Life Sciences Law Blog

Supreme Court Holds That a Law of Nature Applied Using Known and Obvious Steps Is Not Patent Eligible

Sheppard Mullin — Wed, 28 Mar 2012 11:35:58 -0800

On March 20, 2012, the Supreme Court issued its much-anticipated decision in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., with potentially far-reaching ramifications for pharmaceutical and biotechnology companies, particularly those developing diagnostic methods and assays.

At issue was the patent eligibility of certain diagnostic methods under 35 U.S.C. § 101. 35 U.S.C. § 101 provides that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter…may obtain a patent therefor, subject to the [other conditions for patentability under the Patent Act].” Given the broad language of § 101, it was long considered a relatively low barrier to patentability. However, more recent cases, particularly relating to business and computer-software-implemented methods, have curtailed and arguably defined new legal standards for patent eligibility.

Prometheus Laboratories, Inc. (“Prometheus”) was the exclusive licensee of the two patents-in-suit, which claim methods of optimizing therapeutic efficacy for the treatment of immune-mediated gastrointestinal disorders. The claims recite the steps of administering a thiopurine drug to a patient having such a disorder and determining the level of the thiopurine in the patient, along with a statement that the level of the thiopurine drug subsequently administered to the patient should be increased or decreased depending on the concentration of the drug in the patient’s system.

The Court began by noting the primary recognized exceptions to patent eligibility, namely that “laws of nature, natural phenomena, and abstract ideas are not patentable.” The Court did “recognize[], however, that too broad an interpretation of this exclusionary principle could eviscerate patent law[,…f]or all inventions at some level embody, use reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.”

After characterizing the “relationships between concentrations of certain metabolites in the blood and the likelihood that a dosage of a thiopurine drug will prove ineffective or cause harm” as a “law of nature,” the Court considered each of the steps recited in Prometheus’s patent claims, and concluded that the patents were invalid because “the claims inform a relevant audience about certain laws of nature; any additional steps consist of well-understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately.” The Court further stated that the decision is consistent with earlier Supreme Court cases, particularly Diamond v. Diehr and Parker v. Flook, because “post-solution activity that is purely conventional or obvious…cannot transform an unpatentable principle into a patentable process” (internal quotations omitted).

This case may present more questions to pharmaceutical and biotechnology companies than it resolves. While the Court concluded that Prometheus’s patent claims were not patent eligible because “any additional steps [beyond informing a relevant audience about certain laws of nature] consist of well-understood, routine, conventional activity already engaged in by the scientific community,” the Court set forth no standard for determining what further steps would be required to transform the method into patentable subject matter.

The decision is also noteworthy in that it appears to conflate the novelty and non-obviousness requirements for patentability under 35 U.S.C. §§ 102 and 103 with the issue of patent eligibility under 35 U.S.C. § 101. Indeed, the Court even “recognize[d] that, in evaluating the significance of additional steps, the §101 patent-eligibility inquiry and, say, the §102 novelty inquiry might sometimes overlap.” However, the Court did not enunciate the level of novelty and non-obviousness that a claimed diagnostic method must possess before it would be considered patent eligible under 35 U.S.C. § 101.

Finally, the Court dismissed the Federal Circuit’s rationale for upholding the validity of Prometheus’s patents because “[w]hile it takes a human action (the administration of a thiopurine drug) to trigger a manifestation of this relation in a particular person, the relation itself exists in principle apart from any human action. The relation is a consequence of the ways in which thiopurine compounds are metabolized by the body—entirely natural processes.” It remains to be seen how or whether the Court would distinguish purely therapeutic methods, particularly those that involve new uses of known compounds, since the pharmacological activities of the compounds are “a consequence of the ways in which [the drugs] are metabolized by the body—entirely natural processes.”

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

Sheppard Mullin — Wed, 28 Mar 2012 09:58:18 -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 09:57:10 -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.

New California Commission Contract Rules - It is Not Too Early To Get Ready!

Sheppard Mullin — Mon, 19 Mar 2012 15:57:48 -0800

By Jennifer Redmond, Morgan Forsey, and Bram Hanono

Employers with sales teams in California need to get ready. California has a new commission contract law, AB 1396, which takes effect January 1, 2013. Under AB 1396, which amends California Labor Code section 2751, employers who pay commissions to their employees are required to enter into written commission contracts with employees. The contract must describe the method by which commissions are computed and paid. Employers must also provide a copy of the signed contract to each employee, and get a signed receipt from each employee. That's the easy part. Here's the tricky part. Going forward, when a contract governing commissions expires without being replaced but the employee continues work, the terms of the “expired” contract will apply to commissions until the parties sign a new agreement or until the employment is terminated. As a result, it will be important to get new commission contracts in place before or when the old ones expire.

"Commissions" under AB 1396 have the same meaning as in California Labor Code section 204.1: “Commission wages are compensation paid to any person for services rendered in the sale of such employer's property or services and based proportionately upon the amount or value thereof.” AB 1396 excludes from the definition of “commissions” short term productivity bonuses such as those paid to retail clerks or bonus and profit sharing plans, unless the employer has offered to pay a fixed percentage of sales or profits as compensation. The exclusion language is not precise and leaves room for debate as to what types of payments are excluded from the contract requirement.

For employers who do not currently use commission contracts, it is not too early to start thinking about the terms and conditions that you would like to include in them. For employers that already use commissions contracts, you will want to review them and make sure that they comply with AB 1396 and detail how commissions are earned and paid. Employers with existing commissions contracts expire after January 1, 2013 need to be ready with superseding written agreements once the current contract expires.

Employers that have multiple commissions plans that apply to an individual employee will need to consider how they will implement, track, and end multiple commissions contracts for these employees.

California employers are not alone. The Legislature sought to follow the lead of Georgia, Louisiana, Maryland, and Tennessee in requiring that all employers put commission-based employment contracts in writing. The Legislature believes AB 1396 will protect employees from fraud and abuse and employers from unnecessary litigation resulting from vague oral contracts.

The FCPA in 2011: Five Answers and a Looming Question

Sheppard Mullin — Wed, 01 Feb 2012 10:43:01 -0800

The Department of Justice has been warning the Life Sciences industries - pharmaceutical and medical device companies - of its intent to focus "on the application of the Foreign Corrupt Practices Act" ("FCPA") on the pharmaceutical and related industries. (Lanny Breuer, Assistant U.S. Attorney for the Criminal Division, November 12, 2009). The FCPA prohibits, among other things, the actual or attempted bribery of foreign government officials in order to assist in obtaining or retaining business. Potentially violative payments include cash, gifts, charitable donations, travel, meals, entertainment, grants, speaking fees, honoraria, and consultant arrangements. The FCPA does not contain a materiality threshold as to the size of the payment to the government official or the amount of business obtained. While there are some safe harbors for payments to foreign officials, these exceptions are narrowly construed and apply only rarely. There are many situations where these issues can arise for Life Sciences companies in foreign countries.

Because of this focus, Life Sciences companies need to be aware of how the DOJ is enforcing the FCPA. The following blog article, from our Global Trade Law blog, should be reviewed with this in mind.

By Thaddeus McBride and Mark Jensen

There were several noteworthy developments related to the Foreign Corrupt Practices Act (FCPA) in 2011. For the first year in recent memory, however, the most significant developments were not simply huge monetary settlements (although there were those, too). Instead, the key developments of 2011 provide new guidance on how the U.S. Department of Justice (DOJ) and – notably – the courts view enforcement under the statute. While we have a more nuanced view of the FCPA after 2011, we are also left with a substantial question about the future of the law.

Background. 2011 began with the U.S. government seemingly marching on toward continued significant FCPA prosecutions. The dramatic group settlement in November 2010 by Panalpina and several of its customers for alleged bribes paid in Nigeria and elsewhere forcefully capped 2010, and underscored the ability of the DOJ and the U.S. Securities and Exchange Commission (SEC) to investigate and settle cases against a cross-section of industry. April 2011 provided another example of cross-industry reach, when JGC Corporation paid a $218.8 million criminal penalty to the DOJ to settle charges related to alleged bribes to obtain contracts to build liquefied natural gas facilities on Bonny Island, Nigeria. JGC Corp. was the fourth company to enter into a settlement related to the Bonny Island venture yet paid the smallest penalty of the four.

In January 2012, however, the future of the FCPA appears quite different. It is true that, according to public information, the U.S. government continues to prosecute dozens of FCPA cases against individuals and companies. In addition, the government won important victories in 2011. On the other hand, certain aspects of FCPA enforcement were brought into question over the course of the year. The DOJ has suffered significant losses at trial that may point to deeper shortcomings in the way cases are investigated and prosecuted. Most of all, potential Congressional involvement in the FCPA could significantly affect the law and how it is enforced.

Five Answers. Five notable developments from 2011 may shape the future course of the FCPA and enforcement under the statute.

1. Broad interpretation of “foreign official” upheld. The FCPA prohibits bribery of a “foreign official,” defined as “any officer or employee of a foreign government or any department, agency or instrumentality thereof,” 15 U.S.C. 78dd-2(h)(2)(A), for the purpose of obtaining or retaining business, 15 U.S.C. 78dd-2(a)(1). In U.S. v. Aguilar, No. 10-01031 (C.D. Cal. Apr. 20, 2011) (order denying motion to dismiss), the U.S. District Court for the Central District of California issued a ruling that concluded that officials of Mexico’s state-owned utility company, Comisión Federal de Electricidad, could qualify as foreign officials under the FCPA because the company was created by statute; its governing board was made up of high-ranking government officials; it described itself as a government agency; and it performed a quintessential government function. Perhaps equally important, the court listed several factors it evaluated in making its determination, including whether the enterprise provides a service to the citizens of the jurisdiction; whether the key officers and directors of the entity are appointed by government officials; whether the entity is financed through government appropriations or revenues obtained as a result of government-mandated taxes, fees, or royalties; whether the entity is vested with and exercises exclusive or controlling power to administer its designated functions; and whether the entity is widely perceived to be performing governmental functions.

2. The DOJ will both win and lose FCPA cases at trial. The DOJ victory in Aguilar on the legal scope of “foreign official,” under which state-run corporations may be considered “instrumentalities,” turned out to be somewhat short-lived, as the presiding judge ultimately overturned a jury conviction on grounds of prosecutorial misconduct. In particular, the court held that the prosecutors engaged in “many” and “varied” mistakes that, in sum, “added up to an unusual and extreme picture of a prosecution gone badly awry.” Aguilar, No. 10-01031, at 5. The defeat was particularly stinging because it came on the heels of the first jury conviction of a corporation (Lindsey Manufacturing Co., for which Aguilar was a sales agent) under the FCPA, for alleged bribes made through Aguilar’s company.

The first trial resulting from the “ShotShow” series of cases also ended badly for the DOJ,[1] when a mistrial was declared after the jury failed to reach a verdict after six days of deliberation. The defense stressed that the government went to great lengths during the sting operation to make the proposed transaction appear legal by, for example, never using the words “bribe” or “kickback” and assuring the defendants that the proposed transaction had been vetted by the U.S. State Department.

In other individual cases, the government has had more success. For example, in U.S. v. Esquenazi, No. 09-21010 (S.D. Fla. Oct. 26, 2011) (judgment), the former president of Terra Telecommunications Corporation was sentenced to 15 years in prison for committing and conspiring to commit both money laundering and FCPA violations by making payments to directors of Haiti’s state-owned national telecommunications company. According to the DOJ, this is the longest prison sentence yet imposed in a case involving the FCPA. In March 2011, a U.K. national pleaded guilty to violating the FCPA and agreed to forfeit nearly $149 million for channeling bribes to Nigerian government officials again in connection with the Bonny Island venture.

3. The DOJ closely scrutinizes compliance programs. While this is not exactly news, 2011 provided still more evidence that DOJ expects companies to maintain sophisticated compliance programs. As we covered last July, as companies dedicate more attention to compliance, the DOJ may be decreasing its use of compliance monitors in favor of detailed compliance obligations.

Another reminder of the importance of fully implemented compliance programs came in January 2011, when Maxwell Technologies Inc. paid $14 million to settle charges that its Swiss subsidiary paid $2.5 million in kickbacks through an agent to a Chinese state-owned utility company. The SEC criticized the company’s internal controls as “wholly inadequate,” noting that its code of conduct included only a brief FCPA section; the company failed to conduct due diligence on the agent responsible for the payments; and the company failed to provide anti-corruption training to those involved in the payments.

4. The SEC introduces deferred prosecution agreements. In May 2011, Tenaris S.A. paid $8.9 million to settle charges that it paid officials of an Uzbekistan state-controlled oil company for competitors’ bid information. The SEC stated that the company’s immediate self-reporting, full cooperation with the government, and enhancements to its compliance program made it an appropriate candidate for the SEC’s first deferred prosecution agreement.

Besides the financial benefit of a deferred fine, it remains to be seen exactly what the utility of a DPA is in the SEC context. In a typical SEC settlement in which a company neither admits nor denies allegations, the company may avoid an injunction.[2] In contrast, in the DOJ context, avoiding potential criminal liability can be of particular value.

5. Foreign anti-bribery prosecution continues to expand. Outside the United States, Canada brought its first major case under its anti-bribery statute, resulting in a penalty of approximately CAN $9.5 million to settle allegations that an oil and gas company paid bribes to an energy ministry official in Bangladesh. South Korea also brought its first case under its anti-corruption statute, as two representatives from a Korean logistics company and a travel agency were indicted for alleged bribes paid to the executive of a Chinese airline.

In addition, more countries are implementing anti-bribery legislation. Perhaps most significantly, the U.K. Bribery Act entered into force in July 2011, imposing a somewhat broader scope than the FCPA by, among other measures, outlawing commercial bribery, the receipt of bribes, and facilitating payments. The U.K. Act also includes a safe harbor provision for companies that maintain an effective compliance program; this provision may create significantly more protection and certainty for compliant companies than is provided for under the FCPA. China also has implemented its own anti-bribery act.

The Question. For all of the guidance arising from these developments, the specter of Congressional involvement cloaks the future of the FCPA. The U.S. Chamber of Commerce is making a concerted push to amend the law, arguing that it is having a chilling effect on U.S. business abroad. Democratic U.S. Senators from Delaware and Minnesota have indicated that they plan to propose legislation to clarify parts of the law. The Senators argue that the high penalties under the statute mean that companies at least should know clearly what the rules are.

The Chamber proposes, among other changes, a “safe harbor” provision that would allow companies to avoid liability if they have sufficient internal controls in place to prevent bribes. Such a measure would seem to track the “safe harbor” provision of the U.K. Bribery Act. At least according to the Chamber, there is growing sentiment that U.S. business has been damaged by trying to comply with the FCPA yet still do business in areas of the world where corruption is widespread.

The likely results of Congressional involvement, even if greater clarity is obtained, are less clear. For example, in December 2011, a proposed bill was reintroduced in the U.S. House of Representatives that would automatically debar federal contractors who are convicted of violating the FCPA. This sort of extension of penalties for violations is probably not what the Chamber and other advocates for reform had in mind.

In response to criticism and political action by the Chamber, the DOJ has argued that such changes could weaken the FCPA just when its influence – especially on other countries and their enforcement tactics – is at its zenith. The DOJ has agreed that there could be greater transparency under the FCPA, and thus has indicated that it plans to release “detailed new guidance” on the law sometime in 2012. We suspect that such guidance may expand upon more specific guidelines DOJ has provided in enforcement action settlement documents in the past year, most notably in the Johnson & Johnson settlement.

Conclusion. As more actors become more involved in how the FCPA is interpreted and enforced, the law will hopefully become clearer. Specific compliance obligations will hopefully be introduced so that some sort of safe harbor provision can be created, as it has under the U.K. Bribery Act. It is unclear, however, how we will arrive at changes to the FCPA, if any, in the coming year. Increasing international enforcement further complicates the picture. As changes occur, companies will need to be nimble to take advantage of, and comply with, shifts in laws and enforcement.

[1] On Jan. 19, 2010, the FBI conducted a now-infamous raid on a trade show in Las Vegas, arresting 21 individuals. The raid followed an undercover sting operation in which FBI agents posed as officials from an African country and solicited bribes from the defendants in exchange for lucrative defense contracts. This was the first time the government had used an undercover sting to enforce the FCPA.

[2] This SEC practice is in question after a federal judge in New York recently indicated it did not provide a sufficient evidentiary basis for the court to know whether requested relief was justified. In addition, the U.S. House of Representatives Financial Services Committee has announced it will hold a hearing this year to examine the practice.

Authored by:

Thaddeus McBride
(202) 469-4976
tmcbride@sheppardmullin.com

Mark Jensen
(202) 469-4979
mjensen@sheppardmullin.com

Court of International Trade Ruling Provides Tariff Relief for Cell Culture Bioreactors

Sheppard Mullin — Wed, 18 Jan 2012 14:51:36 -0800

By Curt Dombek and Mark Jensen

A recent ruling from the U.S. Court of International Trade has the potential to reduce customs duties significantly for some biotechnology companies. In Applikon Biotechnology Inc. v. United States, 07-364 (Ct. Int’l Trade Dec. 12, 2011), the court changed the tariff classification of Cell Culture Bioreactors from heading 8419, “machinery…for the treatment of materials by a process involving a change of temperature”, to heading 8479, “machines…having individual functions, not specified or included elsewhere in this chapter; parts thereof.” The change resulted in a zero rate of duty instead of the 4.2% rate that had previously been imposed under the classification given by U.S. Customs and Border Protection (“CBP”).

The court described Cell Culture Bioreactors as machines that act to maintain an aseptic and homogeneous environment in which to culture cells, especially bacteria, that are used to break down harmful substances. The cells are grown for use in various applications in research or process development, including the development of biopharmaceuticals.

In its ruling, the court found a stirring component that allows continuous mixing of cell culture to be a key mechanism of bioreactor systems in their primary function of maintaining an aseptic and homogeneous environment for the growth of cells. Although the equipment also included a temperature control function that was used and necessary for some applications, the court concluded that temperature control was “subsidiary to the primary function of the device.” In making the distinction, the court noted that the mixing function was always used when the Bioreactor System is in operation, and that the electric blanket used for heating was not imported with the system and not always used. The court thus distinguished the Cell Culture Bioreactors from machines that involved heating or cooling of DNA strands, Applied Biosystems, 715 F. Supp. 2d 1327 (2010), and the CPU of mainframe computer systems, Fujitsu America, 342 F. Supp. 2d 1326 (2004).

The court’s ruling, and the accompanying savings that will accrue to biotechnology companies under the ruling, underscore the importance of proper tariff classification according to the primary function of complex or novel items. In part because biotechnology equipment does not have its own tariff classification provision, classification of biotechnology items can be more difficult than other equipment. In this case, for example, the plaintiff initially proposed three separate alternative tariff classifications, two of which fell under entirely different tariff headings. The Applikon case demonstrates the potential benefit of close company attention to tariff classifications affecting biotech products and the willingness to use new classifications where warranted by the facts and applicable law.

FDA Announces Proposals for Biosimilars User Fees and Performance Review Goals

Sheppard Mullin — Fri, 09 Dec 2011 11:33:22 -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 11:23:18 -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 09:56:10 -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 15:44:53 -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.

This article was originally posted on Sheppard Mullin's FDA Law Update blog, which can be found at www.fdalawblog.com.

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).

Summary of Innovators' Guide for Obtaining Medicare Reimbursement

Sheppard Mullin — Fri, 29 Jul 2011 03:33:15 -0800

By Karie Rego

Obtaining reimbursement for new medical technologies and services can be complicated. In 2010, the Centers for Medicare and Medicaid Services (CMS) published an Innovator's Guide to assist in the process. The Guide, however, is over fifty pages long so we summarized the key points.

Click here to view our summary.

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

Sheppard Mullin — Mon, 27 Jun 2011 09:27:31 -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

Patent Reform

Sheppard Mullin — Mon, 11 Apr 2011 05:46:04 -0800

By Don J. Pelto and Andrew Keith

The Senate passed their version of a Patent Reform Bill (Senate Bill No. S. 23), on March 8, 2011 by a wide 95-5 margin. The bill makes significant changes, most notably including a first-inventor-to-file system, and an enhanced post-grant review procedures that will be conducted within the USPTO. There are 26 sections to the Senate bill. Some key features of the Senate Bill include:

A first-inventor-to-file system and limitation of the one year grace period (Sec. 2);
A Post-grant review proceeding (Sec. 5);
New inter partes review proceeding (Sec. 5a);
Preissuance submission by third parties (Sec. 7);
USPTO fee-setting authority and USPTO funding (Secs. 9 and 10);
A supplemental examination proceeding (Sec. 11);
Elimination of the best mode defense (Sec. 15.);
A transitional post-grant review of covered business method patents(Sec. 18); and
A change to the False marking Statute (Sec. 2).

The House of Representatives introduced their own version of the Patent Reform Bill (House of Representatives Bill No. H.R. 1249) on March 30, 2011. The House bill is very similar to the Senate bill, but includes some notable differences. The first-inventor-to-file system and limitation of the one year grace period is the same in the passed Senate bill and recently introduced House bill. Regarding the post-grant review and inter partes review proceedings, however, the House bill changes some of the standards of review and time limits in the Senate bill.

Below is a summary of some of the key features of the Senate bill, followed by a short analysis describing some important differences in the House bill.

1) First-inventor-to-file-system

The Senate bill moves to a first-inventor-to-file system, which would become effective 18 months after its enactment. The Senate bill eliminates current 35 U.S.C. § 102(g) and interferences, and questions of conception, diligence, reduction to practice, abandonment, suppression, and concealment.

Moving to a first-to-file system fundamentally changes other aspects of 35 U.S.C. §§ 102 and 103 (new 35 U.S.C. §§ 102 and 103 language provided on page 7). The Senate bill significantly reduces the present one-year grace period, which applies to prior art or disclosures from any source, be it derived from the inventor or from another. Under the Senate bill, that one-year grace period is limited to scenarios where the disclosure was (1) derived from the inventor or (2) made public after the inventor publicized his invention. In practical terms to a patent practitioner, the Senate bill severely limits the ability to antedate or use § 1.131 declarations to swear behind prior-filed references (when the applicant was prior inventor). The Senate bill would remove any possibility to swear behind prior art references or disclosures in, for example, the following cases:

References (not derived from the inventor) that are published by another less than one year before the effective filing of the patent application.
Some Section 102(e) secret prior art references.

For example, there would be no possibility to swear behind patent applications filed more than one year before the effective date of the patent application at issue, but published less than one year before that effective date.

The Senate bill appears to limit public uses or sales of the invention before the effective filing date. Under the current law, sales and offers-to-sell do not constitute a loss of right of a patent if those sales or offers-to-sell occurred less than one year before the effective filing date of the application. Any such grace period appears to be removed. This, however, may depend on the definition of "disclosure" made by the inventor. The Senate bill allows for "disclosures" made by the inventor if "1 year or less before the effective filing date" of the patent application. If sales or offers-to-sell constitute "disclosure," then the rules regarding sales and offers-to sell of the invention (at least in the United States) would remain the same.

The Senate bill also removes geographic limitations for public uses or sales of the invention. Under the current law, an invention is not patentable if it was in public use or on sale in the United States more than one year prior to the effective filing date of the application (§ 102(b); or it was known or used by others in the United States prior to the date of invention (§ 102(a)). The Senate bill removes these geographical limitations. 35 U.S.C. § 102 of the Senate bill states that an invention is not patentable if it was "patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention." No limit to the United States is stated. Thus, public use, sales, and knowledge by others, anywhere in the world could result in the loss of right to a patent.

House bill Provides the exact same language regarding 35 U.S.C. §§ 102 and 103.

2) Post-grant review

The Senate bill provides another way for a third party to challenge a patent. The post-grant review has some interplay with the new inter partes review, which is summarized next. The post-grant review procedure includes the following features:

Allows third parties to file a petition within nine months from when the patent issues.
Third party may challenge any claim of the patent based on any provision of the statute (i.e., §§ 101, 102, 103 and 112). In other words, it is not limited to just prior art references as in present inter partes and ex parte Reexamination.
The standard for whether a post-grant review will be conducted by the "Director" is:

if "information presented in the petition, if not rebutted would demonstrate that it is more likely than not that at least 1 of the claims challenged in the petition is unpatentable." The determination for conducting a post-grant review "may also be satisfied by showing that the petition raises a novel or unsettled legal question that is important to other patents or patent applications." § 324.

The patent owner may file a statement to challenge the petition.
The determination to proceed with a post-grant review is not appealable.
Post-grant reviews will be handled by a Patent Judge (Patent Trial and Appeal Board).
Post-grant reviews may not instituted if the petitioner has filed a civil action challenging the validity of the patent. § 325.
If an infringement claim is filed within three months of the issuance of a patent, the court cannot stay the consideration of the patent owners motion for preliminary injunction against infringement due to the filing of petition of a Post-grant review or Post-grant review was granted. § 325.
The Director is given broad discretion on how to regulate the post-grant review process, including for example procedures for submitting supplemental information, procedures for discovery, and providing either party with the right to an oral hearing. § 326.
The proceeding can be terminated by settlement of the parties or by a final decision of the board. § 327.
Final decisions are appealable to the Federal Circuit.

3) New inter partes Reexamination(now called inter partes review)

As stated above, the timing for inter partes review interplays with the post-grant review system. A request for inter partes review can be filed only on the later of nine months after the issuance of a patent or after a post-grant review is terminated. (§ 311(c)). Other features include:

The standard for granting a request for inter partes review has changed in the Senate bill to "a reasonable likelihood that the petitioner will prevail with regard to at least one claim," thereby raising the standard from a "substantial new question of patentability" under current inter partes reexamination. § 314(a).
The scope of review is still patents and printed publications, i.e., only challenging the patentability of one or more claims under §§ 102 or 103. § 311(b).
Unlike the current inter partes reexamination, the Senate bill's inter partes review proceeding will be held before a Patent Judge (Patent Trial and Appeal Board).
The inter partes review may be terminated by settlement or by a final decision of the board. § 317.
The Director is given broad authority to establish regulations and how the proceedings will be carried out. For example, giving each party the right to an oral hearing, establishing procedures for submitting supplemental information, setting standards for discovery. § 316.
The decision to proceed with inter partes review is not appealable § 314(d).
Allows a preliminary response to be filed by the patent owner to explain why no inter partes review should be instituted. § 313.
The Senate bill prohibits an inter partes review from being initiated or maintained if the petitioner has filed a civil action challenging the validity of a claim of the patent or if more than six months have passed since the petitioner was served with a complaint alleging infringement. § 315(a and b).
The Senate bill includes estoppel provisions as provided in inter partes reexamination and does not allow for broadening of the claims. § 315(e).
The final decision by the board may be appealed to the Federal Circuit. § 319.

4) Preissuance submission by third parties

This provision of the Senate bill allows for third parties to file publications or patents for consideration to the USPTO if the submission is made in writing before the notice of allowance or the a later of: 1) 6 months after the application for patent is first published; or 2) the date of the first rejection of any claim by the USPTO. The brief language is provided below.

GENERAL. Any third party may submit for consideration and inclusion in the record of a patent application, any patent, published patent application, or other printed publication of potential relevance to the examination of the application, if such submission is made in writing before the earlier of

A. the date a notice of allowance under section 151 is given or mailed in the application for patent; or

B. the later of

i. 6 months after the date on which the application for patent is first published under section 122 by the Office, or

ii. the date of the first rejection under section 132 of any claim by the examiner during the examination of the application for patent.

5) USPTO fee-setting authority and USPTO funding

Currently, Congress diverts some fees collected by the PTO for government operations. It has been estimated that about $800 million in collected patent fees have been diverted over the past two decades. The Senate bill eliminates fee diversion by amending 35 U.S.C. § 42(c).

6) Supplemental Examination Proceeding

The Senate bill provides an additional, streamlined supplemental examination similar to an ex parte reexamination. The proceeding permits a patent owner to request "supplemental examination" for the USPTO to "consider, reconsider or correct information believed [by the patent owner] to be relevant to the patent." The standard for granting such a request is that the information raises a "substantial new question of patentability," which is the same as the current ex parte reexamination standard. In this proceeding, the patent owner does not have the right to file a patent owners statement. The proceeding appears to also be a means to correct any "inequitable" conduct during the prior examination. "A patent will not be held unenforceable on the basis of conduct relating to information that had not been considered, was inadequately considered, or was incorrect in a prior examination of the patent if the information was considered, reconsidered, or corrected during a supplemental examination of the patent. The making of a request under subsection (a), or the absence thereof, shall not be relevant to enforceability of the patent under section 282."

7) Elimination of the best mode defense

The best mode under section 112 is still a condition for patentability. Best mode, however, can not be used as a defense for which a patent may be invalid or unenforceable. The Senate bill language is as follows:

(3) Invalidity of the patent or any claim in suit for failure to comply with:

A. any requirement of section 112, except that the failure to disclose the best mode shall not be a basis on which any claim of a patent may be canceled or held invalid or otherwise unenforceable; or

B. any requirement of section 251.

8) Transitional post-grant review of covered business method patents

The Senate bill provides a post-granted review proceeding to determine the validity of business method patents. The proceeding is limited to petitioners who have been sued or charged with patent infringement of the particular business method patent.

9) False-Marking Statute

The Senate bill limits false-marking suits to the United States or any person who suffered a competitive injury as a result of a false-marking violation.

Key Differences in the House Bill

Again, the first-inventor-to-file system and limitation of the one year grace period is the same in the House bill. The big differences in the House bill relate to the post-grant review and inter partes review proceedings. The House bill changes some of the standards for determining whether to proceed and the House bill includes some important language regarding stay of other proceedings, such as patent infringement litigation. In general, the House bill's changes are not favorable to the patentee. The House bill makes it easier to proceed with an inter partes review by lowering the standard and the House bill appears to make it easier to stay patent infringement actions in civil courts until these proceedings are terminated.

1) Post-Grant Review

The House bill expands the window of the post-grant review to twelve months after the issuance of a patent (rather than nine month window in the Senate bill). The House bill also permits review on the standard of "a novel legal question that is important to other patents or patent applications."

The House bill also includes a new section providing guidance regarding requests for stays in other proceedings. The House bill includes considerations the courts should make regarding whether to grant a stay in a "civil action" (including patent infringement litigation as well as actions before the International Trade Commission); the court "shall decide" whether to grant the stay based on "whether the stay, or denial thereof, will simplify the issues . . . and streamline the trial." (§ 330).

2) Inter partes review

The House bill differs from the Senate bill by keeping the old standard for proceeding with a reexamination -- a substantial new question of patentability (rather than showing a "reasonable likelihood that the petition would prevail with respect to at least one of the claims challenged in the petition" in the Senate Bill).

The inter partes review timing period is changed due to the expansion of the post-grant review window. A petition can be filed for an Inter partes review from the later of twelve months after the issuance of a patent or after a post-grant review is terminated.

The House bill also includes a new section not in the Senate version regarding requests for stays similar to the post-grant review. The House bill provides guidance when a party seeks a stay in a "civil action" (including patent infringement litigation as well as actions before the International Trade Commission); the court "shall decide" whether to grant the stay based on "whether the stay, or denial thereof, will simplify the issues . . . and streamline the trial" (§ 320).

Senate Bill S23

§ 102. Conditions for patentability; novelty

(a) NOVELTY; PRIOR ART. A person shall be entitled to a patent unless:

the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or
the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122(b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention.

(b) EXCEPTIONS.

1. DISCLOSURES MADE 1 YEAR OR LESS BEFORE THE EFFECTIVE FILING DATE OF THE CLAIMED INVENTION.

A disclosure made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if:

A. the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or

B. the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor.

2. DISCLOSURES APPEARING IN APPLICATIONS AND PATENTS.

A disclosure shall not be prior art to a claimed invention under subsection (a)(2) if:

A. the subject matter disclosed was obtained directly or indirectly from the inventor or a joint inventor;

B. the subject matter disclosed had, before such subject matter was effectively filed under subsection (a)(2), been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or

C. the subject matter disclosed and the claimed invention, not later than the effective filing date of the claimed invention, were owned by the same person or subject to an obligation of assignment to the same person.

(c) COMMON OWNERSHIP UNDER JOINT RESEARCH AGREEMENTS Subject matter disclosed and a claimed invention shall be deemed to have been owned by the same person or subject to an obligation of assignment to the same person in applying the provisions of subsection(b)(2)(C) if:

the subject matter disclosed was developed and the claimed invention was made by, or on behalf of, 1 or more parties to a joint research agreement that was in effect on or before the effective filing date of the claimed invention;
the claimed invention was made as a result of activities undertaken within the scope of the joint research agreement; and
the application for patent for the claimed invention discloses or is amended to disclose the names of the parties to the joint research agreement.

(d) PATENTS AND PUBLISHED APPLICATIONS EFFECTIVE AS PRIOR ART. For purposes of determining whether a patent or application for patent is prior art to a claimed invention under subsection (a)(2), such patent or application shall be considered to have been effectively filed, with respect to any subject matter described in the patent or application

if paragraph (2) does not apply, as of the actual filing date of the patent or the application for patent; or
if the patent or application for patent is entitled to claim a right of priority under section 119, 365(a), or 365(b), or to claim the benefit of an earlier filing date under section 120, 121, or 365(c), based upon 1 or more prior filed applications for patent, as of the filing date of the earliest such application that describes the subject matter.

§103. Conditions for patentability; nonobvious subject matter

A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made.

Authored by:

Don J. Pelto
(202) 772-5362
dpelto@sheppardmullin.com

and

Andrew Keith
(202) 772-5367
akeith@sheppardmullin.com

A MATRIXX Revolution, Part II: Supreme Court affirms Ninth Circuit's holding that life science companies cannot rely on a statistical significance standard when deciding whether adverse event reports are material for the purpose of securities disclosures

Sheppard Mullin — Tue, 29 Mar 2011 03:54:29 -0800

By Peter S. Reichertz and Allie Frumin

On March 22, the U.S. Supreme Court affirmed the Ninth Circuit’s ruling in Matrixx Initiatives, Inc. v. Siracusano, 09-1156. See our prior blog article from November 18, 2010.

Matrixx Initiatives, Inc. (“Matrixx”) is a manufacturer of over-the-counter pharmaceuticals. Its core brand of products is Zicam, a popular cold remedy. NECA-IBEW Pension Fund and named plaintiff James Siracusano brought a securities fraud class action lawsuit against Matrixx in 2005, alleging that Matrixx and three of its executives made certain misleading public statements about the company’s projected growth in light of information it had that Zicam’s nasal spray had been linked to several cases of anosmia, or loss of the sense of smell. To prevail on a §10(b) claim, a plaintiff must show that the defendant made a statement that was “misleading as to a material fact.” See 17 C.F.R. 240.10b. The Plaintiffs argued that these adverse events were material and that the company’s failure to report them in its SEC filings violated the Securities Exchange Act of 1934 (“the Act”).

Matrixx countered that the reports of anosmia it received were not numerous enough to be “statistically significant” and therefore Matrixx was not required to report them. Matrixx urged the Court to adopt a bright line rule that “reports of adverse events associated with a pharmaceutical company’s products cannot be material absent a sufficient number of such reports to establish a statistically significant risk that the product is in fact causing the events.” Matrixx, at 11. Absent statistical significance, Matrixx viewed adverse event reports as merely “anecdotal evidence” of a possibly coincidental event.

The Court disagreed with this argument. Justice Sotomayor, writing for the Court, explained that a “lack of statistically significant data does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse event.” Id. at 12.

The Court reiterated its prior holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988), where it found that the §10(b) materiality requirement is satisfied when there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Here, the court reasoned, “Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.” Matrixx, at 15.

The Ninth Circuit decision, which the Supreme Court affirmed here, drew considerable concern from members of the life sciences industry who feared that requiring manufacturers to disclose every adverse event report would be both a logistical nightmare due to the volume of reports typically received by manufacturers, and confusing or misleading to the general public because people would be unable to distinguish the legitimate reports of potential concern from the unreliable or anecdotal ones.

In response to the industry’s anxiety on this point, Justice Sotomayor explained:

Application of Basic’s “total mix” standard does not mean that pharmaceutical manufacturers must disclose all reports of adverse events. Adverse event reports are daily events in the pharmaceutical industry; in 2009, the FDA entered nearly 500,000 such reports into its reporting system. … The fact that a user of a drug has suffered an adverse event, standing alone, does not mean that the drug caused that event. … The question remains whether a reasonable investor would have viewed the nondisclosed information “as having significantly altered the “total mix” of information made available.” … [T]he mere existence of reports of adverse events – which says nothing in and of itself about whether the drug is causing the adverse events – will not satisfy this standard. Something more is needed, but that something more is not limited to statistical significance and can come from the source, content, and context of the reports.

… Moreover, it bears emphasis that §10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary to make statements made, in the light of the circumstances under which they were made, not misleading. Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market.

Id. at 15-16 (internal citations and quotation marks omitted, emphasis in original).

Ultimately, the Court found for the plaintiffs, holding that they successfully argued both (1) that a reasonable investor would view the adverse event reports in this particular situation as being material, and (2) facts giving rise to a strong inference of scienter, or a knowledge of wrongdoing on the part of Matrixx. The opinion emphasized the Court’s refusal to establish a bright line rule for determining when adverse event reports are significant enough to mandate disclosure. It remains to be seen how this ruling will impact a manufacturer’s evaluation of which adverse event reports it believes it must disclose; the lack of a bright line rule will leave the decision of materiality to each company.

Authored By:

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

and

Allie Frumin
(202) 469-4948
afrumin@sheppardmullin.com

Going Back to Risk Basics for Clinical Work: Beware of Overly Broad Indemnification Clauses, Lack of Clarity on Third-Party Loss Clauses, and Incomplete Insurance Coverages

Sheppard Mullin — Thu, 03 Mar 2011 13:02:13 -0800

By Blaine Templeman and Sarah E. Aberg

1. You May Get What You Drafted.

Broad indemnification provisions, once played out, can sometimes result in surprising applications. For example, in Mass Transit Administration v. CSX Transportation, Inc., 708 A.2d 298 (Md. 1998), the court considered an indemnification clause in a procurement contract between the Maryland Transit Authority (MTA) and CSX Transportation, Inc. (CSX). CSX had contracted with the MTA to operate a commuter rail service between Washington, D.C., and Baltimore. In the contract, the MTA agreed to “indemnify, save harmless, and defend CSX from any and all casualty losses, claims, suits, damages or liability of every kind arising out of the Contract Service.” Ultimately, the court found that CSX, whose train had crashed into a piece of equipment belonging to CSX’s own subcontractor, could be indemnified against the subcontractor’s claims by virtue of the “any and all” language in the indemnification clause between CSX and the MTA. This was because the services the subcontractor was performing were part of the services CSX had contracted with the MTA to provide under the services contract.

While some courts will find a way to avoid results like that reached in Mass Transit Administration v. CSX Transportation, Inc. (usually by voiding the outcome based on the fact there was no regard for the factual determination of liability, see PIC Group, Inc. v. Landcoast Insulation, Inc., No. 09-662, *9 (S.D. Miss. Sept. 1, 2010) (citing cases)), this is not always the case.

When constructing an indemnification clause in a clinical trial agreement, master agreement with a CRO, or a master manufacturing agreement, avoid rolling out the standard language prior to thinking through the deal very carefully. Ask yourself several questions:

Does the drug involved pose any special safety or administrative concerns?
Is there any special IP risk?
What part of the services will be subcontracted? How wide and far will the indemnification flow? Will subcontractors be providing indemnification for all parties working on the project?
Is very broad indemnification appropriate or would a series of more specific indemnifications be a better approach?
What will the consequences be if the service provider does not perform? What provisions could be used to specifically identify that risk?

These sorts of questions should help you tailor an indemnification provision that makes sense for your transaction. Also, keep in mind that most indemnification provisions apply only to third party losses, so read the next part of this blog to make sure you are being clear on the types of losses that your provision intends to cover.

2. What Losses Will Your Indemnification Cover?

Several states presumptively apply indemnification provisions only to third-party claims, and will not apply the provisions to claims involving the two parties to the contract absent unmistakable clear language to that effect. Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 492-93 (1989). This requirement is often strictly enforced by the courts. Even “when an indemnification provision contains clauses that the court considers to be inapplicable to suits between parties–such as requiring that notice of a claim be given to the indemnitor or allowing the indemnitor to assume the indemnitee’s defense–courts have concluded that the contract does not evidence an unmistakably clear intent to indemnify attorneys’ fees incurred in a lawsuit between the contracting parties.” Goshawk Dedicated Ltd. v. Bank of New York, 2010 WL 1029547, at *6 (S.D.N.Y. Mar 15, 2010) (citing cases). So, if you want the indemnification to apply to more than third party losses, it is time to turn on “Caps Lock,” hit “Return,” get out the bold lettering, and add a sentence that makes the intent of the parties clear.

3. When Did You Last Talk to Your Broker?

Clinical trial injury poses a serious financial risk for all of the parties to a clinical trial. For the patient, injury from participation in a clinical trial may be serious (requiring long term care) or may even result in death. And all this can be expensive. Doctors and hospitals generally rely on the sponsor to get the right insurance, but insurance may not cover all the costs and insurance will certainly not insulate the doctor and hospital from suits and other actions. Very few clinical trial sponsors realize that their insurance does not always cover all of the costs for treatment of clinical trial injury. Even a sophisticated company may not understand the terms of coverage spelled out in its insurance policies and the risks associated with relying on it, including the fact that a sponsor often must come out of pocket to pay such costs even if they have already covered a high retention (deductible). Coverage under some policies will not even kick in until an injured patient threatens to bring a suit.

When the parties to a clinical trial agreement agree on a provision that requires a sponsor to maintain insurance that covers all of the potential liabilities arising in connection with a clinical trial, it is possible that very little has been achieved. This sort of language requires insurance that will never be written by any U.S. insurer. So, the parties may be taking false comfort in its belief that the sponsor and its insurer have such insurance and the sponsor (and not the hospital) will take care of everything.

Before initiating a clinical trial, take time to consider carefully all the coverages that will address the risks of trials – the insurance held by the drug manufacturer, the PI’s insurance, the study site’s insurance, and the sponsor’s insurance. The goal should be to make sure they all work together to protect all the parties involved – including the study subject.

In a future blog, we will cover some of the issues of insuring a non-U.S. trial.

Authored By:

Blaine Templeman
(212) 634-3063
btempleman@sheppardmullin.com

and

Sarah E. Aberg
(212) 634-3091
saberg@sheppardmullin.com

FDA Announces Its Plan For Changes to the 510(k) "Approval" Pathway

Sheppard Mullin — Thu, 27 Jan 2011 07:05:05 -0800

By Peter S. Reichertz and Allie Frumin

January 19, FDA announced its plan to modify the 510(k) “approval” pathway, the most common review path for medical devices. Specifically, FDA released a report containing twenty-five actions it intends to take in 2011 to “improve” the review process. Importantly, however, no changes have yet been made to the process; FDA has just announced its plan of action of how it intends to address potential changes to the process.

A medical device manufacturer who wishes to market a device classified in Class II or, in limited cases, Class I or III, that it believes is substantially equivalent in both safety and effectiveness to a device already on the market (a “predicate device”) must make what is known as a 510(k) notification. Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“FFDCA”) requires medical device manufacturers to notify FDA of their intent to market a medical device at least 90 days in advance of doing so. A 510(k) premarket notification allows FDA to determine whether the particular device is substantially equivalent in safety and effectiveness to a predicate device already being legally marketed. Many changes to medical devices previously cleared for marketing must also be submitted for review prior to implementation.

In September 2009, two committees were established by FDA’s Center for Devices and Radiological Health (“CDRH” or the “Center”) to address challenges facing the medical device review process. Concerns had been raised that the 510(k) program had become less predictable, less consistent, and less transparent, resulting in stifled innovation and the shifting of companies and jobs to overseas locations. Some were concerned that the current 510(k) process was neither providing adequate assurances of safety and effectiveness, nor providing sufficient information for healthcare providers and patients to make well-informed treatment or diagnostic decisions. Within CDRH, employees were dissatisfied with the 510(k) program’s adaptation to the increasing complexity of devices, and expressed frustration that a reviewer’s ability to make well-informed decisions was undermined by the poor quality of 510(k) notifications.

The two committees created by CDRH ultimately produced a list of recommendations which were then submitted for public comment. Based on the feedback CDRH received, FDA has issued a schedule as to how and when it plans to implement these changes. Along with the changes the FDA plans to implement, it announced a date by which it expects each will be addressed. Below is each action listed chronologically by its planned date of action. [Note: There are twenty-six dates listed below because one action, the establishment of the Center Science Council, has a two-part timeline for completion.]

March 31: Implement an “Assurance Case” pilot program to explore the use of an “assurance case” framework for 510(k) notifications.

March 31: Establish a Center Science Council and post the Council’s charter to FDA’s website. The Council’s responsibilities will be to:

Oversee the development of a business process and SOP for determining and implementing an appropriate response to new scientific information;
Promote the development of improved metrics to continuously assess the quality, consistency, and effectiveness of the 510(k) program;
Periodically audit 510(k) review decisions to assess adequacy, accuracy, and consistency; and
Establish an internal team of clinical trial experts to provide support and advice on clinical trial design for Center staff and prospective IDE applicants.

April 7-8: A public meeting will be held on these dates to discuss making device photographs available in a public database without disclosing proprietary information.

April 7-8: A public meeting will be held on these dates to discuss the development of an on-line medical device labeling repository.

June 15: Draft guidance on 510(k) modifications to clarify which changes to previously cleared devices do or do not warrant submission of a new 510(k) and which modifications are eligible for a Special 510(k).

June 15: Post a Standard Operating Procedure (“SOP”) to FDA’s website in order to clarify and more quickly inform stakeholders when CDRH has changed its regulatory expectations on the basis of new scientific information.

June 15: Post the initial results of the Center Science Council’s 510(k) audit to FDA’s website.

June 30: Determine system requirements and select the platform for a new adverse event database in order to develop better data sources, methods and tools for collecting and analyzing meaningful postmarket information, and to enhance the Center’s capabilities to support evidence synthesis and quantitative decision making.

June 30: Complete an assessment of the IDE process in order to better characterize the root causes of existing challenges and trends in IDE decision-making.

June 30: Issue a proposed regulation on implementing a Unique Device Identification (UDI) System with the goal of permitting the rapid and accurate identification of devices and facilitating and improving adverse event reporting and identification of device-specific problems.

July 15: Develop a process for identifying and responding to Center staffing needs by:

formalizing the Center’s internal process for identifying staffing needs and enhancing recruitment, retention, training, and professional development of review staff; and
creating a mechanism to assemble an experienced ad hoc team to temporarily assist with unexpected surges in workload.

July 31: Draft guidance on strategies for improving the quality and performance of clinical trials.

July 31: Post SOPs to FDA’s website to provide greater clarity, predictability, and efficiency in the guidance and regulation development process.

August 31: Enhance training of Center staff by training new Center staff on core competencies; and training Center staff and industry on:

the determination of “intended use”;
the determination of whether a 510(k) raises “different questions of safety and effectiveness”;
the review of 510(k)s that use “multiple predicates”;
the development and assignment of product codes;
the interpretation of the “least burdensome” principles; and
the appropriate use of consensus standards.

September 15: Post SOP to FDA’s website to develop a network of external experts to appropriately and efficiently leverage external scientific expertise, assess best-practices and develop SOPs for staff engagement with external experts.

September 30: Draft guidance on the evaluation of automatic Class III designation (de novo) to clarify the appropriate use of consensus standards.

September 30: Draft guidance to provide greater clarity regarding:

when clinical data should be submitted in support of a 510(k);
the submission of photographs or schematics for internal FDA use only;
the appropriate use of multiple predicates;
the criteria for identifying “different questions of safety and effectiveness” and technological changes that generally raise such questions;
resolving discrepancies between the 510(k) flowchart and the FDCA;
the characteristics that should be included in the concept of “intended use”; and
the development of 510(k) summaries to assure they are accurate and include all required information.

September 30: Complete an evaluation of the methods used to integrate device information into a dynamic format so that it can be more readily used by staff to make regulatory decisions.

September 30: Post SOP to FDA’s website to develop a process for regularly evaluating the list of device types eligible for third-party review and to enhance third-party review training.

October 31: Draft guidance to clarify the appropriate use of consensus standards.

October 31: Draft guidance to clarify the process for appealing CDRH decisions, including decisions to rescind a 510(k).

October 31: Complete and make the results public of additional multiple predicate analysis to determine the basis for the apparent association between citing more than five predicates and a greater mean rate of adverse event reports.

November 30: Draft guidance to supplement the available guidance on pre-IDE meetings and enhance the quality of pre-submission interactions between industry and Center staff.

December 31: Draft guidance to more consistently develop and assign unique product codes.

December 31: Issue a proposed 510(k) transfer of ownership regulation to better document the 510(k) transfer of ownership process.

December 31: Issue a proposed regulation on medical device labeling to clarify the statutory listing requirements for the submission of labeling.

In addition to the above actions to be taken in 2011, CDRH has submitted seven more areas of possible changes to the 510(k) process to the Institute of Medicine (IOM) for evaluation. IOM is to provide its feedback to CDRH during Summer 2011. These particular recommendations were selected because, while they did garner general public support, significant concerns were raised about each one in comments submitted to the FDA docket. The additional areas of potential changes for feedback from IOM are as follows:

To consider defining the scope and grounds for the exercise of the Center’s authority to fully or partially rescind a 510(k) clearance.
To seek greater authorities to require postmarket surveillance studies as a condition of clearance for certain devices.
To develop guidance defining “class IIb” devices for which clinical information, manufacturing information, or, potentially, additional evaluation in the postmarket setting would typically be necessary to support a substantial equivalence determination.
To clarify when a device should no longer be available for use as a predicate.
To consolidate the concepts of “indication for use” and “intended use” into a single term, “intended use”.
To consider the possibility of requiring each 510(k) submitter to keep at least one unit of the device under review available for CDRH to access upon request.
To explore the possibility of pursuing a statutory amendment that would provide the agency with the express authority to consider an off-label use when determining the “intended use” of a device.

Again, CDRH has no plan to implement any of the above recommendations until it receives feedback from IOM and adjusts the recommendations accordingly.

It remains to be seen just how significantly these changes will modify the current system, which most in the device industry support. We will discuss further developments and proposals, when announced, on this blog.

Authored By:

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

and

Allie Frumin
(202) 469-4948
afrumin@sheppardmullin.com

E-CIGARETTES GET A "SMOKING" BREAK: D.C. Circuit Clarifies Scope of FDA's Authority Over E-Cigarettes

Sheppard Mullin — Tue, 04 Jan 2011 10:16:22 -0800

By Deborah M. Shelton and Allie Frumin

On Tuesday December 7^th, the D.C. Circuit Court of Appeals affirmed a lower court’s ruling in Sottera, Inc. v. FDA, No. 10-5032, (D.C. Cir. Dec. 7, 2010) holding that that the Food and Drug Administration (FDA) could not regulate as a medical device the electronic cigarettes (often referred to as “e-cigarettes”) at issue in that case. Instead, the court affirmed the district court’s finding that FDA’s authority over these e-cigarettes, as labeled, was limited to that over traditional tobacco products.

E-cigarettes are battery-powered reusable products that allow users to inhale nicotine vapor without fire, smoke, ash, or carbon monoxide. Manufacturers of e-cigarettes market their electronic nicotine delivery products as a safer, cheaper, and more environmentally-friendly alternative to traditional cigarettes. Designed to look like traditional cigarettes complete with a small LED light on the tip that glows red when activated, each contains an atomizer and a rechargeable battery. These products are viewed by some as a potentially viable alternative to traditional cigarettes, causing their popularity to increase in recent years.

The case was brought first in the U.S. District Court for the District of Columbia (Smoking Everywhere, Inc. v. FDA, 680 F. Supp. 2d 62 (D. D.C. 2010)) (“Smoking Everywhere”), by two e-cigarette distributors, Smoking Everywhere and Sottera, Inc. (doing business as NJOY). They filed the case after inbound shipments of their e-cigarettes were denied entry into the United States by FDA based on the Agency’s claim that the products were an unapproved drug-device combination under the Food, Drug, and Cosmetic Act (“FDCA”). The plaintiffs sought to enjoin FDA from regulating e-cigarettes as a drug-device combination and from denying entry of those products into the United States. The plaintiffs argued that FDA’s authority over their e-cigarette products did not extend beyond that of FDA’s more limited authority over traditional cigarettes. The district court agreed with the plaintiffs and granted the injunction. FDA appealed and the D.C. Circuit Court of Appeals has now affirmed.

Before the U.S. District Court, FDA argued that e-cigarettes should be regulated like nicotine replacement gum or patches pursuant to FDA’s jurisdiction over medical devices. FDA has authority under the FDCA to regulate articles that are “drugs,” “devices,” or “drug/device combinations.” The FDCA defines drugs to include “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the body of man or other animals.”21 U.S.C. § 321(g). Similarly, “device” is defined as “an instrument, apparatus, implement ... or other similar or related article, including any component, part, or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or intended to affect the structure or any function of the body of man or other animals…” 21 U.S.C. § 321(h).In sum, FDA’s statutory authority to regulate a product as a “drug” or “device” is limited to products that are intended to be used to affect a structure or function of the body or that are intended for use in the cure, mitigation, treatment, or prevention of disease.

FDA also has statutory authority to regulate traditional cigarettes and other tobacco products under the FDCA as a result of the Family Smoking Prevention and Tobacco Control Act of 2009 (the “Tobacco Act”), but that authority is more limited than that applicable to drugs and devices. Specifically, FDA may regulate “tobacco products,” which the FDCA defines as “any product made or derived from tobacco that is intended for human consumption.” 21 U.S.C. 321(rr)(1); however, the act excludes any “article that is a drug under 21 U.S.C. § 321(g)(1), a device under 21 U.S.C. § 321(h), or a combination product described in 21 U.S.C. § 353(g).” 21 U.S.C. § 321(rr)(2)-(3). Under its authority over tobacco products, FDA may impose restrictions on their sale, advertising and promotion, regulate their mode of manufacture, and establish other standards for their production and distribution. Unlike its more expansive authority over drugs and devices, however, FDA’s authority over conventional tobacco products does not include a pre-marketing clearance or approval requirement.

In the Smoking Everywhere litigation, the plaintiffs argued that e-cigarettes are the same as traditional cigarettes in their use and purpose, and therefore FDA must be required to regulate them under the Tobacco Act the same as it does traditional cigarettes. Conversely, FDA argued that nicotine is a drug that affects the structure or function of the body, and that, as a nicotine delivery mechanism, e-cigarettes are medical devices. If e-cigarettes were to be classified as a medical device because of their nicotine-delivery feature, the products would require FDA’s premarketing approval under the FDCA, subject to a rigorous demonstration of safety and effectiveness, as well as a host of other regulatory requirements.

The district court found for the plaintiffs, holding that since the e-cigarettes were neither labeled nor advertised as having any therapeutic uses, FDA could not regulate them as drugs or devices. FDA appealed the decision.

The appellate court agreed with the district court that e-cigarettes must be regulated the same way as other traditional tobacco products under the FDA’s Tobacco Act authority. The court noted that FDA itself frequently expressed the view that “cigarettes are beyond the scope of the [FDCA] absent health claims establishing a therapeutic intent on behalf of the manufacturer or vendor.” Sottera, Inc. v. FDA, at 9. The court found dispositive that, in enacting several statutes on tobacco regulation, “Congress has acted against the backdrop of the FDA’s consistent and repeated statements that it lacked authority under the FDCA to regulate tobacco absent claims of therapeutic benefit by the manufacturer.” Id., citing FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 144 (2000). Following the Supreme Court’s reasoning in Brown & Williamson, the court held that FDA can only regulate tobacco products marketed for therapeutic purposes under the FDCA’s drug/device provisions. Since the e-cigarettes at issue in the case were neither labeled nor marketed with any claim of therapeutic use, the court held that these products could not be regulated as drugs or medical devices, and that therefore FDA’s detention of them was unlawful.

Authored By:

Deborah M. Shelton
(202) 772-5351
dshelton@sheppardmullin.com

and

Allie Frumin
(202) 469-4948
afrumin@sheppardmullin.com

IRS Guidance On New Excise Tax On Branded Pharmaceutical Companies: Filing Due January 21, 2011

Sheppard Mullin — Wed, 15 Dec 2010 04:54:42 -0800

By Peter S. Reichertz

In a prior article dated May 25, 2010, we advised of a new excise tax on branded pharmaceutical manufacturers. We indicated that the Patient Protection and Affordable Care Act ("PPACA") required the Internal Revenue Service ("IRS") to publish guidance "necessary to carry out the purpose" of the section in which the tax is included. The IRS has now issued that guidance ("the Guidance").

The Guidance sets forth a proposed methodology for calculating the fee, as well as the requirements for pharmaceutical manufacturers subject to the tax. The fee is to be calculated by the IRS based on information obtained from government agencies which either reimburse for, or procure, branded prescription drugs, including those reimbursed under or purchased by Medicare Parts B and D, Medicaid, the VA, DOD and TRICARE. A description of the methodology for calculation of the fee is found on pages 2-7 of the Guidance.

What is required of pharmaceutical companies? Companies do not calculate the fees; they just provide certain information to the IRS. IRS then obtains information from the appropriate government agencies. Under the Guidance, pharmaceutical companies subject to the tax would have to file a Form 8947 annually, by December 15^th of each year except that the initial submission must be made by January 21, 2011.

Form 8947 solicits the following information from each "covered entity":[1]

For a single-person covered entity, the covered entity's name, address, and employer identification number. For a covered entity which is a controlled group, the name, address, and employer identification number of the designated entity and each manufacturer or importer with gross receipts from the sale of branded prescription drugs that was included in the covered entity as of the end of the day on December 31 of the sales year.
All of the NDCs for branded prescription drugs in which the covered entity is identified in the labeler code as of the end of the day on December 31 of the sales year. For a covered entity which is a controlled group, this includes all NDCs in which a member of the covered entity is identified in the Labeler Code as of the end of the day on December 31 of the sales year.
The brand name and NDC for each orphan drug for which the covered entity was allowed a section 45C credit. A credit was "allowed" for any particular drug if the covered entity claimed the credit and there has not been a final assessment or a court order disallowing the full credit taken for the drug. In addition, even if the credit has been allowed, a covered entity must not report an NDC for an orphan drug for any sales year following the calendar year in which the FDA approved the drug for marketing for any indication other than the treatment of the rare disease or condition for which the section 45C credit was allowed.
The rebates for each NDC paid in the sales year by the covered entity to Medicare Part D with respect to sales occurring in that sales year. Section 9008(d)(1) of PPACA defines covered entity as "any manufacturer or importer with gross receipts from branded prescription drug sales." For purposes of section 9008(a), a manufacturer or importer is the person identified in the Labeler Code of the National Drug Code (NDC) for a branded prescription drug.

Rebate is considered paid in the sales year if it is taken into account on the covered entity's tax return(s) for the sales year. This information is needed for the 2009 sales year because, at this time, CMS does not have rebate data on branded prescription drug sales by NDC. However, starting in 2011, CMS is planning to collect this rebate information by NDC for the 2010 and subsequent sales years. It is therefore possible that covered entities will not report this rebate information for years following 2009.
The state supplemental rebates for each NDC paid in the sales year by the covered entity with respect to sales under Medicaid occurring in that sales year. For this purpose, a rebate is considered paid in the sales year if it is taken into account on the covered entity's tax return(s) for the sales year. This information is needed because Medicaid data will not include state supplemental rebates.

The IRS will provide each "covered entity" with a preliminary fee calculation by May 2, 2011 setting forth the covered entity's:

fee
branded Rx drug sales by NDC, by government program|
drug sales taken into account
aggregate drug sales taken into account for all entities.

A final fee calculation will be sent on August 15, 2011.

Part III – Requests for comments

The IRS has requested comments on the procedures described for consideration when promulgating regulations setting forth procedures for 2011 and the following years. The deadline for submission of comments is June 2, 2011. Written comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2010-71), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2010-71), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.: Comments may be transmitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.dov. "Notice 2010-71" should be in the subject line of any electronic communications.

Authored By:

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

[1] Section 9008(d)(1) of PPACA defines a covered entity as "any manufacturer or importer with gross receipts from branded prescription drug sales." A manufacturer or importer is the person identified in the Labeler Code of the National Drug Code (NDC) for a branded prescription drug.

Section 9008(d)(2) of PPACA provides a controlled group rule under which all persons treated as a single employer under section 52(a), 52(b), 414(m), or 414(o) of the Internal Revenue Code (Code) shall be treated as a single "covered entity". For this purpose, a foreign entity subject to tax under section 881 is included within a controlled group under section 52(a) or 52(b). This controlled group rule will be applied as of the end of the day on December 31 of the sales year. All persons treated as a single employer under section 9008(d)(2) are jointly and severally liable for the fee. In the case of a controlled group that is treated as a single covered entity under section 9008(d)(2), the controlled group must identify a single person as the "designated entity" that may act for the controlled group with respect to the section 9008 fee. If the controlled group, without regard to foreign corporations included under section 9008(d)(2)(B), is also an affiliated group that filed a consolidated return for federal income tax purposes, the designated entity is the common parent of the affiliated group as identified on the tax return filed for the sales year. In all other situations, the controlled group must select a person as the designated entity on Form 8947, Report of Branded Prescription Drug Information which is signed by the designated entity under penalties of perjury, stating that all the manufacturers or importers of branded prescription drugs who are members of the covered entity have consented to the selection of the designated entity.

Adjusting the Inequitable Conduct Doctrine: Federal Circuit Hears Oral Arguments En Banc in Therasense

Sheppard Mullin — Mon, 06 Dec 2010 10:44:55 -0800

By Gray M. Buccigross

On November 9, 2010, the Federal Circuit, sitting en banc, heard oral arguments in Therasense, Inc. v. Becton, Dickinson & Co., regarding the legal tests to be applied in determining whether a patent is unenforceable due to inequitable conduct. This has been a controversial issue over the last several years among practitioners, Federal Circuit judges, and industry groups, particularly Big Pharma. This article assumes some familiarity with the case and the issues. However, for background information on both, please click here.

Plaintiff Abbott, Defendant Becton, Dickinson, Defendant Nova, and the PTO argued at the hearing. They addressed the following issues: (a) the standard for materiality; (b) intent; and (c) whether the facts of the case warranted a finding of inequitable conduct. The argument primarily focused on the materiality inquiry.

[Please note that while we have done our best to appropriately attribute comments to the specific Federal Circuit judges who made them, the associations may not be completely accurate. There is no official transcript available at this time.]

A. Materiality

Under the PTO’s current rules, information is “material” if it satisfies either Rule 56(b)(1) or 56(b)(2). Information is material under Rule 56(b)(1) if it “establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim.” Information is material under Rule 56(b)(2) if it: “refutes, or is inconsistent with, a position the applicant takes in: (i) Opposing an argument of unpatentability relied on by the Office, or (ii) Asserting an argument of patentability.”

Abbott argued that the standard for inequitable conduct case should be “but for” causation, where information is only material if the patent would not have otherwise issued, contending that:

(A) Supreme Court cases only found inequitable conduct where there had been “but for” causation.

(B) Rule 56(b)(2) would swallow Rule 56(b)(1).

(C) Equitable doctrines should not be used to punish; rather, the PTO can and should fill any void by policing misconduct.

(D) Anything less than “but for” causation will maintain the status quo, whereby applicants dump information while attempting to avoid characterizing or explaining that information.

The PTO argued that Rule 56(b) should be applied because:

(A) The “but for” standard allows too much mischief, while the “reasonable examiner” standard is too vague and causes “pathological overcompliance.”

(B) Adjustment of the intent inquiry and Exergen (requiring specific pleading) will mitigate flooding.

(C) The PTO should have the first crack at information, so the market is not disrupted years later, and then an ex post analysis done via litigation.

Defendants argued that the PTO standard at the time of prosecution should be applied because:

(A) Applicants should be judged by the standard to which the PTO held them.

(B) Rule 56 is narrower than the reasonable examiner standard, and therefore not overly broad or vague.

(C) Rule 56(b)(2) can be taken very literally. It is not about whether, for example, an invention is obvious at all, but whether it is obvious over the references relied on by the PTO. Further, disputes are not generally about Rule 56(b)(2).

(D) The real problem is with overpleading, and not with excessive findings of inequitable conduct. Exergen and tightening the intent requirement should help with this.

(E) The “but for” standard will permit misconduct, which the PTO cannot appropriately police.

The Court did not seem inclined to adopt a “but for” standard of causation. At least Judges Lourie, Dyk, and Moore expressed concern. Judge Lourie noted that the Supreme Court has struck down not just the patents that were procured by fraud, but additional patents as well. Judge Gajarsa raised some hypotheticals, seemingly pointing out that it would be hard to determine when a “but for” standard is met, and that it left much room for bad actors. Judges Linn and Dyk expressed concerned that the “but for” standard would require an accused infringer to prove that prior art would have resulted in at least a rejection.

At least Judges Dyk, Newman, Moore, and Bryson also expressed concern about Rule 56(b)(2). The PTO acknowledged that applicants are currently “flooding” the PTO with references. Judge Dyk pointed out that Rule 56(b)(2) is “exactly what the law pretty much is right now.” Judge Dyk posed a hypothetical, asking what if there is a “tiny sliver of scientific opinion that is contrary to the position you are giving.” The PTO responded that this would need to be disclosed, but could be done in context. Judge Prost also repeatedly asked the parties how many people in the last ten years have been disciplined by the PTO for lack of candor. No one could answer.

Judge Newman noted that inequitable conduct is being pled in a large number of cases, but sustained in a small number of cases. This creates a “profound” litigation burden, and many small entities cannot afford to defend such charges. She did not see a reason that this would change if 56(b) remained an applicable standard. Judge Moore expressed that she was “having trouble seeing daylight between current Rule 56 and the reasonable examiner standard,” and later followed up that it’s “(b)(2) that seems to be the real problem.”

Judge Linn’s questioning indicated he was concerned with defendants’ proposal to track PTO standards, because the PTO can change its standards at any time, including back to the “reasonable examiner” standard.

B. Intent

Aside from the facts of the case, the parties and the PTO seemed to agree that intent needed to be clarified. In particular, both the PTO and the Defendants argued that flooding of the PTO should be mitigated not by departing from Rule 56(b), but by: (1) following Kingsdown to require subjective intent and reject the standard requiring only that one “should have known” the materiality of the misrepresentation or undisclosed information; and (2) requiring that any inference of intent must be the single most reasonable inference.

C. Balancing of Materiality and Intent

Judge Gajarsa took issue with the “tie-up of materiality with intent before we find intent.” Defendants argued that materiality can support a finding of intent, but only if there is other evidence as well (e.g., motivation to deceive and knowledge). Defendants thus admitted that it is not proper to infer intent solely from materiality.

D. Specific Facts of the Case

Overall, the arguments regarding the specific facts of the underlying case repeated the briefing and the arguments in the underlying appeal and trial. Defendants contended that the facts fit squarely within the Rule 56(b)(2) “inconsistent” standard of materiality, that this was an egregious case, that there were adverse credibility findings, a finding of motivation to deceive, awareness, and an intentional decision not to disclose.

Abbott argued that if the Court finds the “should have known” standard is improper, then the decision must be reversed. Judge Moore noted the adverse credibility findings, however, and that Judge Alsup only recited the standard, rather than relied on it. Abbott responded that there was no evidence that Attorney Pope and Dr. Sanghera actually appreciated the materiality. Rather, Judge Alsup focused on the interpretation of the EPO briefs. Judge Dyk asked if the facts would satisfy the “but for” test. Abbott denied this, contending that the disclosures related to different substantive issues.

E. Implications for the Inequitable Conduct Doctrine

Although we cannot predict how the Federal Circuit will come out on these issues, it seems obvious that the Federal Circuit will adjust the standard for materiality for purposes of determining whether a patent was procured through inequitable conduct. The Court seems very unlikely to adopt a “but for” standard of materiality. On the other hand, the parties seem to agree that the “reasonable examiner” standard is vague, overly broad, and therefore promotes overdisclosure. Further, the fact that numerous judges expressed concern regarding Rule 56(b)(2) suggests that the Federal Circuit may either tighten up the (b)(2) inquiry in inequitable conduct litigation or do away with it altogether.

The Federal Circuit also appears likely to clarify the intent standard. The Court will likely make clear that “should have known” is not good enough (per Kingsdown), and reinforce that the inference of intent must be the single most reasonable inference (per Star Scientific and Scanner). It remains to be seen whether, and if so to what extent, the Court will allow materiality to serve as a basis for inferring intent. Historically, judges have often inferred intent at least partly from materiality.

Notably, retired Federal Circuit Chief Judge Paul Michel projected at a November 12, 2010 Intellectual Property Owners Association webinar that there will be multiple opinions, both dissents and concurrences. He further predicted that there will be some modest adjustments to the materiality and intent inquiries. Additionally, he thought the Federal Circuit will take care not to push the initial burden of explaining any failure to disclose onto those associated with the patent prosecution.

Authored By:

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

Therasense Opinions And The Doctrine Of Inequitable Conduct

Sheppard Mullin — Mon, 06 Dec 2010 10:09:37 -0800

By Gray M. Buccigross

I. BRIEF OVERVIEW OF THE DOCTRINE

Each person associated with the prosecution of a patent application has a duty of candor and good faith in dealing with the Patent and Trademark Office (“PTO”). Under the doctrine of inequitable conduct, a patent may be rendered unenforceable where that duty is breached, and the person intended to deceive or mislead the PTO.

In particular, one must disclose all material, non-cumulative information. Under the PTO’s current rules, information is “material” if it satisfies either Rule 56(b)(1) or 56(b)(2). Information is material under Rule 56(b)(1) if it “establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim.” Information is material under Rule 56(b)(2) if it: “refutes, or is inconsistent with, a position the applicant takes in: (i) Opposing an argument of unpatentability relied on by the Office, or (ii) Asserting an argument of patentability.”

In litigation, a patent may be found unenforceable based on inequitable conduct where there is an intentional misrepresentation or failure to disclose material information during the prosecution of the patent. Under the current state of the law, information is material if it satisfies any one of a number of standards. Those standards include but are not limited to: (a) the PTO’s Rule 56(b) standard; (b) the “reasonable examiner” standard, which asks whether there is a substantial likelihood that a reasonable PTO examiner would have considered the information “important” in deciding whether to allow a patent to issue; (c) the objective “but for” standard, whereby the misrepresentation was material if the patent should not have issued; and (d) the subjective “but for” standard, where the misrepresentation is material if it actually caused the examiner to approve the patent application when the examiner would not otherwise have done so.

If the accused infringer establishes materiality and intent to deceive by clear and convincing evidence, there is a sliding scale to determine if the patent should actually be held unenforceable, with the great showing of one element requiring a lesser showing of another.

II. UNDERLYING FACTS OF THE THERASENSE CASE

The Federal Circuit appeal is from a Northern District of California ruling by Judge William Alsup, following a bench trial, that United States Patent No. 5,820,551 (the “’551 patent”) was unenforceable due to inequitable conduct. The ’551 patent claims technology related to a disposable electrode strip whose electrodes can be covered by a single drop of solution. These strips could be inserted into a unit for digital readout of the target compound (like glucose) in a test liquid mixture (like blood).

The ’551 patent was in prosecution for over fourteen years, twelve years of which by Fish & Richardson. While the patent was pending before the PTO, assignee Medisense was purchased by Abbott. One of Abbott’s in-house counsel, Lawrence Pope, took over the prosecution. During the prosecution, various claims were rejected over United States Patent No. 4,545,382 (the “’382 patent”) and/or its related patent before the European Patent Office, No. 0078,636 B2 (the “’636 patent”).

In an effort to overcome the PTO’s rejections based on the ’382 patent, Attorney Pope began working with Dr. Gordon Sanghera, Abbott’s Director of Research and Development. They decided to espouse a new point of novelty – that the specification disclosed a sensor for use in whole blood without any protective membrane. However, a passage in the prior art ’382 patent stated:

Optionally, but preferably when being used on live blood, a protective membrane surrounds both the enzyme and the mediator layers, permeable to water and glucose molecules. [Note that all emphasis is added unless otherwise noted.]

Abbott thereafter asserted that one of skill in the art would have believed that a membrane was required, despite the above passage. Attorney Pope submitted a declaration by Dr. Sanghera in which Dr. Sanghera stated that “one skilled in the art would not read [the ’382 patent passage] to teach that the use of a protective membrane with a whole blood sample is optionally [sic] or merely preferred.” Attorney Pope also submitted remarks that one of skill would have understood the “preferably” language as mere patent phraseology (essentially a weasel word for “required”), rather than a technical teaching. Based on those submissions, the Examiner finally approved the proposed claims.

However, several years prior, the ’636 patent (the European counterpart to the ’382 patent) was removed in an opposition proceeding based on a prior art reference called D1. The ‘636 patent specification also contained the pertinent sentence from the ‘382 patent. In an effort to protect the ’636 patent, Medisense submitted a brief to the EPO, arguing:

It is submitted that this disclosure is unequivocally clear. The protective membrane is optional, however, it is preferred when used on live blood in order to prevent the larger constituents of the blood, in particular erythrocytes, from interfering with the electrode sensor. Furthermore it is said, that said protective membrane should not prevent the glucose molecules from penetration, the membrane is “permeable” to glucose molecules.

Note that two functions of the membrane are disclosed in the passage above – protection and permeability. They play an important role in the Federal Circuit debate regarding materiality.

Dr. Sanghera had helped develop the arguments proffered by Medisense in the EPO appeal, and had attended the oral argument before the EPO. He disclosed the EPO submissions to Attorney Pope, who reviewed them at the time they made the pertinent submissions to the PTO in support of the ’551 patent. They discussed the EPO statements, and determined not to disclose them to the PTO.

III. DISTRICT COURT DECISION HOLDING PATENT UNENFORCEABLE DUE TO INEQUITABLE CONDUCT

The district court found that the EPO submissions were “highly material” pursuant to Rule 56(b)(2) because they were “flatly inconsistent” with Attorney Pope and Dr. Sanghera’s statements to the PTO that the ’382 patent did not teach that a protective membrane was merely optional.

Judge Alsup rejected Abbott’s position that the EPO submissions were cumulative, stating that Attorney Pope “knew or should have known” that they were highly material. The court further found that Attorney Pope’s explanation for withholding that materials “was not plausible … and he was not credible,” recounting that Attorney Pope testified that he understood the “unequivocally clear” language to refer only to the concluding phrase “permeable to water and glucose molecules.” In finding intent to deceive, Judge Alsup noted that he had “taken into account the demeanor of Attorney Pope during his trial testimony.”

Judge Alsup found that Dr. Sanghera intended to deceive the PTO as well. Dr. Sanghera testified that he didn’t think the EPO and PTO submissions were inconsistent, because they were directed to different types of membranes. However, Judge Alsup found that the EPO statements “plainly went beyond this point of distinction.” Judge Alsup also noted that, “[a]s a trial witness, it must be said that Dr. Sanghera was impeached on substantive points with his prior inconsistent statements and exhibited an unconvincing demeanor.”

IV. FEDERAL CIRCUIT AFFIRMANCE OF INEQUITABLE CONDUCT

A. Majority Opinion

The Federal Circuit (Judges Dyk and Friedman) affirmed all aspects of Judge Alsup’s decision, finding the present case to be “one of those rare cases in which a finding of inequitable conduct is appropriate,” and noting “the district court’s careful and thorough findings as to materiality and intent.”

Materiality of the EPO Submissions

As to materiality, the Federal Circuit found that Judge Alsup was “indeed clearly correct.” Abbott contended that at the EPO, the focus was on distinguishing the semipermeable membrane of the D1 from the protective, permeable membrane of the ’636 patent. However, the Court found that Abbott first explained that the optional but preferred language was “unequivocally clear,” and then, using the transition, “furthermore,” expressed its second point regarding permeability.

The Federal Circuit also rejected Abbott’s argument that the submissions to the PTO were mere “lawyer argument,” because there were contradictory arguments made in another forum, and because the representations were factual assertions as to the views of those skilled in the art, provided in affidavit form.

Attorney Pope – Intent to Deceive

As to intent, the Federal Circuit noted that Judge Alsup made five findings:

(1) that the statements made to the PTO concerning the prior art ’382 patent were absolutely critical in overcoming the examiner’s earlier rejections to the claims of the ’551 patent; (2) that the EPO statements would have been very important to an examiner because they contradicted the representations made to the PTO; (3) that Pope and Dr. Sanghera both knew of the EPO statements and consciously withheld them from the PTO; (4) that neither Pope nor Dr. Sanghera provided a credible explanation for failing to submit the EPO documents to the PTO; and (5) that Pope’s and Dr. Sanghera’s explanations for withholding the EPO documents were so incredible that they suggested intent to deceive.

The Federal Circuit specifically noted that the fourth and fifth findings were based on Judge Alsup’s assessment of credibility, which were within his discretion and “amply supported.” The Court further focused on the fact that Pope admitted that the “normal English construction” of the EPO statements contradicted his representations to the PTO.

Dr. Sanghera – Intent to Deceive

The Federal Circuit noted that Dr. Sanghera similarly testified that according to normal English construction, the EPO statement contradicted his representations to the PTO. Further, it noted that: (a) Dr. Sanghera was not a person of ordinary skill in the art at the time the application was filed; (b) an inventor on both the ’551 and ’382 patents, Dr. Higgins, testified that “preferably” meant the membrane was optional; and (c) that cases involving declarations are as a matter of law held to a higher standard of disclosure.

B. Dissent (Judge Linn)

There was a vigorous dissent by Judge Linn to the finding of inequitable conduct. He disagreed that the representations to the EPO were material. He found that the phrase “unequivocally clear” referred to “this disclosure,” meaning the entire sentence. In his view, it would be reasonable to read the submission to say that what was “unambiguously clear” “is that the membrane serves the dual roles of preventing larger constituents in blood from interfering with the electrode sensor, while also allowing smaller water and glucose molecules to pass through.” Thus, a finding of materiality was not proper because it was not the single most reasonable inference. (citing Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1366 (Fed. Cir. 2008) (which in turn cited Scanner Techs. Corp. v. ICOS Vision Sys. Corp., 528 F.3d 1365, 1376 (Fed. Cir. 2008)).

As to intent to deceive, Judge Linn emphasized that the correct inquiry was not whether it is plausible that the reference is immaterial, but whether the person in question “subjectively believed” that the reference was immaterial. He stated that Dr. Higgins (the inventor’s) personal opinion was irrelevant as a matter of law, as was the fact that Dr. Sanghera was not one of skill in the art at the time the application for the ’551 patent was filed.

Judge Linn further reasoned that District Judge Alsup’s credibility determinations were improper because they: (1) were not factual findings, but instead reflected a disagreement with Attorney Pope and Dr. Sanghera’s interpretations of the EPO submissions; (2) improperly anchored intent to the materiality determination; and (3) reflected the court’s normative view of the law (that words are supposed to mean what they say).

V. THE FEDERAL CIRCUIT’S ORDER GRANTING ABBOTT’S PETITION FOR REHEARING EN BANC

Abbott petitioned for rehearing en banc, and the Federal Circuit granted rehearing on April 26, 2010, requesting briefing regarding the following issues:

Should the materiality-intent-balancing framework for inequitable conduct be modified or replaced?
If so, how? In particular, should the standard be tied directly to fraud or unclean hands? See Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806 (1945); Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944), overruled on other grounds by Standard Oil Co. v. United States, 429 U.S. 17 (1976); Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240 (1933). If so, what is the applicable standard for fraud or unclean hands?
What is the proper standard for materiality? What role should the United States Patent and Trademark Office’s rules play in defining materiality? Should a finding of materiality require that but for the alleged misconduct, one or more claims would not have issued?
Under what circumstances is it proper to infer intent from materiality? See Kingsdown Med. Consultants, Ltd. v. Hollister Inc., 863 F.2d 867 (Fed. Cir. 1988) (en banc).
Should the balancing inquiry (balancing materiality and intent) be abandoned?
Whether the standards for materiality and intent in other federal agency contexts or at common law shed light on the appropriate standards to be applied in the patent context.

Authored By:

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