Counterfeit Drugs: A New Source of Product Liability?

Therefore, protecting your company's pharmaceutical products from counterfeiters has become even more crucial than before, and implementation of new countermeasures may be in order.

Government Efforts to Combat Counterfeiters

On July 16, the FDA announced an initiative to more aggressively combat counterfeited drugs, including the creation of an internal task force to develop a plan to curb the traffic in counterfeit pharmaceuticals in the United States. This FDA initiative was launched just after two high-profile examples of counterfeiting within the U.S. distribution system were discovered, involving the popular drugs Lipitor' and Procrit' . In press releases, while the FDA admits that the true extent of counterfeiting within the U.S. is unknown, it maintains that counterfeiting “occurs less frequently in the U.S. than in other countries due to the strict guidelines, regulations, and enforcement the FDA provides throughout the production and distribution chain.” The agency points out that “drug counterfeiting is a relatively rare event” in the United States and that “the FDA believes domestic counterfeiting is not widespread.”

Counterfeiting is nonetheless a mounting concern. First, the problem is growing. Based on the number of investigations mounted by the FDA, drug counterfeiting within the U.S. nearly quadrupled in the 2 years between 2000 and 2002. Second, the delivery of pharmaceutical products to consumers undergoes innovations daily due to the shrinking of international borders and the proliferation of internet-based “pharmacies” touting discount medicines with or without a prescription. Meanwhile, pharmaceutical counterfeiting outside of the United States is a disturbing fact of life: The World Health Organization has estimated that between 5% and 8% of the worldwide trade in pharmaceuticals is counterfeit.

What Is a Counterfeit Drug?

A counterfeit drug is defined under 21 USCS ' 331 as a “drug which, or the container or labeling of which, without authorization, bears the trademark, trade name, or other identifying mark, imprint, or device, or any likeness thereof, of a drug manufacturer, processor, packer, or distributor other than the person or persons who in fact manufactured, processed, packed, or distributed such drug and which thereby falsely purports or is represented to be the product of, or to have been packed or distributed by, such other drug manufacturer, processor, packer, or distributor.” As with forgeries of non-pharmaceutical products, drug counterfeiting appears to be defined as a crime committed principally against a manufacturer's intellectual property rather than a public health hazard. This is, in fact, the current legal understanding of drug counterfeiting. See, e.g., United States v. Jamieson-McKames Pharm. Inc., 651 F.2d 532 (8th Cir. 1981) (“The essence of counterfeiting is the unauthorized use of the trademark, trade name, or other identifying mark. Thus, even if the tablets were chemically indistinguishable from [the actual drug], counterfeiting could still be found.”).

Misbranded and adulterated drugs go hand in hand with counterfeit drugs. A drug is misbranded “if its labeling is false or misleading.” 21 U.S.C. ' 352(a). A drug may be deemed adulterated for a number of reasons but one very broad definition will suffice: A drug is always adulterated if the drug's legitimate manufacturer cannot ensure that the product possesses the safety, identity, strength, quality, or purity it purports or is represented to possess. 21 U.S.C. ' 351.

When the FDA or anyone else talks about counterfeit drugs, they mean drugs that are misbranded and/or adulterated and thus pose a public health risk. There are, in reality, no other kinds of counterfeit drugs. As Gerry Norris of Pharmaceutical Research and Manufacturers of America (PhRMA) wrote in a paper for the 2002 Global Forum on Pharmaceutical AntiCounterfeiting, even so-called copycat or knock-off counterfeit drugs that contain all the active ingredients of branded products are more than merely lost sales opportunities and intellectual property headaches for pharmaceutical manufacturers: They endanger the public safety. There is simply no such thing as a safe counterfeit because all counterfeit pharmaceutical products elude the uncompromising regulations of both the government and the pharmaceutical industry. Those controls ensure efficacy and safety, and those responsibilities fall upon the shoulders of the legitimate manufacturer of the drug alone.

The counterfeiting of drugs carries a criminal penalty. Counterfeiting with the intent to defraud or mislead carries a maximum 3-year prison term and/or a fine of up to $10,000. Without the requisite intent it is a misdemeanor with a maximum 1-year prison term and/or a fine of up to $1000. 21 USC ' 333(a).

The Drug Distribution Chain

It is easy to see how a consumer ordering pharmaceutical products without a prescription from an Internet pharmacy located in a foreign country might receive counterfeit drugs. This, too, is a growing problem. To date, the FDA, often in partnership with other government entities, has made over 150 Internet-related drug arrests, including about 60 involving Internet pharmacies. But foreign nationals are hard to reach and various American agencies – including the Customs Service, the Drug Enforcement Administration, the Postal Service, and private carriers – must work in conjunction with the FDA and foreign governments to curtail this source of counterfeit medications.

Recent innovations in cross-border prescription medication sales epitomize the very spirit of entrepreneurship. Consider the March 21 warning letter issued by the FDA in conjunction with the Arkansas State Board of Pharmacy to the storefront Rx Depot, which sold unapproved drugs from Canada to its U.S. consumers, or the West Virginia Pharmacy Board's May 13 warning letter to Discount Prescription Center of Fairmont, WV, an outfit that arranged for a Canadian pharmacy to dispense and ship prescription drugs to patients it solicited. Still, many American consumers get their foreign drugs the old-fashioned way: In 2001 there were an estimated 1700 pharmacies in Tijuana, Mexico, while 20 miles north, in San Diego, there were only 125 pharmacies.

These examples of foreign trafficking in drugs aside, it seemed unlikely that in the tightly regulated U.S. market for prescription medications for which Americans pay premium prices, prescription medications could find their way into the pill counters of well-established, trustworthy pharmacies. But that is precisely what has been happening, for a number of reasons.

Most drugs in this country are sold by a small number of very large and entirely reputable wholesalers. There is a smaller secondary wholesale market that resembles, in many respects, a commodities market. Shortfalls in production and supply may make it necessary for large wholesalers to rely on this secondary market to meet demand for lifesaving medications. Although this secondary market is made up almost entirely of thoroughly honest players, it is the outliers – the rare dishonest market participants – that form the weak link in the supply chain.

In the beginning of this chain, pharmaceutical manufacturers typically sell their products to wholesalers. These wholesalers may, in turn, sell to or trade with other wholesalers. A drug may leave its footprint in the warehouses of many, many wholesalers before it makes its way to a pharmacist's shelves.

Weaknesses in the Distribution System Aid Counterfeiters

The Prescription Drug Marketing Act of 1987 (PDMA) amended the Food, Drug, and Cosmetic Act to add to the FDA's arsenal of weapons against counterfeit, misbranded, and adulterated medicines. It safeguards the drug distribution system by requiring that, however circuitous the trail of a drug is through wholesale outlets, paper records document the source of the drug and its distribution. 21 U.S.C. ' 353(e)(1). This paper trail is known as the drug's “pedigree.” The PDMA also prohibits the resale or trade of prescription drugs by “hospitals or health care entities,” defined as facilities providing diagnostic, medical, surgical, or dental treatment, or providing chronic or rehabilitative care. 21 U.S.C. ' 353(c)(3)(A).

There are problems with the PDMA. First, the pedigree of a drug is literally made of paper. If a counterfeiter can create a decent reproduction of a scored pill with colored lettering and its accompanying four-color packaging, he can certainly forge a few paper documents. Second, the definition of “hospitals or health care entities” under the PDMA excludes any “wholesale distributor of drugs or a retail pharmacy licensed under State law” and may leave room for nursing homes and long-term care facilities to create a secondary wholesale market because they do not provide diagnostic, medical, surgical, or dental treatment, nor do they provide chronic or rehabilitative care. Even if the FDA disagrees with this semantic distinction, it can do nothing, because the PDMA does not bestow it with direct prosecutorial authority. The Department of Justice must prosecute these cases, but admits in its U.S. Attorneys' Manual that because of the complexity of the law and its loopholes, “prosecution of institutional diversion cases under the PDMA has been rare.”

The end result is a system with a labyrinthine secondary wholesale market largely regulated unevenly by state, rather than federal, laws. This system doesn't benefit manufacturers: The National Association of the Boards of Pharmacy has estimated that drug manufacturers lost a billion dollars to diversion schemes in 2000. Nor does this system benefit consumers because one unscrupulous market player in the long distribution chain could introduce counterfeit medication into the marketplace.

This is precisely how counterfeit Procrit' entered the wholesale marketplace. Procrit is a life-saving anemia drug used to treat cancer and HIV/AIDS patients. Authorities arrested a handful of wholesalers in South Florida who later pleaded guilty to trading in counterfeit Procrit diluted with bacteria-laced water to 5% of its labeled potency. One of the people arrested was already a defendant in a 2002 civil lawsuit in which one of the nation's largest wholesalers accused him of selling it counterfeit Epogen', a drug functionally equivalent to Procrit. Several of the arrested wholesalers were convicted felons and technically prohibited from becoming licensed drug wholesalers in Florida, but the state had not checked their arrest records.

Industry Reaction to the Crisis

On April 22, PhRMA announced a voluntary program to report suspected counterfeit drugs to the FDA. Effective May 1, 2003, participating member companies must notify the FDA's Office of Criminal Investigations within 5 working days of determining that a reasonable basis exists to believe that a product has been domestically counterfeited. If the counterfeit is discovered in a foreign nation, the counterfeit must be reported if clear evidence of an intention to distribute the drugs in the United States is found by the member company.

This program is voluntary, but may nonetheless establish an industry standard. The Procrit case is illustrative of how well this cooperation can work. In April 2002, Procrit's manufacturer received a tip about a Florida counterfeiting operation and quickly notified authorities. Two months later, undercover FDA agents began conducting a sting operation. In the meantime, health care providers and wholesalers were warned to be vigilant, and, based upon this information, were able to discover counterfeit “Procrit” that had already entered the stream of commerce before it reached consumers.

Conclusion

As counterfeiting within the United States becomes more lucrative and more prevalent, pharmaceutical manufacturers need to work against the risk of being found legally responsible for the effects of counterfeit drugs on consumers. The response to this threat will include a cost-effective blend of thoughtful packaging and labeling strategies, consumer and provider education, tracking and tracing of products, assessing and acting on business intelligence and reported adverse drug reactions, and proactive regulatory, legislative, and litigation strategies that profitably protect product and intellectual property assets. If measures such as these are taken, it is less likely that courts will hold manufacturers liable for the acts of drug counterfeiters.

Drug counterfeiting robs pharmaceutical manufacturers of their investment in patents, trademarks, copyrights, and trade dress. It robs pharmacists and consumers of money, for worthless and sometimes dangerous products. It undermines the integrity of and consumer confidence in the American health care industry and in the government's ability to regulate it. More troubling than all these systemic evils, drug counterfeiting has the potential to allow controllable illnesses to ravage patients unchecked, to spread rather than stop disease, and to injure and kill.

Traditionally, however, manufacturers have at least been insulated from personal injury tort liability when counterfeit drugs cause harm: The counterfeiter alone possesses criminal intent and the manufacturer is remote to the injury. However, recently, under a number of theories, plaintiffs have alleged negligence on the part of pharmaceutical manufacturers for counterfeiting of their products. For example, a current lawsuit in St. Louis alleges that a breast cancer patient took a counterfeit form of Procrit' 20 times less potent than the genuine drug. According to a report in The San Francisco Chronicle, the attorney representing this plaintiff hopes to transform this suit into a class-action lawsuit. In another recently settled case involving the distribution of counterfeit Serostim', the only growth hormone approved by the FDA for the treatment of AIDS wasting, the lawsuit named the drug's manufacturer, along with the pharmacy and drug distributors.

The idea that a manufacturer of a pharmaceutical product could be held liable for injuries resulting from counterfeiting flies in the face of reason. After all, a counterfeiter steals sales and hard-earned goodwill from the manufacturer whose products are copied. Yet the basis for these lawsuits is simple, as explained by Professor Arthur Best of the University of Denver College of Law: If a manufacturer could have taken reasonable steps to prevent foreseeable counterfeiting but failed to, plaintiffs may argue that the manufacturer should be held liable. Best A: “Manufacturer's Responsibility for Harms Suffered by Victims of Counterfeiters: A Modern Elaboration of Causation Rules and Fundamental Tort Law,” 8 Currents Int'l Trade L.J. 43 (1999).

Therefore, protecting your company's pharmaceutical products from counterfeiters has become even more crucial than before, and implementation of new countermeasures may be in order.

Government Efforts to Combat Counterfeiters

On July 16, the FDA announced an initiative to more aggressively combat counterfeited drugs, including the creation of an internal task force to develop a plan to curb the traffic in counterfeit pharmaceuticals in the United States. This FDA initiative was launched just after two high-profile examples of counterfeiting within the U.S. distribution system were discovered, involving the popular drugs Lipitor' and Procrit' . In press releases, while the FDA admits that the true extent of counterfeiting within the U.S. is unknown, it maintains that counterfeiting “occurs less frequently in the U.S. than in other countries due to the strict guidelines, regulations, and enforcement the FDA provides throughout the production and distribution chain.” The agency points out that “drug counterfeiting is a relatively rare event” in the United States and that “the FDA believes domestic counterfeiting is not widespread.”

Counterfeiting is nonetheless a mounting concern. First, the problem is growing. Based on the number of investigations mounted by the FDA, drug counterfeiting within the U.S. nearly quadrupled in the 2 years between 2000 and 2002. Second, the delivery of pharmaceutical products to consumers undergoes innovations daily due to the shrinking of international borders and the proliferation of internet-based “pharmacies” touting discount medicines with or without a prescription. Meanwhile, pharmaceutical counterfeiting outside of the United States is a disturbing fact of life: The World Health Organization has estimated that between 5% and 8% of the worldwide trade in pharmaceuticals is counterfeit.

What Is a Counterfeit Drug?

A counterfeit drug is defined under 21 USCS ' 331 as a “drug which, or the container or labeling of which, without authorization, bears the trademark, trade name, or other identifying mark, imprint, or device, or any likeness thereof, of a drug manufacturer, processor, packer, or distributor other than the person or persons who in fact manufactured, processed, packed, or distributed such drug and which thereby falsely purports or is represented to be the product of, or to have been packed or distributed by, such other drug manufacturer, processor, packer, or distributor.” As with forgeries of non-pharmaceutical products, drug counterfeiting appears to be defined as a crime committed principally against a manufacturer's intellectual property rather than a public health hazard. This is, in fact, the current legal understanding of drug counterfeiting. See, e.g., United States v. Jamieson-McKames Pharm. Inc. , 651 F.2d 532 (8th Cir. 1981) (“The essence of counterfeiting is the unauthorized use of the trademark, trade name, or other identifying mark. Thus, even if the tablets were chemically indistinguishable from [the actual drug], counterfeiting could still be found.”).

Misbranded and adulterated drugs go hand in hand with counterfeit drugs. A drug is misbranded “if its labeling is false or misleading.” 21 U.S.C. ' 352(a). A drug may be deemed adulterated for a number of reasons but one very broad definition will suffice: A drug is always adulterated if the drug's legitimate manufacturer cannot ensure that the product possesses the safety, identity, strength, quality, or purity it purports or is represented to possess. 21 U.S.C. ' 351.

When the FDA or anyone else talks about counterfeit drugs, they mean drugs that are misbranded and/or adulterated and thus pose a public health risk. There are, in reality, no other kinds of counterfeit drugs. As Gerry Norris of Pharmaceutical Research and Manufacturers of America (PhRMA) wrote in a paper for the 2002 Global Forum on Pharmaceutical AntiCounterfeiting, even so-called copycat or knock-off counterfeit drugs that contain all the active ingredients of branded products are more than merely lost sales opportunities and intellectual property headaches for pharmaceutical manufacturers: They endanger the public safety. There is simply no such thing as a safe counterfeit because all counterfeit pharmaceutical products elude the uncompromising regulations of both the government and the pharmaceutical industry. Those controls ensure efficacy and safety, and those responsibilities fall upon the shoulders of the legitimate manufacturer of the drug alone.

The counterfeiting of drugs carries a criminal penalty. Counterfeiting with the intent to defraud or mislead carries a maximum 3-year prison term and/or a fine of up to $10,000. Without the requisite intent it is a misdemeanor with a maximum 1-year prison term and/or a fine of up to $1000. 21 USC ' 333(a).

The Drug Distribution Chain

It is easy to see how a consumer ordering pharmaceutical products without a prescription from an Internet pharmacy located in a foreign country might receive counterfeit drugs. This, too, is a growing problem. To date, the FDA, often in partnership with other government entities, has made over 150 Internet-related drug arrests, including about 60 involving Internet pharmacies. But foreign nationals are hard to reach and various American agencies – including the Customs Service, the Drug Enforcement Administration, the Postal Service, and private carriers – must work in conjunction with the FDA and foreign governments to curtail this source of counterfeit medications.

Recent innovations in cross-border prescription medication sales epitomize the very spirit of entrepreneurship. Consider the March 21 warning letter issued by the FDA in conjunction with the Arkansas State Board of Pharmacy to the storefront Rx Depot, which sold unapproved drugs from Canada to its U.S. consumers, or the West Virginia Pharmacy Board's May 13 warning letter to Discount Prescription Center of Fairmont, WV, an outfit that arranged for a Canadian pharmacy to dispense and ship prescription drugs to patients it solicited. Still, many American consumers get their foreign drugs the old-fashioned way: In 2001 there were an estimated 1700 pharmacies in Tijuana, Mexico, while 20 miles north, in San Diego, there were only 125 pharmacies.

These examples of foreign trafficking in drugs aside, it seemed unlikely that in the tightly regulated U.S. market for prescription medications for which Americans pay premium prices, prescription medications could find their way into the pill counters of well-established, trustworthy pharmacies. But that is precisely what has been happening, for a number of reasons.

Most drugs in this country are sold by a small number of very large and entirely reputable wholesalers. There is a smaller secondary wholesale market that resembles, in many respects, a commodities market. Shortfalls in production and supply may make it necessary for large wholesalers to rely on this secondary market to meet demand for lifesaving medications. Although this secondary market is made up almost entirely of thoroughly honest players, it is the outliers – the rare dishonest market participants – that form the weak link in the supply chain.

In the beginning of this chain, pharmaceutical manufacturers typically sell their products to wholesalers. These wholesalers may, in turn, sell to or trade with other wholesalers. A drug may leave its footprint in the warehouses of many, many wholesalers before it makes its way to a pharmacist's shelves.

Weaknesses in the Distribution System Aid Counterfeiters

The Prescription Drug Marketing Act of 1987 (PDMA) amended the Food, Drug, and Cosmetic Act to add to the FDA's arsenal of weapons against counterfeit, misbranded, and adulterated medicines. It safeguards the drug distribution system by requiring that, however circuitous the trail of a drug is through wholesale outlets, paper records document the source of the drug and its distribution. 21 U.S.C. ' 353(e)(1). This paper trail is known as the drug's “pedigree.” The PDMA also prohibits the resale or trade of prescription drugs by “hospitals or health care entities,” defined as facilities providing diagnostic, medical, surgical, or dental treatment, or providing chronic or rehabilitative care. 21 U.S.C. ' 353(c)(3)(A).

There are problems with the PDMA. First, the pedigree of a drug is literally made of paper. If a counterfeiter can create a decent reproduction of a scored pill with colored lettering and its accompanying four-color packaging, he can certainly forge a few paper documents. Second, the definition of “hospitals or health care entities” under the PDMA excludes any “wholesale distributor of drugs or a retail pharmacy licensed under State law” and may leave room for nursing homes and long-term care facilities to create a secondary wholesale market because they do not provide diagnostic, medical, surgical, or dental treatment, nor do they provide chronic or rehabilitative care. Even if the FDA disagrees with this semantic distinction, it can do nothing, because the PDMA does not bestow it with direct prosecutorial authority. The Department of Justice must prosecute these cases, but admits in its U.S. Attorneys' Manual that because of the complexity of the law and its loopholes, “prosecution of institutional diversion cases under the PDMA has been rare.”

The end result is a system with a labyrinthine secondary wholesale market largely regulated unevenly by state, rather than federal, laws. This system doesn't benefit manufacturers: The National Association of the Boards of Pharmacy has estimated that drug manufacturers lost a billion dollars to diversion schemes in 2000. Nor does this system benefit consumers because one unscrupulous market player in the long distribution chain could introduce counterfeit medication into the marketplace.

This is precisely how counterfeit Procrit' entered the wholesale marketplace. Procrit is a life-saving anemia drug used to treat cancer and HIV/AIDS patients. Authorities arrested a handful of wholesalers in South Florida who later pleaded guilty to trading in counterfeit Procrit diluted with bacteria-laced water to 5% of its labeled potency. One of the people arrested was already a defendant in a 2002 civil lawsuit in which one of the nation's largest wholesalers accused him of selling it counterfeit Epogen', a drug functionally equivalent to Procrit. Several of the arrested wholesalers were convicted felons and technically prohibited from becoming licensed drug wholesalers in Florida, but the state had not checked their arrest records.

Industry Reaction to the Crisis

On April 22, PhRMA announced a voluntary program to report suspected counterfeit drugs to the FDA. Effective May 1, 2003, participating member companies must notify the FDA's Office of Criminal Investigations within 5 working days of determining that a reasonable basis exists to believe that a product has been domestically counterfeited. If the counterfeit is discovered in a foreign nation, the counterfeit must be reported if clear evidence of an intention to distribute the drugs in the United States is found by the member company.

This program is voluntary, but may nonetheless establish an industry standard. The Procrit case is illustrative of how well this cooperation can work. In April 2002, Procrit's manufacturer received a tip about a Florida counterfeiting operation and quickly notified authorities. Two months later, undercover FDA agents began conducting a sting operation. In the meantime, health care providers and wholesalers were warned to be vigilant, and, based upon this information, were able to discover counterfeit “Procrit” that had already entered the stream of commerce before it reached consumers.

Conclusion

As counterfeiting within the United States becomes more lucrative and more prevalent, pharmaceutical manufacturers need to work against the risk of being found legally responsible for the effects of counterfeit drugs on consumers. The response to this threat will include a cost-effective blend of thoughtful packaging and labeling strategies, consumer and provider education, tracking and tracing of products, assessing and acting on business intelligence and reported adverse drug reactions, and proactive regulatory, legislative, and litigation strategies that profitably protect product and intellectual property assets. If measures such as these are taken, it is less likely that courts will hold manufacturers liable for the acts of drug counterfeiters.