FDA and DEA Litigation Briefing

United States v. Olympus Medical Systems Corp. and Yabe
Plea Agreements, No. 2:18-cr-00727 (D.N.J. filed Dec. 10, 2018)

The plea agreement describes how Olympus received information requiring submission of an initial or supplemental MDR. Under the plea, the company is required to undertake certain compliance measures specific to MDR processes, akin to those contained in

FDA civil consent decrees:
• Retain an independent MDR expert to inspect and review the company’s policies and procedures;
• Have the MDR expert conduct periodic reviews of the company’s continued compliance with MDR requirements;
• Report to FDA and DOJ periodically for 3 years; and
• Require the President and Board of Directors to periodically review MDR compliance measures and provide certifications to FDA and DOJ regarding those reviews.

The global settlement committed all of DOJ, including the U.S. Attorney’s Offices throughout the country, not to
prosecute the company for the same conduct. Hisao Yabe, the former Division Manager for the Quality Assurance and Environment Division, agreed to plead guilty to one count for the same conduct. He stipulated that he was aware of the obligation to file and supplement MDRs, and that he failed to make such submissions even when required. Interestingly, the stipulation notes that he considered whether to submit a supplemental MDR in 2013 but did not file it until 2015. In reviewing the underlying Information, it appears Yabe was in the process of evaluating whether the information it received in 2013 required reporting (e.g., whether the methodology and conclusions of the information were appropriate), and agreed that if a supplemental MDR was required, the company should file it. It is unclear, however, why the company waited until 2015 and what ultimately motivated the filing decision at that time.

In addition to the mandatory compliance measures, the company agreed to pay an $80 million criminal fine (which was 2.5 times the profit earned from the duodenoscopes sold during the time period), and a $5 million forfeiture. Yabe faces up to a year in prison and a $100,000 fine; he will be sentenced in March 2019.

United States v. ev3, Inc.

Plea Agreement, No. 1:18-cv-10461 (D. Mass. filed Dec. 7, 2018)

The First Circuit resoundingly rejected the relator’s theories: “The FDA’s failure actually to withdraw its approval of Onyx in the face of [relator]’s allegations precludes [the relator] from resting his claims on a contention that the FDA’s approval was fraudulently obtained.” In the absence of such official agency action by FDA, the court held that it was impossible to determine that FDA would not have approved the Onyx device without the alleged fraudulent representations. The court also concluded that the relator could not demonstrate materiality where CMS had continued to reimburse for Onyx, stating that “[t]he fact that CMS has not denied reimbursement for Onyx in the wake of [the relator]’s allegations casts serious doubt on the materiality of the fraudulent representations that [the relator] allege[d].”

ev3 pleaded guilty to misdemeanor violations of the FDC Act for conduct that echoed allegations previously dismissed in an earlier FCA case against the company.

ev3’s criminal plea, however, demonstrates that thegovernment did take serious issue with ev3’s marketing of its Onyx product, although not necessarily because it evinced the alleged fraud posited by the relator in his FCA claim. The criminal information does not explicitly discuss the company’s communications with FDA during the approval process for the device but does refer to post- marketing statements by FDA that made clear the company needed additional data to support an expanded indication for Onyx – statements that the company apparently disregarded. Thus, the pleading seems to
describe a straightforward off-label promotion violation rather than any “fraudulent inducement” of FDA approval
in the first instance The ev3 case serves as an excellent reminder that successful defense of FCA claims does not necessarily put an end to underlying statutory or regulatory violations. The government may choose an enforcement tool better suited to penalizing, for example, off-label marketing or misleading statements to the FDA.

United States ex rel. Ruckh v. Salus Rehabilitation, LLC
304 F. Supp. 3d 1258 (M.D. Fla. 2018)

In Ruckh, the relator alleged the nursing facilities violated Medicaid regulations, which rendered fraudulent its claims to the Medicaid program. The alleged non-compliances involved a failure to maintain a comprehensive care plan and a failure to keep proper records of services. After trial, the judgments against defendants totaled $350 million. In its opinion, the court found compelling the entire absence of evidence of how the government behaved in comparable circumstances. Given the lack of evidence, the court concluded that the jurors returned “an unwarranted, unjustified, unconscionable, and probably unconstitutional forfeiture – times three – sufficient in proportion and irrationality to deter any prudent business from providing services and products to a government armed with the untethered and hair-trigger artillery of a False Claims Act invoked by a heavily invested relator.” Absent this evidence, the court held that this FCA case could not stand – even after a jury trial and judgment. The court, like many since Escobar, agreed that Escobar requires that the relator prove “both that the non-compliance was material to the government’s payment decision and that the defendant knew at the moment the defendant sought payment that the non-compliance was material to the government’s payment decision.”

The Ruckh case adds more fodder to the circuit split on whether inaction by FDA or continued reimbursement by CMS, despite knowledge of regulatory violations, can foreclose an FCA case. Drug and device manufacturers facing FCA allegations based on regulatory violations could challenge the materiality of the alleged false compliance “certification” if FDA or CMS declines to respond to earlier knowledge of the alleged non- compliance.

United States v. 48,877 bags of Kratom Powder
Complaint, No. 4:18-cv-02981 (D.S.C. filed Nov. 5, 2018)

The federal crusade against kratom began much earlier. In February 2014, the FDA issued an import alert that directs U.S. officials to detain imported dietary supplements and bulk dietary ingredients that are, or contain, kratom without physical examination (an import alert is easily imposed by FDA without a requirement for judicial authorization). In January 2016, the FDA administratively detained another kratom product under the FD&C Act, as amended by the Food Safety Modernization Act (FSMA). While an import alert is obviously aimed at blocking products at the U.S. border if FDA considers them to be violative, under its administrative detention authority (which can be exercised on any products in the United States), the FDA can detain a food or dietary supplement product if the agency has reason to believe the product is adulterated or misbranded. The product administratively detained in January 2016 was also the subject of a court-ordered seizure.

In December, FDA officials pledged more vigorous enforcement against allegedly noncompliant dietary supplements.

In addition to the kratom enforcement measures, our firm has noticed an uptick in threats of injunction actions against dietary supplement manufacturers or importers, even when the products do not have defects other than being handled under what FDA considers to be less than strict compliance with regulations. At the December 2018 Enforcement and Litigation Conference held by the Food and Drug Law Institute, FDA officials pledged more vigorous enforcement against allegedly noncompliant dietary supplements. Dietary supplement importers, manufacturers, and distributors would be well advised to carefully follow the CGMP regulations described above, to seek help from legal professionals or other qualified consultants, to justify their positions that incoming materials and finished products cannot be identified through scientifically valid tests, and to document thoroughly that new dietary ingredients do not present a significant or unreasonable risk of illness or injury. In addition, such entities should carefully consider whether submission of a new dietary ingredient notification is required.

For purposes of the appeal, the Third Circuit assumed that the Service Fee Defendants’ alleged interpretation was wrong and proceeded on that assumption. The Third Circuit applied the analytical framework used by the D.C. Circuit in United States ex rel. Purcell v. MWI

Corp., 807 F.3d 281, 287-88 (D.C. Cir. 2015). The three- part Purcell test asks: (1) whether the relevant statute was ambiguous; (2) whether the defendant’s interpretation was objectively reasonable; and (3) whether the defendant was “warned away” from that interpretation “by available administrative and judicial guidance.” With respect to the last item, it is noteworthy that Purcell, citing to the Supreme Court’s 2007 decision in Safeco Insurance Co. of America v. Burr, made it clear that such guidance must be “authoritative guidance” because “[i]n Safeco Insurance, the Supreme Court explained that informal guidance . . . is not enough to warn a regulated defendant away from an otherwise reasonable interpretation.” Purcell, 807 F.3d at 289-90.

The FCA violations alleged by the relator took place between 2004 and 2012. The Third Circuit found that, during that period, the available CMS guidance on calculating AMP in general “failed to articulate a coherent position on AMP and, specifically, price- appreciation credits.” Opinion at 14, United States ex

rel. Streck v. Allergan, Inc., 17-1014 (3d Cir. 2018). Under those circumstances, the court found that the relator had failed to plead that the defendants were “warned away” from their interpretation that price appreciation credits were excluded from AMP. Based on the Purcell framework, the Third Circuit agreed with the district court that the manufacturers’ alleged failure to include price appreciation credits as a price adjustment in calculating AMP could not sustain an FCA claim, because even if their interpretation was incorrect, it was not unreasonable.

As the Streck decision reinforces, the FCA is not an all- purpose tool for policing every alleged price reporting error. Rather, it requires a “knowing” violation, the absence of which can defeat an FCA claim, even if the defendant made a reasonable mistake.

The FTC staff appealed the ALJ’s ruling to the full Commission, and on January 29, 2016, the Commission reversed the ALJ, holding that that LabMD’s lax security practices did constitute an “unfair act or practice within the meaning of Section 5 of the FTC Act.” Op. of the Comm’n at 1, In re LabMd, Inc., No. 9357 (FTC filed Jan. 29, 2016). The Commission issued a cease and desist order against LabMD, when LabMD appealed to the Eleventh Circuit.

The Eleventh Circuit struck down an FTC cease and desist order based on negligent health data security practices.

In its appeal, LabMD argued that the FTC erred in finding that the company’s security practices “cause or are likely to cause substantial injury” as required to deem an act “unfair” under the FTC Act, because the only injury that could have possibly occurred was intangible and even conjectural and could only have incurred in the past. LabMD further argued that a finding of “unfairness” necessitates a showing that goes beyond negligence. Rather, the act in question must be “deceptive or reckless.” Finally, LabMD argued that the FTC’s order was impermissibly vague because it did not specify how LabMD should meet the requirement to establish a “reasonably designed” information security
program.

The Eleventh Circuit vacated the FTC’s cease and order based on LabMD’s last argument: The order was not enforceable because it, and the accompanying FTC complaint, were impermissibly vague. The court held that a lack of specific prohibitions would put a future court in the position of weighing the opinions of various experts about what is and is not “reasonable” in terms of an information security program, “and that this micromanaging is beyond the scope of court oversight contemplated by injunction law.”

The court’s ruling will likely result in the FTC pursuing more specific data security measures in administrative orders
and injunctions going forward. However, the fact that the
Eleventh Circuit did not conclusively address the FTC’s
authority over negligent information security practices
could also provide some protection to companies facing
FTC action, especially where tangible injury is lacking. At the very least, despite the increasing focus on privacy and
data security, this decision will force the Commission to be more circumspect about the details behind future data security-related complaints.

Indictment, No. 5:18-cr-00258 (N.D. Cal. filed June 14, 2018)

The government further alleged that Holmes and
Balwani represented to investors that Theranos did not
need FDA approval but was seeking approval
voluntarily, despite knowing as early as 2013 that FDA
required premarket approval. Under the FDC Act,
medical device manufacturers are required to obtain
FDA clearance or approval of products before
introducing them into interstate commerce. There is no
“voluntary” approval process, and the company’s
communications with FDA allegedly put the company on
notice that FDA required approval before marketing.
The indictment charged each defendant with two counts
of conspiracy to commit wire fraud, in violation of 18
U.S.C. § 1349, and nine counts of wire fraud, in violation
of 18 U.S.C. § 1343. If convicted, the defendants face a
maximum sentence of twenty (20) years in prison, and a
fine of $250,000, plus restitution, for each count of wire
fraud and for each conspiracy count.

University of Michigan Health System (E.D. Mich. 2018)

Civil Penalty Settlements

DEA’s investigation revealed that EHS had failed to maintain appropriate recordkeeping procedures to detect the diversion and concluded that EHS failed to report the suspected diversion. EHS “overhauled its pharmacy operations” to prevent future diversion by conducting quarterly internal accountability audits and maintaining detailed records. Id.

Hospitals and other healthcare facilities are facing millions of dollars in civil penalties for failing to maintain adequate systems to prevent diversion and abuse by healthcare employees.

DEA’s investigation of UMHS, a large public, not-for-profit, tax-exempt teaching hospital with off-site ambulatorylocations began after it was reported that a nurse and an anesthesiology resident overdosed on opioids, including fentanyl. DEA’s investigation revealed that UMHS distributed controlled substances to 15 state-licensed ambulatory care locations that had not been registered with DEA. Also, UMHS committed “significant” recordkeeping violations, including failure to maintain complete and accurate transaction records and failure to notify DEA of the thefts. See DOJ, Press Release, Eastern District of Michigan Announces Record-Setting Hospital Drug Diversion Civil Penalty Settlement with the University of Michigan Health System (Aug. 30, 2018). DEA determined that UMHS’ recordkeeping deficiencies “negatively impacted” its ability to guard against theft and diversion. Id. UMHS employees allegedly diverted 16,000 hydrocodone dosages between May 2011 and January 2012 and registered nurses diverted controlled substances for months or years, even replacing fentanyl with saline for administration to patients. These investigations and settlements underscore that healthcare professionals, even those with state licenses and training, are contributing to the opioid abuse epidemic. Hospitals must ensure that policies and procedures address these risks and ensure complete accountability for controlled substances. Systems to maintain complete and accurate records, conduct frequent accountability audits and reconcile discrepancies are critical to reduce employee diversion. Hospitals and other healthcare entities may need to go beyond current inventory requirements and conduct more periodic accountability audits to protect against these risks

The final sentence of section 53(b) – “Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction” – has historically been viewed as a separate grant of authority for the FTC to litigate its case against a company or individual in federal court, regardless of whether the requirements in sections 53(b)(1) and (2) are satisfied. In
dismissing the case, the district court rejected this view. Instead, the court accepted Shire’s argument that the statutory language authorizes FTC to “bring suit” only upon satisfying the conditions of (b)(1), and after which it “may seek” certain types of relief, including either preliminary or permanent injunctive relief. Thus, to seek permanent injunctive relief in federal court, the FTC must have already satisfied the requirements for bringing suit by alleging that the defendant “is violating or is about to violate” a law enforced by the FTC.

If the district court’s statutory interpretation is accepted more broadly, it would significantly limit a statutory mechanism that the FTC has used extensively to seek injunctive and other relief in both antitrust and consumer protection actions since the 1980s.

The court further rejected the FTC’s alternative argument that “is about to violate” should be read as equivalent to the general standard for awarding injunctive relief – i.e., that the violation is likely to recur. The court ruled that the FTC must adequately allege an ongoing, or imminent future violation, and it had not done so with respect to ViroPharma. If the district court’s statutory interpretation is accepted more broadly, it would significantly limit a statutory mechanism that the FTC has used extensively to seek injunctive and other relief in both antitrust and consumer protection actions since the 1980s. It would prevent the FTC from bringing suit in federal court for past violations of the FTC Act and other laws enforced by the FTC, and from seeking damages and restitution for such violations (let alone permanent injunctions) unless it can also allege an imminent future violation. With respect to past violations, the FTC would be required to first engage in administrative litigation pursuant to FTC Act § 5(b) 15 U.S.C. § 45(b).

While consent decrees are nothing novel in the drug manufacturing world, consent decrees against outsourcing facilities, of which there are only around 75 such facilities, and which have only existed under the current statutory scheme for six years, demonstrate FDA’s vigilance in ensuring that these new entities must consistently comply over time with FDA’s drug manufacturing cGMP and insanitary conditions requirements. Even more interestingly, notwithstanding very recent enactment of the DQSA, the consent decrees against both Cantrell and Delta Pharma address conduct that FDA observed at the facilities (as then-compounding pharmacies) prior to the enactment of the DQSA – as far back as 2004. Thus, in considering taking enforcement action, FDA and DOJ considered conduct that FDA observed at the entities well prior to the existence of the current regulatory and statutory scheme for outsourcing facilities, and repeated inspection observations concerning aseptic practices over a period of several years. The detailed provisions of both decrees are similar to the three earlier consent decrees DOJ negotiated against outsourcing facilities (such as Isomeric Pharmacy Solutions and Medistat in 2017; and Downing Labs in 2016). Like the three prior decrees, the 2018 Consent Decrees require the entities to cease compounding operations. In order to resume compounding operations, the decrees broadly require that defendants ensure that the facilities, methods, and controls used to manufacture, hold, and distribute drugs are established, operated and administered in conformance with the terms of the decrees and the FD&C Act, and are adequate to prevent adulteration of drug products produced at the facility. Importantly, the decrees (which are identical in most material respects) require that the facilities retain an expert to conduct a thorough cGMP audit (and a review of all prior FDA observations) to determine whether the entity is in compliance with cGMP, and to recommend corrective actions. The expert must certify in writing that the facility has complied with the compliance requirements set forth in the decree. In addition, each facility must destroy all in-process and finished drugs except as needed for validation studies (and which will not be distributed). If, after the initial audit process is completed and FDA permits the facility to reopen, then the facility must continue to engage in frequent independent audits (that are reported to FDA) as set forth in the decree for the 5-year duration of the decree. Notwithstanding stringent and long-lasting requirements set forth in the Consent Decrees for both Delta Pharma and Cantrell Drug, Cantrell announced in late September 2018 that it was resuming aseptic compounding operations. Of the five facilities that have been the subject of a consent decree since the enactment of the DQSA in 2013, Cantrell Drug is the only entity that has managed to meet FDA’s requirements and resume production.

Furthermore, the court held that the Act would have the effect of discriminating between purchasers of opioids in New York and those outside of the state’s boundaries, as any additional charge could be passed through to those located outside of New York; thus, the Act treats New York customers of opioids differently than those located out of state. Interestingly, the court noted that, although the Dormant Commerce clause prevents New York from enforcing the Act, the Dormant Commerce Clause does not “speak to the ability of the federal government to pass similar legislation.” Id. at 49. Thus, the court granted the plaintiffs’ motions for preliminary injunction and declaratory judgment, holding that the Act is unconstitutional.

On December 19,

New York was permanently enjoined from enforcing the State’s newly enacted Opioid Stewardship Act.

So, what happens next? Manufacturers and distributors that are licensed to sell opioid drug products into New York were required to provide estimates of MMEs for 2018 sales, and then were invoiced by the State based on that MME amount, of which payments are due in January 2019. The court issued its decision on December 19, 2018, specifically noting at page 14 that it was leaving time for the parties to appeal the decision to the United States Court of Appeals for the Second Circuit, before payments are due in January 2019. On December 21, the Court entered an amended Order and Judgment stating:
The Court hereby DECLARES that the Opioid Stewardship Act, 2018 N.Y. Sess. Laws 57, S.7507-C, codified at N.Y. Pub. Health Law § 3323 and N.Y. State Fin. Law § 97-aaaaa (“the OSA”), violates the Commerce Clause of the Constitution. Defendants and all of their officers, agents, servants, employees, successors, assigns, and attorneys, as well as any persons or entities acting in concert with them or on their behalf are hereby
PERMANENTLY ENJOINED from enforcing the OSA. As of the date of this writing, the docket does not reflect anappeal by defendants.

Eagle Pharms., Inc. v. Azar, No. 18-5207 (D.C. Cir.)
In August 2018, Eagle Pharmaceuticals won its suit against FDA for violating the Administrative Procedure Act when it refused to grant exclusivity to Eagle’s orphan drug product, Bendeka. The Orphan Drug Act provides a seven-year period of exclusivity to drugs that are (1) designated by FDA as “orphan drugs” (i.e., for treatment of rare diseases or conditions) and (2) approved by FDA for use in that disease or condition. The district court held that FDA wrongly denied exclusivity to Bendeka and ordered FDA to grant orphan drug exclusivity for Bendeka. Two companies with generic versions of Bendeka, as well as FDA, appealed the decision to the D.C. Circuit; a decision is expected in 2019. In a separate action, the court in United Therapeutics Corp. v. Department of Health & Human Services, No. 1-17-cv-01577, stayed its ruling pending resolution of the Eagle appeal on the ground that the case addresses the same legal issue. United Therapeutics is represented by HPM.

Carlton & Harris Chiropractic, Inc. v. PDR Network, LLC, No. 17-1705 (U.S.)
Carlton & Harris sued PDR Network for alleged violations of the commercial fax provisions of the Telephone
Consumer Protection Act (“TCPA”). The Fourth Circuit ruled in Carlton & Harris’s favor, relying on an
interpretation of the TCPA issued by the Federal Communications Commission (“FCC”). The Supreme Court
granted PDR Network’s petition to review that ruling but limited its review to a single question: whether federal
courts are bound to accept a federal agency’s interpretation of a statute such as the TCPA without considering
the validity of that interpretation. The case has important implications for administrative law that are not limited
to the TCPA or to the FCC.

Center for Food Safety v. Price, No. 17 Civ. 3833 (S.D.N.Y.)
In May 2017, several nonprofit entities filed a lawsuit against FDA challenging the legality of FDA’s final rule formally establishing the GRAS notification process. When a substance is determined to be “generally recognized as safe” or “GRAS,” it can be used in food without satisfying premarket review requirements for food additives. Plaintiffs asserted that FDA created a “secret GRAS system” that does not require a manufacturer to provide notice to FDA or the public, or to maintain records that document or explain the basis for its conclusion that a use of a substance is GRAS. This “secret GRAS system” allegedly has permitted an “estimated thousand chemical substances” to be added to food without undergoing premarket safety review via the food additive petition process. The case is proceeding for two plaintiffs: the Center for Food Safety and the Environmental Defense Fund. Briefing will begin in early 2019.

United States v. USPLabs LLC, No. 15-cr-00496 (N.D. Tex.)
In November 2015, an 11-count indictment was filed against USPLabs LLC, a Dallas firm that manufactured highly popular workout and weight loss supplements. According to the indictment, the company conspired to import and sell synthetic dietary supplements but falsely marketed the products as plant-based under the theory that federal regulatory agencies would be less likely to question the importation of plant extracts, and retailers
would be more likely to sell such products. The government alleged that, in the Fall of 2013, an outbreak of injuries was associated with USPLabs’ aegeline-based products after numerous consumers in Hawaii experienced liver-related symptoms, including liver failure. Although USPLabs agreed to cease distributing these products, it did not, and rather pushed sales as fast as possible. The criminal trial against USPLabs is expected in 2019.

About Hyman, Phelps and McNamara, P.C.
Hyman, Phelps & McNamara has its finger on the pulse of the FDA and extensive experience with the universe of issues faced by companies regulated by FDA. As the largest dedicated FDA law firm in the United States, our technical expertise and industry knowledge are exceptionally wide and deep. We represent clients in administrative, civil, and criminal litigation. We regularly defend our clients against allegations of violations of law by state and federal regulators and prosecutors. Examples of our defensive litigation include:
• Litigating DEA immediate suspension orders and orders to show cause, and Controlled Substances Act cases
seeking criminal sanctions and/or civil monetary penalties
• Defending Federal False Claims Act cases
• Defending federal criminal charges
• Litigating seizure actions
• Representing witnesses in depositions, hearings, and trials
• Defending State Attorney General actions
We also sue the government when it violates our clients’ rights. Our affirmative government litigation includes
suits against agencies for:
• Unlawful FDA decisions regarding market exclusivity under the FDC Act
• Unreasonable delay in agency action
• Unlawful product classification
• Arbitrary and capricious or otherwise unlawful agency action, such as
o Actionable FDA Warning Letters
o Unlawful FDA approval of competitors’ products
o Failure to approve our clients’ products
o Improper imposition of import detentions
Please see our website at www.hpm.com or the FDA Law Blog (www.fdalawblog.net) for more information.

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Hyman, Phelps & McNamara, P.C.
700 13th Street, Northwest, Suite 1200
Washington, D.C. 20005
(202) 737-5600
www.hpm.com