The Changing Face of FDA Consent Decrees

Section 302(a) of the FDCA (21 U.S.C. ' 332(a)) gives federal district courts jurisdiction to issue injunctions to 'restrain violations' of almost all of the prohibited acts in ' 301 (21 U.S.C. ' 331). From 1997 to 2005, the FDA obtained 115 injunctions, most through consent decrees. And in 2006 at least five major injunctions were the result of consent decrees.

Conventional FDA consent decrees focused on repeated violations of 'current good manufacturing practices.' They typically involved a two-stage injunction. The first stage halted the manufacture of certain products 'unless and until' defendants fixed the identified problems. In the second stage, defendants were required to retain an independent compliance auditor and, if problems arose, to take appropriate corrective action. In these consent decrees, executives were always named personally as defendants. Monetary penalties had no role.

The consent decrees accepted by Abbott Laboratories (1999), Wyeth-Ayerst (2000), and Schering-Plough (2002) all addressed manufacturing problems. Recent consent decrees have addressed other problems, including allegations of improper drug importation (RxDepot, 2004; Canada Care Drugs, 2006) and off-label promotion (Lilly, 2005).

The Lilly decree is especially significant because it mirrors many of the provisions traditionally found in a CIA and does not join individual officers as defendants, long an FDA requirement. It enjoins Lilly from promoting Evista' for unapproved ('off-label') uses, sets a compliance infrastructure, and requires that an independent review organization evaluate Lilly's promotional activities and compliance. The Lilly consent decree thus incorporates standard provisions of a CIA, reflecting a more aggressive approach by the FDA and increased cooperation between FDA and OIG. At the same time, the Lilly decree is more narrow than the usual CIA. While the typical CIA imposes company-wide requirements, the Lilly decree is tied to a court-ordered and enforced injunction and therefore does not reach beyond the boundaries of the alleged misconduct, which relates only to Evista.

If a company has the option of negotiating either a consent decree or a CIA, it must weigh the benefits and constraints of the decree's narrow, court-enforced agreement against the CIA's broad, agency-monitored plan, and it must consider possible government demands that executives be bound individually by the consent decree and that the company pay financial penalties for past behavior.

Unlike the typical CIA, a consent decree almost always names the company and executives. Because the FDCA imposes strict liability for misdemeanor violations on 'responsible' individuals, the FDA has the leverage to require executives to submit personally to the consent decrees. Naming executives 'reflects a core value' of the FDA because, according to an FDA official, executives occupy a 'virtual fiduciary relationship to the public ' ' Eric Blumberg, 55 Food Drug L. J. 145 (2000). Yet the FDA apparently compromised its longstanding position in the Lilly decree in exchange for a broader and more intrusive injunction.

Cost of Settlement

While the naming of individuals now seems to be negotiable, the upward trend in the cost of settlement seems immutable. For almost 40 years, the FDA made no effort to obtain payments for past misconduct as part of its injunctive actions, since it seemed clear that the FDCA authorized injunctions merely to 'restrain violations,' thus precluding monetary penalties. But in 1999, the FDA obtained restitution as an equitable remedy in United States v. Univ. Mgmt. Servs., Inc., 191 F. 3d 750 (6th Cir. 1999), and the floodgates opened.

The FDA moved quickly to secure a $100 million payment from Abbott Laboratories in 1999, and then followed with $30 million from Wyeth-Ayerst in 2000, $500 million from Schering-Plough in 2002, and $24 million from Lilly in 2005. The FDA asserts in these consent decrees that 'the payments made ' are not a fine, penalty, forfeiture or payment made in lieu thereof,' but publicly celebrates them as examples of a 'noteworthy string of record-breaking penalties against medical product manufacturers.' FDA White Paper (June 30, 2003) (emphasis added).

Unfortunately, the FDA's penalty policy is not accompanied by any consistent approach to calculating the amount. One FDA official noted that the $100 million paid by Abbott Laboratories 'was not derived by precise mathematical calculation.' Blumberg, 55 Food Drug L.J. 145, 146 (2000). Three years later, this same official proposed two 'fair' methods of calculating payments: take either the net profits or gross proceeds attributable to the product in question. See Blumberg, 58 Food Drug L.J. 169, 188-189 (2003). While perhaps more precise mathematically, these methods ignore that only a portion of the enrichment was 'unjust' by assuming that the accused product was, in fact, unsafe or ineffective. See Erika King and Elizabeth M. Walsh, 58 Food Drug L.J. 149, 154-155 (2003). The FDA's lack of a principled basis for penalties runs headlong into the supposed ideal of uniformity and fairness embodied in the Organizational Sentencing Guidelines, which typically play a role in every global resolution.

In addition to the large up-front penalties, a common feature of recent FDA consent decrees is a liquidated damages (or 'stipulated penalties') provision, imposing per diem or per violation payments for failure to comply. These penalties apply to any breach of a consent decree, including failures to comply with ministerial provisions. Critically, the FDA ' not the court ' retains initial authority to determine when payments are necessary and how long the damages period continued, subject only to limited review by the court. While not grounded in any provision of the FDCA, the approach is similar to the stipulated penalties commonly found in CIAs, reflecting the increasing influence of CIAs on FDA consent decrees.

Breaching a Consent Decree

Breaching a consent decree can have other serious consequences as well. By violating the terms of a consent decree, a defendant also violates a court-ordered injunction and therefore could be subject to civil or criminal contempt proceedings. Courts generally have wide discretion in framing appropriate sanctions for contempt, but the consequences could include substantial fines, further interruption of operations, and imprisonment for individuals violating the consent decree. Of course, defendants always agree in consent decrees to pay all of the FDA's costs in any contempt proceeding.

Finally, modern FDA consent decrees also contain extremely broad provisions regarding what steps the FDA may take upon its determination of non-compliance. Subject only to a very narrow right of appeal to the district court, the FDA usually retains enormous power to determine violations and impose harsh consequences, which can include ordering a halt to operations concerning 'any or all drug(s)' or 'any other corrective actions as FDA deems necessary' to ensure compliance.

Conclusion

FDA consent decrees are changing rapidly, and the line between FDA and HHS OIG enforcement is blurring. Practitioners now need to be well versed in the evolving enforcement approaches at both the FDA and the HHS OIG in order to obtain the resolution that best fits the particular client's situation.

Joseph F. Savage Jr. ([email protected]), a member of this newsletter's Board of Editors, is a partner in Goodwin Procter LLP's White Collar Crime and Government Investigations Group. Adam B. Ziegler is an associate in the Trial Department at the firm.

Historically, when a health care company had a compliance failure, counsel could help it remain in business by negotiating with the relevant agency. If the problem involved sales, marketing or pricing, the company could seek a Corporate Integrity Agreement (CIA) with the Office of Inspector General (OIG) at Health and Human Services (HHS). If the problems related to manufacturing, counsel could obtain a consent decree of permanent injunction ('consent decree') with the Food and Drug Administration (FDA) under the Food Drug and Cosmetic Act (FDCA). Consent decrees and CIAs each had their particular burdens and benefits, which health care practitioners had learned to navigate. Now this tidy distinction has become blurred as the FDA has borrowed features from HHS's CIAs.

HHS has imposed CIAs since 1994. Typically, they require a company (but not its executives) to address marketing deficiencies by adopting a compliance infrastructure, reporting compliance activity, and submitting to external review of business practices under the threat of stipulated money penalties or, ultimately, exclusion from federal reimbursement. By contrast, the traditional FDA consent decree addresses manufacturing problems through an agreed injunction (without financial penalty) against the company and its senior officers requiring corrective action, monitoring, and reporting. Traditions aside, FDA consent decrees are now evolving into CIA-type agreements, addressing issues well beyond manufacturing, and imposing financial penalties.

Consent Decrees

Section 302(a) of the FDCA (21 U.S.C. ' 332(a)) gives federal district courts jurisdiction to issue injunctions to 'restrain violations' of almost all of the prohibited acts in ' 301 (21 U.S.C. ' 331). From 1997 to 2005, the FDA obtained 115 injunctions, most through consent decrees. And in 2006 at least five major injunctions were the result of consent decrees.

Conventional FDA consent decrees focused on repeated violations of 'current good manufacturing practices.' They typically involved a two-stage injunction. The first stage halted the manufacture of certain products 'unless and until' defendants fixed the identified problems. In the second stage, defendants were required to retain an independent compliance auditor and, if problems arose, to take appropriate corrective action. In these consent decrees, executives were always named personally as defendants. Monetary penalties had no role.

The consent decrees accepted by Abbott Laboratories (1999), Wyeth-Ayerst (2000), and Schering-Plough (2002) all addressed manufacturing problems. Recent consent decrees have addressed other problems, including allegations of improper drug importation (RxDepot, 2004; Canada Care Drugs, 2006) and off-label promotion (Lilly, 2005).

The Lilly decree is especially significant because it mirrors many of the provisions traditionally found in a CIA and does not join individual officers as defendants, long an FDA requirement. It enjoins Lilly from promoting Evista' for unapproved ('off-label') uses, sets a compliance infrastructure, and requires that an independent review organization evaluate Lilly's promotional activities and compliance. The Lilly consent decree thus incorporates standard provisions of a CIA, reflecting a more aggressive approach by the FDA and increased cooperation between FDA and OIG. At the same time, the Lilly decree is more narrow than the usual CIA. While the typical CIA imposes company-wide requirements, the Lilly decree is tied to a court-ordered and enforced injunction and therefore does not reach beyond the boundaries of the alleged misconduct, which relates only to Evista.

If a company has the option of negotiating either a consent decree or a CIA, it must weigh the benefits and constraints of the decree's narrow, court-enforced agreement against the CIA's broad, agency-monitored plan, and it must consider possible government demands that executives be bound individually by the consent decree and that the company pay financial penalties for past behavior.

Unlike the typical CIA, a consent decree almost always names the company and executives. Because the FDCA imposes strict liability for misdemeanor violations on 'responsible' individuals, the FDA has the leverage to require executives to submit personally to the consent decrees. Naming executives 'reflects a core value' of the FDA because, according to an FDA official, executives occupy a 'virtual fiduciary relationship to the public ' ' Eric Blumberg, 55 Food Drug L. J. 145 (2000). Yet the FDA apparently compromised its longstanding position in the Lilly decree in exchange for a broader and more intrusive injunction.

Cost of Settlement

While the naming of individuals now seems to be negotiable, the upward trend in the cost of settlement seems immutable. For almost 40 years, the FDA made no effort to obtain payments for past misconduct as part of its injunctive actions, since it seemed clear that the FDCA authorized injunctions merely to 'restrain violations,' thus precluding monetary penalties. But in 1999, the FDA obtained restitution as an equitable remedy in United States v. Univ. Mgmt. Servs., Inc. , 191 F. 3d 750 (6th Cir. 1999), and the floodgates opened.

The FDA moved quickly to secure a $100 million payment from Abbott Laboratories in 1999, and then followed with $30 million from Wyeth-Ayerst in 2000, $500 million from Schering-Plough in 2002, and $24 million from Lilly in 2005. The FDA asserts in these consent decrees that 'the payments made ' are not a fine, penalty, forfeiture or payment made in lieu thereof,' but publicly celebrates them as examples of a 'noteworthy string of record-breaking penalties against medical product manufacturers.' FDA White Paper (June 30, 2003) (emphasis added).

Unfortunately, the FDA's penalty policy is not accompanied by any consistent approach to calculating the amount. One FDA official noted that the $100 million paid by Abbott Laboratories 'was not derived by precise mathematical calculation.' Blumberg, 55 Food Drug L.J. 145, 146 (2000). Three years later, this same official proposed two 'fair' methods of calculating payments: take either the net profits or gross proceeds attributable to the product in question. See Blumberg, 58 Food Drug L.J. 169, 188-189 (2003). While perhaps more precise mathematically, these methods ignore that only a portion of the enrichment was 'unjust' by assuming that the accused product was, in fact, unsafe or ineffective. See Erika King and Elizabeth M. Walsh, 58 Food Drug L.J. 149, 154-155 (2003). The FDA's lack of a principled basis for penalties runs headlong into the supposed ideal of uniformity and fairness embodied in the Organizational Sentencing Guidelines, which typically play a role in every global resolution.

In addition to the large up-front penalties, a common feature of recent FDA consent decrees is a liquidated damages (or 'stipulated penalties') provision, imposing per diem or per violation payments for failure to comply. These penalties apply to any breach of a consent decree, including failures to comply with ministerial provisions. Critically, the FDA ' not the court ' retains initial authority to determine when payments are necessary and how long the damages period continued, subject only to limited review by the court. While not grounded in any provision of the FDCA, the approach is similar to the stipulated penalties commonly found in CIAs, reflecting the increasing influence of CIAs on FDA consent decrees.

Breaching a Consent Decree

Breaching a consent decree can have other serious consequences as well. By violating the terms of a consent decree, a defendant also violates a court-ordered injunction and therefore could be subject to civil or criminal contempt proceedings. Courts generally have wide discretion in framing appropriate sanctions for contempt, but the consequences could include substantial fines, further interruption of operations, and imprisonment for individuals violating the consent decree. Of course, defendants always agree in consent decrees to pay all of the FDA's costs in any contempt proceeding.

Finally, modern FDA consent decrees also contain extremely broad provisions regarding what steps the FDA may take upon its determination of non-compliance. Subject only to a very narrow right of appeal to the district court, the FDA usually retains enormous power to determine violations and impose harsh consequences, which can include ordering a halt to operations concerning 'any or all drug(s)' or 'any other corrective actions as FDA deems necessary' to ensure compliance.

Conclusion

FDA consent decrees are changing rapidly, and the line between FDA and HHS OIG enforcement is blurring. Practitioners now need to be well versed in the evolving enforcement approaches at both the FDA and the HHS OIG in order to obtain the resolution that best fits the particular client's situation.

Joseph F. Savage Jr. ([email protected]), a member of this newsletter's Board of Editors, is a partner in Goodwin Procter LLP's White Collar Crime and Government Investigations Group. Adam B. Ziegler is an associate in the Trial Department at the firm.