Seventh Circuit Decision in Caputo Finding a Device Company CEO & CCO Criminally Liable for Off-Label Marketing Could Significantly Affect Civil and Criminal Defense Strategies

March 6, 2008

On February 27, 2008, the U.S. Court of Appeals for the Seventh Circuit issued a decision in United States v. Caputo, in which the court generally affirmed a “complex and unusual” district court decision holding criminally liable a corporate Chief Executive Officer (“CEO”) and, remarkably, a Chief Compliance Officer (“CCO”) for the illegal marketing of a medical device.  As discussed further below, the Seventh Circuit’s ruling could significantly affect civil and criminal defense strategies, particularly with respect to the use of expert testimony.

The defendants, Ross Caputo (CEO) and Robert Riley (CCO) of the medical device company AbTox, advanced a First Amendment (freedom of speech) argument at the appellate level, alleging that the Federal Food, Drug, and Cosmetic Act (“FDC Act”) violated the U.S. Constitution by restricting promotional materials to those uses that FDA has approved.  The court stated that whether the First Amendment applies to promotional activity by a product’s manufacturer “which struck a bargain with the FDA in the approval process by promising to limit its promotion . . . is a difficult question.  The doctrine of unconstitutional conditions places limits on the promises that an agency may extract from those who seek approval.”  Ultimately, the Seventh Circuit decided not to consider whether a seller of medical devices has a constitutional right to promote off-label uses because in this case the medical device at issue was not lawfully on the market for any use.

Following an 8-week jury trial, the defendants were convicted of 19 criminal counts, including conspiracy, fraud, mail fraud, wire fraud, and the introduction of an “altered” or misbranded device into interstate commerce. Applying the sentencing objectives set forth at 18 U.S.C. § 3553(a), the district court sentenced the CEO to 10 years imprisonment and 3 years of supervised release and the CCO to 6 years imprisonment and 3 years of supervised release.  In addition, the district court found the defendants jointly and severally liable for $17,209,074 in restitution to the hospitals, which, in the court’s opinion, were left with a worthless medical device not cleared by FDA. 

The Seventh Circuit affirmed the district court’s decision in all respects except as to the amount of restitution owed the hospitals, setting forth guidelines for the district court to apply in recalculating the appropriate amount upon remand.

Key to the appellate and district court’s analysis is that the “case involved a scheme which went beyond economic harm to the marketplace and involved direct physical harm to consumers.”  The district court found that at least 25 patients at 5 different hospitals suffered corneal decompensation in one eye after ocular surgery performed with instruments sterilized with the defendants’ product.  The district court further found that defendants had knowledge that brass instruments sterilized in defendants’ product would produce a potentially harmful blue-green residue, identified as copper acetate and zinc acetate.  Despite this knowledge, and in light of reports of patient harm, defendants allegedly did not conduct an investigation, open a complaint file with FDA, or file a medical device report.

The product in this case is the plazlyte sterilizer manufactured and marketed by AbTox; this sterilizer uses a peracetic acid mixture as its principal sterilant.  AbTox filed a 510(k) premarket notification with FDA to support the claim that its plazlyte sterilizer was substantially equivalent to ethylene oxide sterilizers currently on the market.  In its application, AbTox sought FDA clearance for a smaller sterilizer than the model the company ultimately marketed.  The company also allegedly withheld adverse test results from FDA during the premarket notification process. Based on the information submitted in the 510(k), FDA cleared the small sterilizer limited to be used for the sterilization of only flat, stainless instruments without lumens or hinges.  Upon FDA clearance, the district court found that AbTox induced its customers to purchase the large sterilizer by distributing “printed promotional material boldly proclaiming the ability of the AbTox sterilizer to process instruments with hinges and lumens, and to serve as a complete replacement for ethylene oxide.  Indeed . . .  the defendants jettisoned the manual [cleared by FDA] and substituted expansive language tending to obscure the narrow scope of the clearance.” 

AbTox then submitted a new 510(k) premarket notification to FDA requesting clearance for the expanded claims (lumens, different wraps) and a shorter time cycle and again failed to inform FDA of adverse test results.  The FDA reviewer reportedly found the premarket notification wholly deficient and sent AbTox a letter requesting additional information, and that also directed the defendants not to put the device into commercial distribution.  Shortly thereafter, the FDA sent AbTox a Warning Letter directing the company to desist from off-label promotion of the company’s already cleared sterilzer.  The company agreed to do so, discontinued some of its promotional materials, revised its operator’s manual back to the original language cleared by FDA, but then went on selling the large sterilizers to hospitals under the guise that those devices had been cleared by FDA.

The district court found thus that “defendants . . . effectively carried out a bait-and-switch scheme on the FDA and its customers, obtaining clearance on one sterilizer but using the clearance to sell another . . . in defiance of law and FDA directives through a pattern of falsehoods and deception, until the company shut down sales operations . . . under pressure from the FDA.”  Of special note is the district court’s treatment and findings regarding the company’s CCO: 

Corporate compliance officers are very much today’s corporate ‘fire personnel.’  They are often the company’s ‘first responders’ and must focus on both proactive and reactive efforts to be effective.  Proactive efforts need to emphasize the complementary goals of crime prevention and corporate ethical behavior.  Reactive efforts measure how well a corporation reacts when it learns that questionable and potentially illegal corporate conduct has occurred.

The Seventh Circuit’s opinion includes a number of discussions that will be somewhat controversial.  Perhaps most noteworthy is the court’s treatment of expert testimony.  The court found that the district court did not abuse its discretion in keeping out of evidence proposed expert testimony the defendants wanted to introduce “about the meaning of the [FDC Act] and [FDA’s implementing] regulations.”  Without citing any FDA-related judicial precedent, the court found that this topic is “a subject for the court, not for testimonial experts . . . .  The only legal expert in a federal courtroom is the judge.”  If adopted by other courts, this ruling could have a significant effect on the way that companies defend themselves in civil cases, as well as criminal cases.

The Seventh Circuit’s opinion also has an interesting discussion about the extent to which a manufacturer may modify a device that FDA has cleared under the 510(k) procedures. The court rejected the defendants’ argument that the Fifth Amendment precluded FDA from keeping the product at issue off the market.  The court ruled that FDA had provided the defendants with numerous warnings that the defendants’ sale of the product at issue was illegal, thus precluding them from putting forth a successful Due Process challenge.  The Court ruled that “[w]hen Caputo and Riley chose to go their own way, the question on the table for the court became simply who is right about the meaning of the legal rules, not whether adequate notice was given.”

It will be interesting to see if other like decisions follow, and how FDA might use this decision to its advantage.


  • An MP3 file of the oral argument before the Seventh Circuit is available here.

  • A copy of the Washington Legal Foundation’s brief in the case is available here.

  • An article, titled “Corporate Compliance Officer – Gatekeeper or Jailbird,” by Hyman, Phelps & McNamara, P.C.’s, John R. Fleder discussing the district court’s decision in Caputo is available here.