reduction in revenue. That, in turn, would negatively impact prosecutorial discretion and the flexibility to reach an appropriate resolution given the facts and circumstances of the particular case.

DOJ's opposition would ordinarily be enough to ensure that “mandatory debarment” would not be taken seriously. And in fact the Senate took no further action on the House bill, perhaps because of DOJ's opposition after the House bill was passed.

However, a recent law-review article has sought to resurrect this misguided debarment notion. In November 2011, Fordham Law Review published a 70-page article entitled “FCPA Sanctions: Too Big to Debar,” available here, which was written by Professor Drury Stevenson of the South Texas College of Law, along with one his law students. The article took the position that debarment should be considered as an additional punishment for FCPA violations. According to the article, corporations can only be punished via fines, and government contract revenues are so large that fines often become a mere “cost of doing business,” which prevents those fines from having deterrent value. In addition, the public may interpret a failure to debar a company as suggesting that companies can buy their way out of FCPA violations.

The article acknowledged that mandatory debarment might discourage self-disclosure – one of DOJ's concerns – but proposed that self disclosure might be meaningfully rewarded through a reduced criminal fine. The article also acknowledged that debarment might be the contractor's “death knell”; it might even raise an “Arthur Andersen” problem by driving an important and responsible company out of business entirely, which might harm the contracting market, foreign relations, national security, and the company's shareholders. As an alternative to mandatory debarment, the article proposed an increase in discretionary debarments based on FCPA violations.

For a number of reasons, “mandatory debarment” for FCPA violations is a bad idea. In fact, In January 2012, two months after “Too Big to Debar” was published, Fordham Law Review published a responsive article authored by Jessica Tillipman, a professor at George Washington Law School. Jessica Tillipman, “A House of Cards Falls: Why “Too Big to Debar” is All Slogan and Little Substance”, available here. Tillipman disagreed with nearly all of Professor Stevenson's conclusions and analysis, and her remarks warrant summarizing here.

First, the debarment provision in the Federal Acquisition Regulations (FAR) is itself inconsistent with “mandatory debarment.” FAR 9-402(b) states that “the serious nature of debarment and suspension requires that these sanctions be imposed only in the public interest for the Government's protection and not for purposes of punishment.” (Emphasis added.) The point of debarment is to ensure that the government works with “responsible partners.” Indeed, that is why the prosecutors handle the fines, and the debarring officials handle the debarment.

Second, the FAR expressly requires the debarment officials to consider whether the contractor undertook remedial measures or whether the violation involved mitigating factors that demonstrate that the contractor is still “presently responsible.” FAR 9-406-1. Mandatory debarment would make those provisions meaningless, and would shift the focus of debarment from future conduct to past conduct.

Third, imposing the remedy of “mandatory debarment” would unfairly focus on government contractors, not on other companies or individuals that may violate the FCPA. Why should contractors be discriminated against – especially automatically discriminated against?

Fourth, debarment is an inappropriate “all or nothing” remedy. Its use might destroy responsible companies – even essential companies – that have thousands of employees and contribute immensely to the economies of the U.S. and the world. That is why debarment should be used only rarely, and only after an extensive review of what prompted the transgression, how the company responded, and other important factors.

Fifth, if mandatory debarment were to become the law, it might even discourage large companies from engaging in business with the U.S., because their devotion of time to and their monetary investments in government contract work could be lost at the whim of federal prosecutors, perhaps as the result of actions by rogue employees who clandestinely refused to adhere to the companies' anti-corruption compliance program.

Finally, as DOJ itself pointed out in 2010, “mandatory debarment” might actually hurt the US's FCPA-enforcement efforts by discouraging corporate self-disclosure and cooperation as part of the remediation process. Those procedures are currently a critical source of information for DOJ to use in its prosecution of FCPA violations.

In light of DOJ's opposition, “mandatory debarment” for FCPA violations is unlikely ever to become law. Nonetheless, because the consequences would be potentially devastating, any such possibility should be monitored closely by and vigorously opposed by global contractors.

The Uncomfortable Resurgence of the Responsible Corporate Officer Doctrine

Sheppard Mullin — Wed, 28 Mar 2012 09:45:47 -0800

By Mike Emmick and Joseph Barton

Corporate executives in the health care and environmental industries are rapidly coming to appreciate the implications of the responsible corporate officer doctrine, a recently-revitalized weapon in U.S. Department of Justice’s battle against corporate crime.

This doctrine is a peculiar exception to the usual requirements for a criminal prosecution. Ordinarily, criminal law requires a defendant to have committed a criminal act, and to have done so with criminal intent.

The responsible corporate officer doctrine ("RCO doctrine") departs from that model and imposes vicarious and strict liability on corporate officers based entirely on their position within the company. Under the doctrine, a corporate officer can be held criminally liable for a low-level employee's criminal activity, even if the officer did not participate in or know anything about the criminal activity. The criminal liability is based entirely on the officer's responsibility and authority to prevent or correct the violation, and his failure to do so. The only defense is where prevention of the crime was "objectively impossible," which is almost never the case.

This doctrine has been around a long time, although it has been used only occasionally. The two leading cases upholding the doctrine involve an interpretation of the Food, Drug, and Cosmetic Act: U.S. v. Dotterweich, 320 U.S. 277 (1943)(misbranded drugs) and U.S. v. Park, 421 U.S. 658 (1975)(rats in a warehouse). Those cases involved misdemeanor violations and relatively small fines, which helps explain why the U.S. Supreme Court tolerated and upheld the doctrine.

The RCO doctrine was used primarily for prosecutions brought under the Food, Drug, and Cosmetic Act until the mid-1980s, when it began to be used for environmental crimes as well. Some environmental statutes, such as the Clean Air Act and Clean Water Act, expressly provide that "responsible corporate officers" are among the "persons" who can be prosecuted for any violations. See 33 U.S.C. Section 1319(c)(6)(1987 Clean Water Act).

The rationale for the doctrine is straightforward. Prosecuting "public welfare" offenses is particularly important because those crimes can have a far-reaching impact. Yet, prosecuting the low-level employees who actually carried out the crimes is often impossible, unfair, or unappealing. Similarly, prosecuting the corporation often has minimal deterrent value because the corporation can regard the criminal fines as a "cost of doing business." On the other hand, prosecuting corporate executives for crimes committed "on their watch" will encourage greater supervision and prevention of those crimes, which will ultimately provide greater protection for the public.

Recently, federal authorities announced a return to using the RCO doctrine. In 2009, Assistant Attorney General Tony West said the Justice Department would be making more use of the doctrine to combat health care fraud; and in 2010, Food and Drug Administration Commissioner Margaret Hamburg made a similar announcement.

True to those announcements, several responsible corporate officer prosecutions have recently been brought. Two aspects of those prosecutions are, however, somewhat unsettling: the doctrine's practical implications in this new world of corporate cooperation, and the unexpected use of these convictions to obtain prison sentences and debarment.

From a practical point of view, the RCO doctrine is largely a way for the Justice Department to prosecute individual corporate executives whom it believes or suspects (but cannot prove) actually played a role in directing, encouraging, or approving the corporation's criminal conduct. In that sense, the doctrine operates a bit like criminal liability based on theories of recklessness or criminal negligence, or like the practice of proving criminal knowledge through a defendant's "conscious avoidance" of learning the underlying facts. The doctrine is thus an easier "fall-back" way of bringing or threatening criminal charges against a deserving corporate officer.

More to the point, prosecutors can thus use the threat of an RCO prosecution to put pressure on corporate executives to cooperate with the government's investigation. With the doctrine in hand, the prosecutor's negotiation with the executive and his attorney is no longer simply about what the executive did and what he knew; the prosecutor can simply say, "This was your area of responsibility, right?" Such a threat can be effective because the doctrine is broad and vague, and its use is limited primarily by prosecutorial discretion.

The recent use of the doctrine is disturbing, though, because it goes beyond Dotterweich and Park, which involved only minimal fines for misdemeanor charges. The recent sentences for RCO violations have included substantial incarceration – at least, "substantial" by the standards of a corporate executive who did little to warrant any conviction at all. In the Synthes prosecution, for example, four executives pleaded guilty to responsible corporate officer misdemeanors and were sentenced in 2011. Two were sentenced to nine months in prison; one was sentenced to eight months in prison; and one was sentenced to five months in prison. All four received fines of $100,000.

Also unsettling is the government's recent use of these convictions to debar executives from further work in their industry – arguably a greater consequence than the misdemeanor conviction and fine. For example, in the Purdue Frederick case, an executive who pleaded guilty to a responsible corporate officer count was debarred for 12 years, even though the common period of debarment would be only three years if the officer had directly committed the crime.

The legitimacy of that debarment is being challenged on appeal, but the point here is clear: A guilty plea to a "soft" or "fall-back" RCO count can have harsh and far-reaching consequences, which is quite different than the small, almost-regulatory fines envisioned by Dotterweich and Park.

These renewed applications of the doctrine also raise questions about how it might be used in the future. If the doctrine can be the basis for substantial prison time, can it also be used for felony prosecutions? Although the doctrine is now limited to public welfare offenses involving health care and environmental crimes, could it also be used for other crimes that can be characterized as public welfare offenses, or perhaps for crimes that do not involve public welfare at all? Is the doctrine a creature of statutory interpretation, or has it evolved into a common law concept applicable to other settings entirely?

Finally, there is a quirky recent development that, properly interpreted, might serve as a "wake-up call" regarding this new threat of RCO prosecutions. Just this month, insurance companies have begun offering "RCO insurance" to cover the economic loss an executive might suffer as a result of such a prosecution, debarment, and/or loss of salary. Needless to say, the insurance company will not also serve the executive's prison sentence.

The lesson going-forward is therefore clear: Executives must protect themselves through active and responsible adherence to the corporate compliance program. The days of "protecting yourself from criminal responsibility by doing nothing" are long behind us.

Comment Period to Close On Petition to FDA for Mandatory Labeling of All Foods Produced Using Genetic Engineering

Sheppard Mullin — Mon, 26 Mar 2012 10:55:25 -0800

By Robert Uram

On March 27, 2012, the comment period will close on a petition filed by the Center for Food Safety that calls for the FDA to issue new regulations requiring labeling of all foods produced using genetic engineering (GE). Docket No. FDA-2011-P-0723 (Filed October 12, 2011). Unlike many other developed countries – such as 15 nations in the European Union, Japan, Australia, Brazil, Russia and even China – the U.S. has no laws requiring labeling of genetically engineered foods.

Nearly one million individuals, more than 500 partner organizations representing the healthcare community, consumer advocates, farmers, concerned parents, environmentalists, food and farming organizations, businesses and 55 members of Congress and many more concerned with protecting the consumer’s right to know have joined together in support of the FDA petition and the mandatory labeling of genetically engineered foods.

A recent letter by 55 members of Congress explains:

At issue is the fundamental right consumers have to make informed choices about the food they eat…The agency currently requires over 3,000 other ingredients, additives, and processes to be labeled; providing basic information doesn’t confuse the public, it empowers them to make choices. Absent labeling, Americans are unable to choose for themselves whether to purchase GE foods…. We urge you to fully review the facts, law, and science, and side with the American public by requiring the labeling of genetically engineered foods as is done in nearly 50 countries throughout the world.

According to Justlabelit.org, studies show that more than 90 percent of the population support mandatory labeling of genetically engineered foods.

Why Are GE Foods Not Labeled?

The Federal Food, Drug, and Cosmetic Act requires the FDA to prevent consumer deception by clarifying that a food label is misleading if it omits significant “material” information. In 1992 the FDA issued a policy statement that defined “material” as the ability to be sensed by taste, smell, or other senses. The FDA determined that GE Foods were “substantially equivalent” to conventionally produced foods, so there was no material difference – and no labeling was required. After almost 20 years, this policy is still in effect today.

The petition calls for the FDA to:

Issue new regulations requiring labeling of all foods produced using genetic engineering.
Change the way it defines “material” to a change in food at the atomic, molecular or genetic level that a significant share of consumers would find relevant to their purchasing decisions; and/or
Issue new regulations requiring labeling of all transgenic food because it always results in novel DNA and proteins never before present in the foods, and which consumers would not expect.

The issue has attracted significant press attention and is being closely watched. Use of GE products have also raised significant environmental and economic issues. Further information on the petition can be found at http://justlabelit.org/about-just-label-it/.

State-by-State Differences in Retailer Enforcement

Sheppard Mullin — Thu, 15 Mar 2012 11:33:21 -0800

By Seth A. Mailhot

Welcome to the next monthly installment in FDA's enforcement of regulated tobacco products. This month we will examine some of the differences found between different states in FDA enforcement actions against retailers.

Sheppard Mullin has been closely monitoring FDA's tobacco enforcement actions to better serve its clients. From the beginning of FDA's program inspecting tobacco retailers, a trend emerged suggesting that there are significant differences in enforcement between retailers depending on the state in which the inspection was conducted. This raises concerns about not only in how each state conducts its retail inspection program, but the level of oversight applied by the Center for Tobacco Control over the program as a whole.

One of the most important of these state-to-state differences relates to the percentage of inspections resulting in an enforcement action. The following table provides the most recent data for states where more than 1,000 retailer inspections were conducted.

State	Inspections	Enforcement Action Rate	Civil Money Penalties
MO	2,235	13.65%	0
IL	1,214	13.18%	0
CO	2,125	11.11%	7
AZ	1,251	8.07%	1
WA	1,644	7.42%	4
MS	4,976	6.95%	10
AR	1,541	5.58%	0
All[1]	40,001	5.07%	29
MA	3,892	4.39%	5
TN	1,342	4.32%	0
MD	2,294	3.05%	1
PA	5,883	3.04%	0
AL	3,221	2.64%	1
KS	2,687	2.01%	0
ME	4,203	0.74%	0

As demonstrated by the table, the rates across the different states vary by a broad margin. For states where more than 1,000 inspections have been conducted, the highest state action rate is well over 10% greater than the lowest state action rate. In statistical terms, enforcement action rates for four (4) of these fourteen (14) states fall outside of the standard deviation for the set.[2]

The difference in enforcement action rate may be due to any number of causes. The most critical issue is whether the difference is the result of factors that are within FDA's control, or the result of factors outside of FDA's control. For example, a particular state government's bias for or against tobacco retailing in general may have a significant influence on that state's enforcement action rate. This would be a factor controllable by FDA through the administration and management of state retail inspection contracts.

Not every factor is within FDA's power to control. For example, a state may have lacked laws or regulations governing tobacco retailing prior to the enactment of the Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act), or may have lacked funding to enforce such laws or regulations. Alternatively, a state may have had a very strict regulatory regime with robust enforcement prior to enactment.

There is reason to believe that the difference in enforcement action rate is due to factors within FDA's control. Most telling are the state-by-state differences in the length of time from inspection to Warning Letter issuance. A wide variation across different states suggests that FDA’s management of the inspection program has a significant impact on many aspects of the program, including enforcement.

A lengthy delay between a retailer’s inspection and the issuance of a Warning Letter is a common occurrence, which leads to a lack of notice to retailers who wish to act responsibly. As of January 20, 2012, the average length of time between inspection of a tobacco retail facility and the subsequent issuance of a Warning Letter was over seventy (78) days. The following table displays the minimum, maximum, and average number of days from inspection to Warning Letter, by state, as well as the standard deviation.[3]

This data is represented graphically in the following chart. The red I-bars represent one standard deviation from the average.

Figure 1

On average, a retailer can expect to wait eleven (11) full weeks from the date of an inspection before a Warning Letter is sent. In many instances, a retailer first learns that an inspection has occurred when the Warning Letter is received. Of course such lengthy delays make it nearly impossible for a retailer to effectively evaluate the situation, and adequately address any alleged violations.

Maintaining consistency in enforcement has long been a struggle of the agency in other areas. While it is not surprising to see these issues arise in the context of tobacco retailer enforcement, it is discouraging given the centralized nature of FDA's management over the retail inspection program. Whether a retailer has received a Warning Letter, or a more serious Civil Money Penalty complaint, they are strongly encouraged to consult counsel when preparing a response.

In the next installment, we will examine how different combinations of violations impact Civil Money Penalty complaints, and reflect upon some of the differences in the types of violations found among different states.

[1] Note that this total includes all state inspections conducted to date, and not just the fourteen (14) states with over 1,000 inspections.

[2] The standard deviation in enforcement action rate for states with more than 1,000 inspections is 4.12%, placing Maine, Colorado, Illinois and Montana outside of this range. The standard deviation calculated for all states, including those with less than 1,000 inspections, is significantly higher at 20.41%. The calculation of standard deviation is not weighted by the number of inspections.

[3] Data was compiled as of January 20, 2012.

Update on Tobacco Warning Letters

Sheppard Mullin — Mon, 30 Jan 2012 14:54:26 -0800

Welcome to the first monthly update on FDA's enforcement over regulated tobacco products. This update will examine trends in Warning Letters, and cover some unique Warning Letters and enforcement actions that have occurred in the previous month. As the first post regarding tobacco products, we begin with an alert regarding FDA's issuance of civil money penalty complaints. The update also provides a summary of tobacco related Warning Letters issued by the FDA to date.[1]

The most significant enforcement event over the last month is the issuance of twenty (20) civil money penalty complaints to retailers by the FDA. The Family Smoking Prevention and Tobacco Control Act provides for civil money penalties for violations of FDA's tobacco regulations at 21 C.F.R. part 1140. This is a significant concern, particularly as some of these complaints allege five (5) violations, which is the minimum necessary for FDA to bring a "No Tobacco Sale Order" against a retailer. The following tables list the violations identified in the complaints, the values of the civil money penalties assessed, and the states where the retailers are located.

Overall, there have been 1,370 Warning Letters issued by the Center for Tobacco Products since the Family Smoking Prevention and Tobacco Control Act was passed in 2009. The majority of Warning Letters were issued as the result of state contract inspections of retailers. The remaining 45 Warning Letters were issued directly by the Center for Tobacco Products to Internet retailers and manufacturers.

Tobacco Warning Letters Issued to Date

Tobacco Warning Letters Issued in 2011

The most common violation among brick-and-mortar retailers is the sale of a tobacco product to a minor, which is prohibited by 21 C.F.R. § 1140.14(a). This violation is often combined with a violation for the failure to check for identification, which is a requirement of 21 C.F.R. § 1140.14(b)(1). These violations arise out of the undercover purchases made by minors who are accompanied by state contract inspectors. FDA has also given considerable attention to the use of self-service displays and vending machines, which are prohibited in establishments that permit anyone under the age of 18 to enter. Inspections of facilities that do not permit anyone under the age of 18 to enter are generally conducted only by the state contract inspector, and do not include a minor. The following table provides totals for violations found among all state contract inspections.

In addition, four (4) Warning Letters cited brick-and-mortar retailers for selling cigarettes that contained a characterizing flavor, and forty-four (44) brick-and-mortar retailers were notified regarding the use of modified risk language in labeling.

Warning Letters issued directly by the Center for Tobacco Products, and not as the result of a state contract inspection, were primarily sent to Internet retailers. These Warning Letters generally concerned the sale of cigarettes with a characterizing flavor (39 of 45 Warning Letters), and the use of modified risk language in advertising and labeling (19 of 45 Warning Letters). Two manufacturers were cited for sponsoring an event, and one was cited for offering a free gift or item for the sale of a tobacco product.

The FDA has taken a hard line against cigarettes containing a characterizing flavor, and it is not surprising to see the agency continuing to monitor the Internet for such products. Use of modified risk language, even if explaining a change in product name, has also been a focus of the FDA with regards to Internet retailers and manufacturers.

Warning Letters regarding the offer of a free gift or item generally involved a free item, most commonly a lighter. One Warning Letter, however, involved a rewards program, which offered a check to customers in exchange for providing proof of purchase of specially marked tobacco products.[2] This is the first public Warning Letter to address the issue of a rewards program (as opposed to a free item), and it remains to be seen what attention the FDA will give to more general rewards programs.

Based on this data, retailers should review their training policies and procedures, and be on the lookout for state contract inspections with an undercover minor. There are a number of programs available, and counsel may be retained to assist with implementing such programs. Further, given the large penalties possible under the Tobacco Control Act, any company that receives a Warning Letter or complaint should retain counsel to represent its interests before the FDA.

Next month will include an examination of trends seen between different states.

[1] This includes all Warning Letters posted by the FDA as of January 13, 2012

[2] FDA, Warning Letter issued to Pinkerton Tobacco Company LP (Nov. 28, 2011).

FDA Announces Proposals for Biosimilars User Fees and Performance Review Goals

Sheppard Mullin — Fri, 09 Dec 2011 11:27:28 -0800

By Peter Reichertz

FDA has at last began formal implementation of the Biologics Price Competition and Innovation Act of 2009 ("BPCI Act"), by announcing the proposal it will send to Congress to implement user fees for "generic" copies of biologics, called biosimilars in the BPCI Act. A biosimilar is a product approved under Section 351(k) of the Public Health Service Act ("PHSA"); approvals are not Federal Food, Drug and Cosmetic Act ("FFDCA") approvals. Under the proposal, the user fees for biosimilars - including the product application fee, the annual product fee and the annual establishment fee - would be identical to the fees established for human drug products approved under Section 505(b) of the FFDCA with one significant difference.[1]

Because there are currently no biosimilars approved, FDA expects to expend significant resources upfront in evaluating research and protocols for biosimilar applications. As a result, it is proposing to assess a Biological Product Development ("BPD") Fee for review of Investigational New Applications ("INDs") submitted for biosimilar products. The fee would be due at the time of submission of an IND for a biosimilar product or, if requested, within five (5) days of FDA granting a request for a BPD meeting. In addition, a BPD fee would be assessed to any IND filed for a biosimilar product before any biosimilars user fee legislation is enacted. The BPD fee would be ten percent (10%) of the application fee established for a 505(b) application for the year submitted.

In addition, the fee would be assessed on an annual basis until the applicant either submits a marketing application, or withdraws the IND.[2] The BPD fees would be subtracted from the application user fee due when a biosimilars application is filed under Section 351(k) of the PHSA. There is also a reactivation fee if one withdraws an IND and reactivates subsequently. That fee would be in amount equal to twice the BPD user fee for fiscal year the IND is reactivated, and would be due upon reactivation of the IND, or within five (5) days of FDA granting a request for a BPD meeting.[3]

In addition, FDA has announced proposed review performance goals. The full description of the proposed performance goals and procedures for the biosimilars user fee program can be found in the draft biosimilars user fee commitment letter (draft commitment letter) posed on FDA's Web site at:

FDA: Biosimilar Biological Product Authorization Performance Goals and Procedures Fiscal Years 2013 Through 2017

In brief FDA proposes to review 70% of 351(k) application within 10 months of receipt in fiscal 2013 and 2014, 80% in fiscal 2015, 85% in fiscal 2016 and 90% in fiscal 2017. There are other performance goals for review of supplements, review of proprietary names, clinical hold responses, meeting requests, and the like.

FDA is holding a public hearing on these proposals on December 16, 2011, and is requesting comments - which are due by January 6, 2011. FDA's proposal can be found at 76 Fed. Reg. 76, 424 (December 7, 2011).

These proposals are just the first in a series of proposals on the regulation of biosimilars expected to be announced in the near future. Other expected proposals include proposals on generic names of biosimilars, clinical trial requirements and ability to rely upon foreign approvals, implementation of the "interchangeability" provision and characterization of molecules. It has been almost twenty months since the BCPI Act was enacted. At last manufacturers are being provided some formal notice on how FDA intends to approve biosimilars.

Authored By:

Peter Reichertz
(202)772-5333
preichertz@sheppardmullin.com

[1]The 2012 user fees for human drug products approved under Section 505(b) are currently as follows: - NDA - $1,841,500 - Supplements - $920,750 - Establishment - $520,100 (after approval) - Product - $98,970 (after approval) These fees, as well as the user fees for medical devices, are up for renewal. A comprehensive bill establishing new conditions for these fees - and new fees for generic human drug products approved under Section 505(j) of the FFDCA - is expected to be enacted during the next year (prior to September 30, 2012).

[2] A sponsor would need to withdraw the IND by August 1 to avoid paying a fee that would be due on each October 1.

[3]If fees are not paid, FDA would not grant BPD meetings or not consider IND's as submitted. If annual BPD fees were not paid, FDA would place by investigation on "financial hold".

Safe-Harbor Provision of Hatch-Waxman Act Does Not Protect Post-Approval Research Activities

Sheppard Mullin — Mon, 24 Oct 2011 13:22:50 -0800

By Gray Buccigross

The Federal Circuit issued its opinion in Classen Immunotherapies, Inc. v. Biogen Idec, 2011 U.S. App. Lexis 18126, on August 31, 2011. As part of that decision it held that the safe-harbor provision of the Hatch-Waxman Act is limited to activities reasonably related to obtaining pre-marketing FDA approval of generic counterparts, and does not protect post-approval research activities.

Two of Classen’s patents are broadly directed to comparing the effectiveness of immunization schedules with regard to risk of developing chronic immune-mediated disorders (e.g., diabetes, asthma, cancer), and then immunizing according to the lower risk schedule. [1] Classen alleged Biogen and GlaxoSmithKline directly infringed by:

(1) participating in studies “to evaluate suggested associations between childhood vaccinations, particularly against hepatitis B and Haemophilus influenza … and risk of developing type 1 diabetes; and to determine whether timing of vaccination influences risk;” and
(2) “providing instructions and/or recommendations on a proper immunization schedule for vaccines.”

These research activities involved post-approval research.

The "safe harbor" provision of the Patent Act, 35 U.S.C. Section 271(e)(1), which was added by the Hatch-Waxman Act, provides:

It shall not be an act of infringement to make, use, offer to sell, or sell within the United States … a patented invention … solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products.

Judges Newman and Rader examined the Hatch-Waxman House of Representatives Report, which stated, inter alia, that “the only activity which will be permitted by the bill is a limited amount of testing so that generic manufacturers can establish the bioequivalency of a generic substitute.” They further reasoned that “[e]very decision examining the statute has appreciated that §271(e)(1) is directed to premarketing approval of generic counterparts before patent expiration.” The decision held that the safe-harbor provision “does not apply to information that may be routinely reported to the FDA, long after marketing approval has been obtained.” Rather, it is limited to activities related to the “development of information for regulatory approval of generic counterparts of patented products.”

Judge Moore vigorously dissented on several grounds. First, she argued that the plain text of the provision does not explicitly limit the safe harbor to pre-approval uses. Second, she argued that Supreme Court precedent (Merck v. Integra, which evaluated pre-approval activities) stated that the safe harbor applies to “submission of any information under the FDCA.” Third, the legislative history relied on by the majority did not address whether the provision covers more than just pre-approval activity.

It remains to be seen whether the defendants will seek Supreme Court review, and, if so, whether certiorari will be granted. For the time being, companies should not rely on the Section 271(e)(1) safe harbor to shield them from activities other than those reasonably related to seeking pre-marketing FDA approval.[2] To the extent that activities may not fall within this scope, particularly any post-approval research, it would be wise to explore in more detail: (a) whether the activities actually practice the pertinent patent claims; (b) whether they fall under the common law experimental use exemption; and (c) whether the pertinent patents are invalid.

Authored By:

Gray Buccigross
(858) 720 - 7427
gbuccigross@sheppardmullin.com

[1]The opinion also addressed whether the claims recited patent-eligible subject matter under 35 U.S.C. § 101; however, that aspect is not discussed here.

[2]Note that in Eli Lilly v. Medtronic, 496 U.S. 661, 671 (1990), the U.S. Supreme Court held that research activities related to obtaining approval of a medical device were protected under the safe harbor. Thus, the extent of the Safe Harbor is arguably broader than suggested by the majority opinion, which limits it to obtaining approval of generic counterparts of drugs. See also Merck KGaA v. Integra Life Sciences I, Ltd., 545 U.S. 193, 207 (2005).

Rights to Compensation for use of Biospecimens: OHRP and FDA Clarify that Waivers of Rights in Informed Consents are not "Exculpatory"

Sheppard Mullin — Mon, 12 Sep 2011 09:48:53 -0800

By Peter S. Reichertz

In a Federal Register notice of September 7, 2011,[1] the Office of Human Research Protection (“OHRP”) and the Food and Drug Administration have clarified that a waiver by an individual in an informed consent to compensation for use of his/her biospecimens is not “exculpatory”, and permissible, if worded properly. This Guidance – entitled “Guidance on Exculpatory Language in Informed Consent" – applies to research conducted for purposes of FDA approval, as well as research sponsored by the Department of Health and Human Services (“DHHS”).

Under current OHRP and FDA regulations, found at 45 C.F.R. § 46.116 and 21 C.F.R. § 50.21, a waiver by a subject in an informed consent is not permissible if it is exculpatory. In the Guidance referred to in the Federal Register notice, OHRP and FDA have clarified that a waiver is only exculpatory – and, hence, impermissible – if it has the “general effect of freeing or appearing to free an individual or entity from responsibility for malpractice or negligence, or from blame, fault or guilt. …” As stated in the Guidance:

On the other hand, a subject’s waiver of any rights he or she may have with respect to a biospecimen obtained by investigators for research purposes would not be exculpatory because it does not have the effect of freeing the investigator, sponsor, institution, or others involved in the research from malpractice, negligence, blame, fault, or guilt. Accordingly, including such waiver language in an informed consent document would be permissible under 45 CFR 46.116 and 21 CFR 50.20. OHRP and FDA understand it has long been common practice of investigators and sponsors not to compensate research subjects who agree to provide biospecimens for research purposes even if those biospecimens are later used for commercial purposes. Moreover, OHRP and FDA are not aware of any federal or state laws or policies that suggest that research subjects would have any legal right to such compensation if they voluntarily signed an informed consent form which clearly stated that they would not be paid or otherwise compensated for providing their biospecimens.

They provide the following examples of ACCEPTABLE waiver language:

Although future research that uses your samples may lead to the development of new products, you will not receive any payments for these new products.
By agreeing to this use, you are giving up all claims to any money obtained by the researchers from commercial or other use of these specimens.
I voluntarily and freely donate any and all blood, urine, and tissue samples to the [name of research institution] and hereby relinquish all property rights, title, and interest I may have in those samples.
By consenting to participate in this research, I give up any property rights I may have in bodily fluids or tissue samples collected during this research.
Although the results of research, including your donated materials, may be patentable or have commercial value, you will have no legal or financial interest in any commercial development resulting from the research.
Tissue obtained from you in this research may be used to establish a cell line that could be patented and licensed. No financial compensation will be provided to you should this occur.
By consenting to participate, you authorize the use of your bodily fluids and tissue samples for the research described above.
Because of hospital policy, the hospital is not able to offer financial compensation should you be injured as a result of participating in this research. However, you are not precluded from seeking to collect compensation for injury related to malpractice, fault, or blame on the part of those involved in the research, including the hospital.
Because of hospital policy, the hospital makes no commitment to provide free medical care or payment for any unfavorable outcomes resulting from participation in this research. Medical services will be offered at the usual charge. However, you are not precluded from seeking to collect compensation for injury related to malpractice, fault, or blame on the part of those involved in the research, including the hospital.
In the event that you suffer a research-related injury, your medical expenses will be your responsibility or that of your third-party payer, although you are not precluded from seeking to collect compensation for injury related to malpractice, fault, or blame on the part of those involved in the research.

Companies conducting clinical research for purposes of obtaining FDA approval should review their informed consents and make sure they are consistent with the FDA/OHRP Guidance.

Comments on the Guidance may be submitted to FDA or OHRP by November 7, 2011.

Authored By:

Peter S. Reichertz
(202) 772-5333
preichertz@sheppardmullin.com

[1] 76 Fed. Reg. 55390.

Institute of Medicine Report: Dead on Arrival

Sheppard Mullin — Mon, 01 Aug 2011 13:56:08 -0800

By Seth A. Mailhot

On Friday, July 29, 2011, the Institute of Medicine of the National Academies (IOM) released its long awaited report on the premarket clearance process under section 510(k) of the Federal Food Drug and Cosmetic Act.[1] The premarket clearance submission, commonly known as a 510(k), allows manufacturers to market a medical device based on its similarity, or “substantial equivalence,” to one or more marketed devices (called “predicate devices”). The 510(k) process is the most widely used pathway for marketing medical devices through the U.S. Food and Drug Administration (“FDA”), and is intended for intermediate risk devices.[2] The report was anticipated to provide clear action items to the agency to strengthen the 510(k) process and make it more responsive to companies developing emerging medical technology. Instead, the recommendations made by the IOM committee only heighten the current uncertainty with the future direction of the 510(k) process.

The IOM committee was convened sixteen (16) months ago to address perceived problems with the 510(k) process based on comments from groups such as Public Citizen regarding the safety and effectiveness of 510(k) cleared devices and concerns raised following the clearance and subsequent rescission of the ReGen Biologics Menaflex Collagen Meniscus Implant.[3] The FDA tasked the IOM committee with answering the following questions:

Does the current 510(k) clearance process optimally protect patients and promote innovation in support of public health?
If not, what legislative, regulatory, or administrative changes are recommended to optimally achieve the goals of the 510(k) clearance process?

During the IOM committee’s review, the FDA commenced a concurrent internal review of the 510(k) process and came to its own preliminary conclusions on ways to strengthen the existing system.[4] The FDA has started to act on its internal conclusions by developing a twenty-five (25) item action plan that the FDA hopes to implement over the course of 2011.[5] The FDA has begun to implement this action plan, as evidenced by the recent release of revised draft guidance on when a new 510(k) may be required for a change to an existing device.[6]

In publishing its action plan, the FDA expressed the hope that the IOM committee’s report would help to resolve debate on some of the FDA’s more controversial proposals regarding the 510(k) process.[7] There was also a hope that the IOM report would potentially bring an end to the period of self-reflection that had seemed to paralyze and significantly slow device decisions at the agency. A carefully thought out set of proposals could also help frame the discussions between FDA and industry on modifications to the 510(k) process.

The IOM’s report, however, citing “the legislative and regulatory history of the 510(k) program,” determined that the 510(k) process was never “designed to determine whether a new device provides a reasonable assurance of safety and effectiveness or whether it promotes innovation.”[8] As such, the IOM recommended that the 510(k) process be abandoned in favor of a new process that would serve as “an integrated premarket and postmarket regulatory framework that effectively provides a reasonable assurance of safety and effectiveness throughout the device life cycle.”[9] Implementing such a framework would require development by the FDA and the enactment of legislation by Congress.

There are flaws with the IOM committee’s reasoning, most significant of which is their finding that substantial equivalence has no relationship to safety and efficacy. The IOM premises this on the concern that substantial equivalence only requires that devices be as safe and effective as their predicate. This ignores the fact that substantial equivalence serves as an iterative process where technological improvements in medical devices are captured as each new generation serves as the predicate for the next generation. Further, as the FDA has the ability to reclassify devices or implement special controls, it has the ability to move devices that could previously be cleared into a higher class requiring regulatory approval (and clinical data of safety and effectiveness), or make specific testing requirements and standards mandatory on new devices.

Notwithstanding the flaws in the IOM committee’s reasoning, there are no actual recommendations on what sort of model would serve in the 510(k) process’s stead. The IOM committee only comments “that available information is [not] adequate to inform the design of an appropriate [replacement] framework.”[10] Despite the arduous process involved with researching and developing legislation, the time required to pass such legislation, and then the efforts required to write and implement regulations and guidance to inform such legislation, the IOM committee states that “further investment in the 510(k) process is [not] a wise use of the FDA’s scarce resources.”1[11]

It is unrealistic to presume that the IOM committee’s overall recommendations could ever be acted on, particularly in the present political environment. The recommendations, however, will serve as powerful ammunition for those seeking to severely limit industry’s access to the 510(k) pathway. For its part, the FDA was critical of the report, stating that “FDA believes that the 510(k) process should not be eliminated.”[12] While the FDA has opened a public docket to receive comments on the IOM committee’s report, a greater concern will be the continued pressure on legislators by some groups to tighten controls over the 510(k) process or eliminate innovation-promoting aspects of the Federal Food, Drug and Cosmetic Act, such as the least burdensome provisions. Industry must continue its pressure on legislators and the FDA to encourage innovation in medical technology and its speedy introduction to patients.

Authored By:

Seth A. Mailhot
(202) 469-4980
smailhot@sheppardmullin.com

[1] The prepublication copy of the IOM’s report is available on its website. IOM, Medical Devices and the Public’s Health: The FDA 510(k) Clearance Process at 35 Years (Washington, DC: The National Academies Press, 2011) (available at http://www.iom.edu/Reports/2011/Medical-Devices-and-the-Publics-Health-The-FDA-510k-Clearance-Process-at-35-Years.aspx, hereinafter IOM Report).

[2] Intermediate risk devices are generally categorized as Class II devices, although some Class I devices and transitional Class III devices also utilize the 510(k) process.

[3] Comments included statements such as “devices with no meaningful evidence of effectiveness that would never be approved, were they drugs, instead can be approved when they’re devices,” and “[t]he 510(k) process is a loophole that’s swallowed the law.” Ingrid Mezo, Scrutinizing 510(k)s: Critical Voices Get Heard In Congress, The Gray Sheet (July 16, 2007), at 6-7 (quoting Peter Lurie, Deputy Director of Public Citizen’s Health Research Group).

[4] The preliminary report and recommendations are detailed in two (2) reports, CDRH Preliminary Internal Evaluations, Volume I: 510(k) Working Group Preliminary Report and Recommendations (at http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDRH/
CDRHReports/UCM220784.pdf), and CDRH Preliminary Internal Evaluations, Volume II: Task Force Utilization of Science in Regulatory Decision Making Preliminary Report and Recommendations (at http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDRH/
CDRHReports/UCM220783.pdf).

[5] FDA, Plan of Action for Implementation of 510(k) and Science Recommendations (at http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDRH/
CDRHReports/UCM239450.pdf).

[6] FDA, Guidance for Industry and FDA Staff - 510(k) Device Modifications: Deciding When to Submit a 510(k) for a Change to an Existing Device, Draft Guidance (Jul. 27, 2011) (at http://www.fda.gov/MedicalDevices/DeviceRegulationandGuidance/
GuidanceDocuments/ucm265274.htm).

[7] In announcing its action plan, the FDA commented that it planned to “give the IOM an opportunity to provide feedback” on certain recommendations before implementing them. FDA, 510(k) and Science Report Recommendations: Summary and Overview of Comments and Next Steps (at http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDRH/
CDRHReports/UCM239449.pdf).

[8] IOM Report at xi.

[9] IOM Report at 6.

[10] Id.

[11] Id.

[12] FDA, Press Release, “FDA to seek public comment on IOM recommendations” (Jul. 29, 2011) (at http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/
ucm265908.htm).

Generic Drug Manufacturers And Failure To Warn: What duty is there after Pliva v. Mensing?

Sheppard Mullin — Mon, 27 Jun 2011 09:50:42 -0800

By Peter S. Reichertz

The Supreme Court ruled on June 23, 2011, that generic drug manufacturers cannot be sued for a failure to warn under state tort law, as long as their labeling complies with the FDA mandated labeling for the innovator drug product. While the Court had previously declined to find that federal regulation and approval of drug labeling of an innovator drug preempted state tort law in Wyeth v. Levine, 555 US 555 (2009), the Court ruled 5-4 in Pliva that the comprehensive scheme for approval of generic drugs under the 1984 Hatch-Waxman amendments required generic manufacturers to use the same labeling as the innovator brand name product. Since the law and FDA regulations, as conceded by the Food and Drug Administration (FDA), preclude a generic company from obtaining approval of labeling different from the innovator brand name product, the Court held it was not possible for a generic manufacturer to comply with both federal and state law. As such, under the doctrine of impossibility, they ruled federal law was supreme and state tort laws on failure to warn were preempted. In so finding, they held that the issue of “impossibility” turns on whether the private party could independently do under federal law what state law requires of it. In this case, they held that generic manufacturers could only ask FDA to change labeling and could not do so without FDA approval, and thus could not act independently.

As stated by the Court:

The non obstante provision suggests that pre-emption analysis should not involve speculation about ways in which federal agency and third-party actions could potentially reconcile federal duties with conflicting state duties. When the “ordinary meaning” of federal law blocks a private party from independently accomplishing what state law requires, that party has established pre-emption.

The Court ruled at length upon the FDA’s interpretation of its authority. FDA conceded that a generic company could not obtain approval of a CBE-30 (Changes Being Effected in 30 day supplement) to add additional warning language to labeling, and that its only alternative if it chose to do so was to propose new warnings to the FDA if they believed they were necessary. At that point the Agency is to work with the brand name manufacturer “to create a new label”. The appellant manufacturers and FDA did not agree as to whether there was such a duty. The Court did not rule on that issue, since it found that pre-emption applies, even if there were such a duty.

Both the majority opinion conceded, and the dissent made a big point of, the fact that the result of the decision resulted in a situation where an individual’s right to seek relief for failure to warn turns on whether he/she took a generic or brand name of a product. As noted in the majority opinion:

We recognize that from the perspective of Mensing and Demahy, finding pre-emption here but not in Wyeth makes little sense. Had Mensing and Demahy taken Reglan, the brand-name drug prescribed by their doctors, Wyeth would control and their lawsuits would not be pre-empted. But because pharmacists, acting in full accord with state law, substituted generic metoclopramide instead, federal law pre-empts these lawsuits. See, e.g., Minn. Stat. §151.21 (2010) (describing when pharmacists may substitute generic drugs); La. Rev. Stat. Ann. §37:1241(A)(17) (West 2007) (same). We acknowledge the unfortunate hand that federal drug regulation has dealt Mensing, Demahy, and others similarly situated.

But “it is not this Court’s task to decide whether the statutory scheme established by Congress is unusual or even bizarre.” Cuomo v. Clearing House Assn., L.L.C., 557 U. S. ___, ___ (2009) (THOMAS, J., concurring in part and dissenting in part) (slip op., at 21) (internal quotation marks and brackets omitted). It is beyond dispute that the federal statutes and regulations that apply to brand name drug manufacturers are meaningfully different than those that apply to generic drug manufacturers. Indeed, it is the special, and different, regulation of generic drugs that allowed the generic drug market to expand, bringing more drugs more quickly and cheaply to the public. But different federal statutes and regulations may, as here, lead to different pre-emption results. We will not distort the Supremacy Clause in order to create similar preemption across a dissimilar statutory scheme. As always, Congress and the FDA retain the authority to change the law and regulations if they so desire.

Given this ruling, what duty do generic manufacturers have if they become aware of new information as to the safety of a drug? Generic drug manufacturers still have pharmacovigilance duties under 21 C.F.R. § 314.80, and may become aware of data that they believe requires a labeling change. While the Court did not rule there was a duty to take any action, the FDA made it clear in their briefing that there was an obligation to bring such information to their attention and request a label change. As stated by the Court:

According to the FDA, the Manufacturers could have proposed—indeed, were required to propose—stronger warning labels to the agency if they believed such warnings were needed. U. S. Brief 20; 57 Fed. Reg. 17961. If the FDA had agreed that a label change was necessary, it would have worked with the brand-name manufacturer to create a new label for both the brand-name and generic drug. Ibid.

The agency traces this duty to 21 U. S. C. §352(f)(2), which provides that a drug is “misbranded . . . [u]nless its labeling bears . . . adequate warnings against . . . unsafe dosage or methods or duration of administration or application, in such manner and form, as are necessary for the protection of users.” See U. S. Brief 12. By regulation, the FDA has interpreted that statute to require that “labeling shall be revised to include a warning as soon as there is reasonable evidence of an association of a serious hazard with a drug.” 21 CFR §201.57(e).

According to the FDA, these requirements apply to generic drugs. As it explains, a “ ‘central premise of federal drug regulation is that the manufacturer bears responsibility for the content of its label at all times.’ ” U. S. Brief 12–13 (quoting Wyeth, 555 U. S., at 570–571). The FDA reconciles this duty to have adequate and accurate labeling with the duty of sameness in the following way:

Generic drug manufacturers that become aware of safety problems must ask the agency to work toward strengthening the label that applies to both the generic and brand name equivalent drug. U. S. Brief 20.

There are questions left open on this issue, including the lack of any clarity on whether this is indeed a statutory duty. If it is, what is the consequence if a generic manufacturer becomes aware of a safety issue with one of its product and does not act to bring the matter to FDA? In addition to the potential misbranding charges which FDA’s interpretation suggests, will the knowing failure to bring the matter to FDA result in liability under a negligence or other theory? Or is the only possible liability a potential violation of the Federal Food Drug and Cosmetic Act? (the Act) Would a plaintiff claiming a generic manufacturer did not pursue its duty to request a label change face the defense that there is no private right of action with regard to a generic manufacturer’s duty as outlined by FDA?

In addition, as discussed at same length in the dissent, what happens when the brand name product is discontinued as frequently occurs after generics enter the market? Who, if any one, may be exposed to failure to warn issue? If, as FDA frequently does, FDA lists the first generic as the Reference Listed Drug for purposes of bio-equivalence studies, does that “generic” manufacturer get put in the place of the brand name company in the analysis? While it may appear to be the last word on generic drug manufacturer labeling for failure to warn under state law, Pliva may not totally absolve generic drug manufacturers from product and other liability if they become aware of safety data and do not act to address the issue.

Authored By:

Peter S. Reichertz
(202) 772-5333
preichertz@sheppardmullin.com