Drug and Medical Device Manufacturers

Congress enacted the Federal Food, Drug, and Cosmetic Act (FDCA or “the Act”), 21 U.S.C. '' 301-399, in 1938 to protect the public from deleterious, impure, and deceptive goods. FDCA violations include adulterating or misbranding a food, drug, device, or cosmetic and placing it in interstate commerce. 21 U.S.C. ' 331(a)-(b). The Food and Drug Administration (FDA) has used the misbranding provisions of the Act to prosecute a wide range of actions from failure to disclose safety information to marketing of products for “off-label” uses, though such marketing theories can raise significant constitutional issues. See, eg, Washington Legal Foundation v. Henney, 202 F.3d 331, 336 n.6 (D.C. Cir. 2000). Violators are subject to criminal and civil penalties, injunctions, exclusion from federal health programs, and seizure of goods.

The FDA's Office of Criminal Investigations has primary responsibility for investigating criminal violations of the FDCA, but refers matters to the DOJ when action by a grand jury appears warranted. By regulation, 28 C.F.R. ' 0.45(j), the Assistant Attorney General, Civil Division, through the Office of Consumer Litigation (OCL), has overall responsibility for criminal and civil litigation arising under the FDCA. The Washington Legal Foundation has recently petitioned the DOJ to transfer this role to the Department's Criminal Division in cases involving promotional activities of pharmaceutical companies because of concerns that “the OCL has failed to provide clear guidance and coordination” and “has left senior FDA officials largely in the dark” as to standards for such investigations. See http://www.wlf.org/%20upload/COMEYLET.pdf. Any individual U.S. Attorney's Office may also carry out grand jury investigations and prosecute violations.

The FDCA provides felony and misdemeanor penalties for violations. According to chapter 4-8.210 of the United States Attorneys' Manual, the government 'attempts wherever possible to bring felony charges to deal with fraudulent behavior.' Typical violations of the FDCA 'with intent to defraud or mislead' a consumer and/or the FDA carry a sentence of up to 3 years and a fine of $10,000. 21 U.S.C. ' 333(a)(2).

An individual who commits a misdemeanor offense can receive up to a year in prison and/or a $1000 fine. 21 U.S.C. ' 333(a)(1). A misdemeanor charge requires no proof of “the conventional requirement for criminal conduct — awareness of some wrongdoing.” United States v. Dotterweich, 320 U.S. 277, 281 (1943). Significantly, under 21 U.S.C. ' 332(a)(2), an FDCA misdemeanor violation is also punishable as a felony if committed by an individual or organization previously convicted of a felony offense under the Act. Thus, a manufacturer who already has pled guilty to a felony has little room for error.

Other applicable statutes include the Antikickback Statute and the criminal False Claims Act, under which manufacturers also can be prosecuted for such offenses as improper “off label” promotion of drugs or devices. One DOJ prosecutor has used these statutes to prosecute improper conduct in the execution of clinical trials performed to obtain approval to bring a new drug to market — a significant and potentially troubling extension of the statute's reach. See Clinical Trial Conduct May Be Subject to DOJ Enforcement, “The Pink Sheet,” Feb. 7, 2005, at 27. The Antikickback Statute provides penalties of up to 5 years in prison and a $25,000 fine, and the criminal False Claims Act provides for a maximum prison sentence of 5 years and a fine as provided by 18 U.S.C. ' 3571, discussed below.

The Government's leverage against manufacturers, however, does not come exclusively from the substantive criminal statutes. Rather, drug and medical device manufacturers face two enormous risks in considering whether to plead guilty or take a case to trial. The first is the risk of exclusion from participation in federal health care programs, which extends even to indirect providers, such as pharmaceutical companies, whose drugs or devices will not be eligible for federal health care program re-imbursement if the company is excluded — a virtual corporate death sentence. Exclusion is mandatory for a manufacturer found guilty, under either federal or state law, of a felony relating to “fraud in connection with the delivery of a health care item or service.” 42 C.F.R. ' 1001.101(c); see 42 U.S.C. ' 1320a-7(a)(3). Similarly, a convicted manufacturer risks debarment from certain dealings with the FDA and other government agencies. For example, debarment is mandatory for a manufacturer convicted of a felony offense relating to the development or approval of any abbreviated new drug application for a generic product. 21 U.S.C. ' 335a(a)(1).

The second risk is potentially crippling fines. Under 18 U.S.C. ' 3571(c), an organization may be fined up to $500,000 for a felony where the offense results in no pecuniary gain or loss. If it does, ' 3571(d) provides that “the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss.” Application of ' 3571(d) has allowed DOJ to obtain fines dramatically higher than the maximum specified in the substantive statute. For example, TAP Pharmaceuticals stipulated in its plea agreement that the pecuniary loss from its offense was an estimated $145 million, which yielded a fine of up to $290 million under ' 3571(d). In other words, the sky's the limit on the potential fine for a drug or device manufacturer.

Compliance Strategies

In the current climate of increased prosecution for health care fraud, the best defense is good offense. Pharm-aceutical companies now must have highly structured compliance programs to help prevent problematic conduct and put them in as good a position as possible to persuade prosecutors that any violations that are uncovered in an investigation are not representative. The Department of Health and Human Services' Office of Investigator General (OIG) has identified seven elements of a comprehensive compliance plan to thwart criminal activity: 1) development and distribution of written standards of conduct, policies, and procedures reflecting the company's commitment to compliance; 2) designation of a compliance officer; 3) development and implementation of regular, effective education and training; 4) creation and maintenance of effective lines of communication between the compliance officer and all employees; 5) use of audits and/or other risk evaluation techniques to monitor compliance, identify problem areas, and assist in the reduction of identified problems; 6) effective disciplinary action for those who have violated company polices and procedures; and 7) development of policies and procedures for the investigation of identified instances of non-compliance or misconduct. 68 Fed. Reg. 23,731, 23,732-33 (May 5, 2003).

In addition, companies should establish a protocol for handling possible wrongdoing, including disclosure to government agencies if appropriate under the circumstances. The OIG has published a protocol on self-disclosure by health care providers. 63 Fed. Reg. 58,399, 58,399-403 (Oct. 30, 1998). The OIG emphasizes that if a health care provider uncovers an “ongoing fraud scheme,” the provider should contact the OIG instead of performing its own assessment because of the potential that an internal investigation may compromise the government's investigation. Id. at 58,400. Of course, the promptness and quality of a company's disclosure is a key element in the DOJ's assessment under the Thompson Memorandum of whether to bring charges.

Responding to a Criminal Investigation

The risk-reward calculus generally favors a negotiated disposition of criminal charges against a drug or device manufacturer — provided, of course, that the manufacturer is not subject to exclusion penalties and the criminal fine is not crippling. In approaching a negotiation, the manufacturer should seek to maximize the benefit of two recent developments.

The first is that the Supreme Court's ruling in United States v. Booker, 125 S.Ct. 238 (2005), has cast doubt on the constitutionality of 18 U.S.C. ' 3571(d). Section 3571(d)'s legislative history indicates that Congress “authorized the court to impose such an alternative fine.” See H.R. Rep. No. 100-390, at 6 (1987), reprinted in 1987 U.S.C.C.A.N. 2137, 2142 (emphasis supplied). “The court” has been generally understood to mean the judge applying a preponderance-of-evidence standard. Since a fine pursuant to ' 3571(d) increases the statutory maximum, however, a court cannot make findings of gain or loss without violating the defendant's Sixth Amendment rights defined in Booker. In any dialogue with the DOJ, a manufacturer's defense attorney should point out that, at the very least, in order to obtain a fine based on ' 3571 in a contested proceeding, the DOJ will have to allege the amount of loss and prove it, to a jury, beyond a reasonable doubt. If possible, the attorney should attack the DOJ's loss theory, which should be easier under a “reasonable doubt standard.” The defense attorney's objective must be to persuade the DOJ's attorney to take into account the government's heavier burden and calculate loss accordingly. Otherwise, the manufacturer's only option is to force a trial and put the loss issue before a jury – which, of course, puts the manufacturer at risk of exclusion if convicted.

The second development is the DOJ's increasing use of deferred-prosecution agreements, in part a result of the Arthur Andersen debacle. In the past 2 years, the DOJ has entered into 10 deferred-prosecution agreements with such major companies as Merrill Lynch, Computer Associates, and American International Group. The defense attorney should seek a deferred-prosecution agreement, arguing that the policy considerations are no different for drug and device manufacturers than for financial service companies.

Drug and medical device manufacturers are caught in criminal, regulatory and civil crosshairs. Their options are few, if any, once a serious violation occurs and an investigation begins. Their best hope is to implement aggressive compliance measures.

Following a guilty plea last year by a major pharmaceutical company, Associate Attorney General Robert McCallum declared that “[t]he Department of Justice is committed to rooting out and prosecuting health care fraud. It is of paramount importance that the Department use every legal tool at its disposal to assure the health and safety of the consumers of America's health care system.” The tools — the variety of different criminal statutes and theories used to prosecute drug and device manufacturers — are so diverse as to defy easy summary. At one end are the general, long-established offenses, such as the Civil War-era statute criminalizing the submission of false claims to a department or agency of the United States, 18 U.S.C. ' 287 (the “criminal False Claims Act”) or the mail and wire fraud statutes. At the other are highly focused statutes, such as the federal health care “Antikickback Statute,” 42 U.S.C. ' 1320A-7b(b); see also 21 U.S.C. '' 331(t), 333(b) (drug importation and marketing violations), which prohibit, inter alia, “remuneration” to physicians to use drugs or devices that are reimbursable by a federal health care program. See also 68 Fed. Reg. 23,731, 23,734-38 (May 5, 2003) (identifying anti-kickback “risk areas”).

The tools have been wielded effectively. The Department of Justice (DOJ) has obtained staggering criminal, regulatory, and civil fines from pharmaceutical companies. In October 2001, for example, TAP Pharmaceuticals agreed to pay $875 million to resolve criminal charges and civil liabilities, under the Antikickback Statute and other laws, arising from the company's distribution of thousands of free samples of Lupron', a prostrate cancer treatment, to induce doctors to write prescriptions.

The Statutory and Regulatory Scheme

Congress enacted the Federal Food, Drug, and Cosmetic Act (FDCA or “the Act”), 21 U.S.C. '' 301-399, in 1938 to protect the public from deleterious, impure, and deceptive goods. FDCA violations include adulterating or misbranding a food, drug, device, or cosmetic and placing it in interstate commerce. 21 U.S.C. ' 331(a)-(b). The Food and Drug Administration (FDA) has used the misbranding provisions of the Act to prosecute a wide range of actions from failure to disclose safety information to marketing of products for “off-label” uses, though such marketing theories can raise significant constitutional issues. See, eg , Washington Legal Foundation v. Henney , 202 F.3d 331, 336 n.6 (D.C. Cir. 2000). Violators are subject to criminal and civil penalties, injunctions, exclusion from federal health programs, and seizure of goods.

The FDA's Office of Criminal Investigations has primary responsibility for investigating criminal violations of the FDCA, but refers matters to the DOJ when action by a grand jury appears warranted. By regulation, 28 C.F.R. ' 0.45(j), the Assistant Attorney General, Civil Division, through the Office of Consumer Litigation (OCL), has overall responsibility for criminal and civil litigation arising under the FDCA. The Washington Legal Foundation has recently petitioned the DOJ to transfer this role to the Department's Criminal Division in cases involving promotional activities of pharmaceutical companies because of concerns that “the OCL has failed to provide clear guidance and coordination” and “has left senior FDA officials largely in the dark” as to standards for such investigations. See http://www.wlf.org/%20upload/COMEYLET.pdf. Any individual U.S. Attorney's Office may also carry out grand jury investigations and prosecute violations.

The FDCA provides felony and misdemeanor penalties for violations. According to chapter 4-8.210 of the United States Attorneys' Manual, the government 'attempts wherever possible to bring felony charges to deal with fraudulent behavior.' Typical violations of the FDCA 'with intent to defraud or mislead' a consumer and/or the FDA carry a sentence of up to 3 years and a fine of $10,000. 21 U.S.C. ' 333(a)(2).

An individual who commits a misdemeanor offense can receive up to a year in prison and/or a $1000 fine. 21 U.S.C. ' 333(a)(1). A misdemeanor charge requires no proof of “the conventional requirement for criminal conduct — awareness of some wrongdoing.” United States v. Dotterweich , 320 U.S. 277, 281 (1943). Significantly, under 21 U.S.C. ' 332(a)(2), an FDCA misdemeanor violation is also punishable as a felony if committed by an individual or organization previously convicted of a felony offense under the Act. Thus, a manufacturer who already has pled guilty to a felony has little room for error.

Other applicable statutes include the Antikickback Statute and the criminal False Claims Act, under which manufacturers also can be prosecuted for such offenses as improper “off label” promotion of drugs or devices. One DOJ prosecutor has used these statutes to prosecute improper conduct in the execution of clinical trials performed to obtain approval to bring a new drug to market — a significant and potentially troubling extension of the statute's reach. See Clinical Trial Conduct May Be Subject to DOJ Enforcement, “The Pink Sheet,” Feb. 7, 2005, at 27. The Antikickback Statute provides penalties of up to 5 years in prison and a $25,000 fine, and the criminal False Claims Act provides for a maximum prison sentence of 5 years and a fine as provided by 18 U.S.C. ' 3571, discussed below.

The Government's leverage against manufacturers, however, does not come exclusively from the substantive criminal statutes. Rather, drug and medical device manufacturers face two enormous risks in considering whether to plead guilty or take a case to trial. The first is the risk of exclusion from participation in federal health care programs, which extends even to indirect providers, such as pharmaceutical companies, whose drugs or devices will not be eligible for federal health care program re-imbursement if the company is excluded — a virtual corporate death sentence. Exclusion is mandatory for a manufacturer found guilty, under either federal or state law, of a felony relating to “fraud in connection with the delivery of a health care item or service.” 42 C.F.R. ' 1001.101(c); see 42 U.S.C. ' 1320a-7(a)(3). Similarly, a convicted manufacturer risks debarment from certain dealings with the FDA and other government agencies. For example, debarment is mandatory for a manufacturer convicted of a felony offense relating to the development or approval of any abbreviated new drug application for a generic product. 21 U.S.C. ' 335a(a)(1).

The second risk is potentially crippling fines. Under 18 U.S.C. ' 3571(c), an organization may be fined up to $500,000 for a felony where the offense results in no pecuniary gain or loss. If it does, ' 3571(d) provides that “the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss.” Application of ' 3571(d) has allowed DOJ to obtain fines dramatically higher than the maximum specified in the substantive statute. For example, TAP Pharmaceuticals stipulated in its plea agreement that the pecuniary loss from its offense was an estimated $145 million, which yielded a fine of up to $290 million under ' 3571(d). In other words, the sky's the limit on the potential fine for a drug or device manufacturer.

Compliance Strategies

In the current climate of increased prosecution for health care fraud, the best defense is good offense. Pharm-aceutical companies now must have highly structured compliance programs to help prevent problematic conduct and put them in as good a position as possible to persuade prosecutors that any violations that are uncovered in an investigation are not representative. The Department of Health and Human Services' Office of Investigator General (OIG) has identified seven elements of a comprehensive compliance plan to thwart criminal activity: 1) development and distribution of written standards of conduct, policies, and procedures reflecting the company's commitment to compliance; 2) designation of a compliance officer; 3) development and implementation of regular, effective education and training; 4) creation and maintenance of effective lines of communication between the compliance officer and all employees; 5) use of audits and/or other risk evaluation techniques to monitor compliance, identify problem areas, and assist in the reduction of identified problems; 6) effective disciplinary action for those who have violated company polices and procedures; and 7) development of policies and procedures for the investigation of identified instances of non-compliance or misconduct. 68 Fed. Reg. 23,731, 23,732-33 (May 5, 2003).

In addition, companies should establish a protocol for handling possible wrongdoing, including disclosure to government agencies if appropriate under the circumstances. The OIG has published a protocol on self-disclosure by health care providers. 63 Fed. Reg. 58,399, 58,399-403 (Oct. 30, 1998). The OIG emphasizes that if a health care provider uncovers an “ongoing fraud scheme,” the provider should contact the OIG instead of performing its own assessment because of the potential that an internal investigation may compromise the government's investigation. Id. at 58,400. Of course, the promptness and quality of a company's disclosure is a key element in the DOJ's assessment under the Thompson Memorandum of whether to bring charges.

Responding to a Criminal Investigation

The risk-reward calculus generally favors a negotiated disposition of criminal charges against a drug or device manufacturer — provided, of course, that the manufacturer is not subject to exclusion penalties and the criminal fine is not crippling. In approaching a negotiation, the manufacturer should seek to maximize the benefit of two recent developments.

The first is that the Supreme Court's ruling in United States v. Booker , 125 S.Ct. 238 (2005), has cast doubt on the constitutionality of 18 U.S.C. ' 3571(d). Section 3571(d)'s legislative history indicates that Congress “authorized the court to impose such an alternative fine.” See H.R. Rep. No. 100-390, at 6 (1987), reprinted in 1987 U.S.C.C.A.N. 2137, 2142 (emphasis supplied). “The court” has been generally understood to mean the judge applying a preponderance-of-evidence standard. Since a fine pursuant to ' 3571(d) increases the statutory maximum, however, a court cannot make findings of gain or loss without violating the defendant's Sixth Amendment rights defined in Booker. In any dialogue with the DOJ, a manufacturer's defense attorney should point out that, at the very least, in order to obtain a fine based on ' 3571 in a contested proceeding, the DOJ will have to allege the amount of loss and prove it, to a jury, beyond a reasonable doubt. If possible, the attorney should attack the DOJ's loss theory, which should be easier under a “reasonable doubt standard.” The defense attorney's objective must be to persuade the DOJ's attorney to take into account the government's heavier burden and calculate loss accordingly. Otherwise, the manufacturer's only option is to force a trial and put the loss issue before a jury – which, of course, puts the manufacturer at risk of exclusion if convicted.

The second development is the DOJ's increasing use of deferred-prosecution agreements, in part a result of the Arthur Andersen debacle. In the past 2 years, the DOJ has entered into 10 deferred-prosecution agreements with such major companies as Merrill Lynch, Computer Associates, and American International Group. The defense attorney should seek a deferred-prosecution agreement, arguing that the policy considerations are no different for drug and device manufacturers than for financial service companies.

Drug and medical device manufacturers are caught in criminal, regulatory and civil crosshairs. Their options are few, if any, once a serious violation occurs and an investigation begins. Their best hope is to implement aggressive compliance measures.