January 2007 - Legal File

Crime and Punishment - FDA Style

By Jeffrey D. Knowles and Todd Halperin

The reputation of the U.S. Food and Drug Administration (FDA) as a paper tiger that informs regulated parties of allegedly violative conduct rather than prosecuting them is partially justified. FDA commonly “enforces” the Federal Food, Drug and Cosmetic Act (FDCA) by sending relatively innocuous letters to companies that cite the alleged violation(s), and companies usually can avoid legal penalties by subsequently promising to cease the violative conduct. However, in 2006, the agency demonstrated its ability to assert much harsher sanctions against direct response marketers who flout the FDCA and FDA’s regulations.

Alleged FDCA and regulatory violations are a significant part of legal actions initiated against two direct response marketers this past year. Last summer, the agency seized several million dollars worth of medical devices, and their component parts, at two separate fulfillment centers that assembled and shipped products for a Canadian marketing company. The government is seeking the forfeiture and ultimate destruction of the devices. A few months later, the government announced the filing of a criminal indictment against a marketer of dietary supplements that allegedly (among other things) mislabeled its products and obstructed an FDA investigation. The defendants, including the company and several principals, are reportedly facing fines of $100 million and prison sentences of several years.

These actions highlight the importance of understanding the FDA’s rules and how they may apply to your business. Most importantly, they put all direct response marketers on notice that ignoring the FDA can lead to the destruction of their businesses and, in the worst cases, imprisonment. Following are some preliminary guidelines on how to assess issues, such as: (1) whether or not the FDA regulates your business; and (2) how the classification of your product affects the FDA regulations that apply.

The scope of FDA’s jurisdiction is enormous. As one of the largest regulators of consumer products sold in the United States, its rules govern the manufacture, labeling, distribution and importation of products comprising approximately 25 cents of every consumer dollar. This includes several of the most commonly seen products advertised by direct response marketers on television, radio, print and the Internet. Acne medicines, “rejuvenating” skin creams, abdominal toning belts and colon-cleansing dietary supplements are just a few of the thousands of FDA-regulated products marketed by the direct response industry. For the week ending December 1, 2006, approximately one-quarter of the top 25 infomercials reported by IMS featured products subject to FDA rules.

Determining whether or not the FDA regulates your product(s) requires understanding: (1) the composition of your product (i.e., the ingredients or materials from which it is made); and (2) its intended use (which depends in large part on statements contained in product labeling). This latter point is crucial, as a single word on the product’s label can trigger the application of a highly cumbersome and complex regulatory scheme. For example, generic exercise equipment generally is not regulated at all by the FDA. However, if the marketer claims in labeling that the equipment can be used in the rehabilitation of a particular injury, it may be subject to regulation as a medical device, subjecting it to (among other things) a premarket requirement to submit clinical data to the agency, establishing that the device is both safe and effective for this use.

The agency generally investigates through its authority to inspect, and it enforces the FDCA through a wide range of administrative and legal mechanisms described below.

Inspection. The FDA’s authority to inspect is broad. Generally speaking, although its authority can vary, depending upon the type of product involved, the FDCA permits the agency to enter (without a warrant) any facility that manufactures, processes, packs or holds an FDA-regulated product. Although the agency, in many cases, will contact the company before initiating an inspection, some FDA inspections are unannounced.

Administrative enforcement tools. The FDA has several weapons in its arsenal to terminate and deter misconduct; some are more potent than others. Enforcement letters and requests to recall are two of the more common ways in which the agency uses administrative means for obtaining “voluntary” cooperation from a company. Enforcement letters generally state that there has been, or may have been, a violation of the FDCA. The letters are relatively harmless in and of themselves, simply describing the violation and requesting corrective action. However, if the company does not respond adequately, the agency may follow with a legal action seeking more significant sanctions. The FDA also may request that a company “voluntarily” recall product from the marketplace with the same threat of legal consequences (and bad publicity) if the company refuses.

Legal enforcement tools. While the administrative tools described above are more common, the FDA is not afraid to seek the legal penalties expressly authorized by the FDCA, including product seizures, injunctions, fines and imprisonment. The FDA commonly initiates seizure actions, in which the FDA seeks constructive possession of the violative products by application to a court, and injunction actions, in which the FDA requests a court order requiring a company and its principals to cease the unlawful conduct.

As should be clear by now, FDA enforcement can be devastating; however, there are several things companies can do to prevent a catastrophe.

Always heed FDA’s warnings. FDA initiates many legal actions only after learning of a company’s failure to remedy a previously cited violation. This is true of both of the cases described above. For example, the FDA alleges that several years ago, it warned a Canadian marketing company that it could not market the device in the U.S., and that the company attempted to circumvent FDA scrutiny by exporting the components of the product for assembly in the United States. When the FDA inspected the fulfillment center and found the components, it initiated the seizure action, which may cost the company several million dollars. The dietary supplement marketer previously received a warning letter from the FDA alleging that it was selling misbranded products. Several months later, continuing to see marketing of the product, the agency decided to criminally prosecute.

Do not attempt to hide misconduct. It is a federal crime to make false statements to the FDA (or any other government agency) or to attempt to obstruct an FDA investigation. The FDA’s indictment of the dietary supplement marketer includes an allegation that the company attempted to hide mislabeled products in a truck parked in a location away from its warehouse. Such intentional misconduct will almost always lead to criminal prosecution.

Respond swiftly and comprehensively to enforcement letters. Smart companies see such letters as an opportunity to get a firm understanding of the FDA’s expectations with respect to the company’s activities. By satisfying the FDA at this stage, companies can save themselves from more significant liability in the future.

Anticipate an investigation. The above list is far from comprehensive. Companies have several means for further mitigating against potential liability before the FDA knocks on the door. For example, written standard operating procedures can ensure that the company complies with legal requirements, but does allow the FDA inspector to exceed his or her statutory authority. In addition, written agreements allocate regulatory responsibilities, provide auditing rights to confirm compliance and protect one party from the stealth misconduct of another.

By understanding and respecting the FDA’s authority, your business can avoid the potentially catastrophic consequences recently seen by some direct response marketers.

Jeffrey Knowles manages Venable LLP’s Government Division and heads the firm’s Advertising and Marketing Practice Group. Knowles is the immediate past chairman of the ERA Board. He can be reached at (202) 344-4860. Todd Halperin is an attorney at Venable. He can be reached at (202) 344-4984.


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