On January 4, the Federal Trade Commission (FTC) announced the release of a new guidance by FTC staff concerning Multi-Level Marketing (MLM). The guidance, in the form of questions and answers, addresses issues relevant for businesses evaluating their compliance with the FTC Act.

Multi-level marketing is a business model used in a wide variety of industries, including the dietary supplement and cosmetic industries. Generally, an MLM distributes products (or services) through a network of individuals.  These individuals essentially comprise the sales force.  They are not employees but independent contractors.  The business model relies on the sales people not only selling product but also recruiting additional individuals who, in turn, want to sell products and also recruit additional sales people.  Thus, the model results in multiple “levels” of distributors/members/participants.

The FTC has a long history of challenging unfair and deceptive MLM practices. Recent actions regarding MLM practices concerning dietary supplement companies include actions against HerbaLife International of America (July 15, 2016), and Vemma Nutrition Comp. (Aug. 26, 2015). The orders in these cases, as well as other  FTC documents, e.g., a 2017 letter by former FTC Chairwomen Edith Ramirez provide insight into FTC’s expectations regarding a lawful MLM business. The newly released Guidance memorializes and expands on the principles set forth in these documents and clarifies the factors that the FTC will consider in assessing whether a company has committed unfair and deceptive acts or practices in violation of the FTC Act.

Whether an MLM is lawful is a fact-specific determination. For FTC, primary issues are the compensation structure (which should be based on actual sales to actual consumers (rather than on purchases by distributors)) and the representations of earning potential by distributors/members/participants.  The guidance addresses specifics such as “internal consumption” (consumption by the distributors themselves), what evidence is needed to validate that sales are indeed retail sales and income and business opportunity claims used to recruit new distributors.  The guidance also addresses compliance programs.  An MLM should develop a compliance program.  The program should include monitoring of distributors/participants to ensure they also comply with applicable policies and procedures, particularly those related to claims, sales validation, and other consumer protection-oriented policies.

The guidance serves as an important reminder for MLM businesses. Companies would be well-served to (re)evaluate their business practices and compliance programs in light of the new guidance and other FTC materials, including the FTC orders.  (Unfortunately, the guidance does not link to that information.)

The guidance is final. It summarizes existing law or FTC cases, and provides tips and advice to consumers and businesses but is not itself binding.

On December 20, FDA issued a new, draft guidance, “Medical Device Accessories – Describing Accessories and Classification Pathways.”  This guidance is the latest chapter in the years-long, and still on-going, story of accessory classification. As you may recall, Congress and FDA have both been working for years to revamp how accessories are classified.  The 21st Century Cures Act (Cures Act), signed into law in December 2016, required that accessories be independently classified from the parent device.  The Food and Drug Administration Reauthorization Act (FDARA), signed into law in August 2017, went a step further, specifying a process for such classification and re-classification or accessories previously classified based on the parent device with which it is used.

It is impressive that after a mere four months, FDA has issued a draft guidance that complies with the new statutory provision. Below, we provide historical perspective on why the accessory classification process needed changing as well as commentary on the draft guidance.

In short, the guidance is a clear restatement of the statutory requirement and lays out a good framework on which industry can comment. In our view, additional clarification and details, beyond the statutory requirements, should be included in the final guidance.

Historical Background

As we have previously discussed in our earlier posts (here, here, and here) regarding the Agency’s classification of accessories, FDA has historically classified accessories in one of two ways: (1) according to the parent device’s classification (either by express inclusion in the classification regulation or by clearance or approval of an accessory under the parent device’s classification regulation); or (2) by establishment of a separate classification regulation specific to the accessory type. This classification scheme led to a number of issues.  With regard to accessories classified according to the parent device’s classification were, in at least some instances, being over-regulated.

The Cures Act and FDA’s 2016 Guidance

The Cures Act has a provision directing the Agency to “classify an accessory . . . based on the intended use of the accessory, notwithstanding the classification of any other device with which such accessory is intended to be used.” FDA finalized the guidance, “Medical Device Accessories – Describing Accessories and Classification Pathway for New Accessory Types,” later in the same month that the Cures Act was passed.  (2016 Guidance)

The 2016 Guidance acknowledged that some accessories present less risk than the parent device with which they are used and should not, accordingly, be automatically placed in the same class as the parent device.  The 2016 Guidance recommended that sponsors utilize the de novo process for new types of accessories (i.e., not yet classified) for which the risk is less than the parent device.

The Cures Act and the 2016 Guidance only addressed new, not yet classified, accessories. Neither addressed the large body of accessories classified prior to passage of the Cures Act.  The only option for reclassification of these accessories would be to submit a petition for reclassification under 21 C.F.R. § 860.123.  Petitions for reclassification are seldom used and the Agency is typically slow to respond.

FDARA and FDA’s 2017 Draft Guidance

FDARA, in part, sought to solve this problem of previously classified accessories. FDARA established an 85-day process for re-classifying accessories based on their risk, separate from the parent device with which they are used.  This is a new submission type not previously implemented at FDA.  In addition, for accessories previously classified according to the parent device with which they are used, by August 2018, and at least once every 5 years thereafter, FDA is now required to publish a list of accessories that it determines are suitable for classification into Class I.

FDARA also created a new streamlined process for classifying new accessories separately from, but concurrently with the parent device. For accessories not previously classified, when a sponsor submits a 510(k) or PMA for a parent device with an accessory, the sponsor may include a request for classification of the accessory based on its risk.  FDA’s clearance or approval letter shall include a granting or denial for the sponsor’s request.

The 2017 draft guidance indicates how FDA will implement the revised statutory provisions in FDARA. Specifically, Section VI of the guidance reiterates the two new accessory classification request pathways created by FDARA.  FDA plans to track both types of requests as pre-submissions.  While pre-submissions by their nature are non-binding, it appears this will simply be for tracking purposes because the output of an accessory classification request will be a classification order.  Administratively, it is not clear how this will work.  At a minimum, under the statute, FDA has authority to issue a classification order in response to an accessory classification request.  We assume this order will be published in the Federal Register, like administrative classification and reclassification orders permitted under FDASIA.  However, the timing for issuance of the public order is unclear.  Pre-Submissions are generally non-public, unlike other premarket submissions, the output of which are made public on FDA’s website.  However, the output of this new type of Pre-Submission will be important to both the applicant as well as the general public.  We hope that the final guidance provides additional clarity regarding how and when it will make publicly available the output of accessory classification requests that are done solely through the pre-submission process.

The guidance also strongly recommends that manufacturers submit a pre-submission prior to seeking reclassification or classification of an accessory through either of the new pathways. Yes, you read that correctly, a pre-submission to a pre-submission.  Everyone loves the pre-submission program!

With regard to reclassification of accessories previously classified under a parent device’s classification, applicants can submit an “Accessory Request” for reclassification under a lower regulatory classification. The draft guidance provides very high level recommendations as to the type of information that should be included in such a request.  FDA has 85 days from receiving an Accessory Request in which to review and approve or deny it, as required by statute.

With regard to new accessories, an applicant can submit a request for classification together with a premarket submission (e.g., 510(k), PMA, de novo) for the parent device for which the accessory is intended for use (a “New Accessory Classification”). The classification request would identify a lower classification than the classification of the parent device under review.  For example, a classification request in a PMA might explain why an accessory used with the parent device that is the subject of the PMA is appropriately classified as Class I or II.  The draft guidance provides very high level recommendations as to the type of information that should be included in such a classification request.  FDA will grant or deny the classification request when it clears or approves the premarket submission.  If the request is denied, the accessory will be considered cleared or approved with the parent device in its same classification.

Because the request must be submitted with the parent device’s premarket submission, it appears this process will only benefit accessories owned or manufactured by the parent device company or those accessory manufacturers with a cooperative relationship with the parent-device manufacturer. Manufacturers of new accessories that do not have a relationship with the parent device manufacturer may utilize the de novo process to seek classification of their accessories.  This may sound like a minor procedural difference; however, there are no user fees associated with the classification request included with the parent device submission and the de novo user fee is $93,229 ($23,307 for a small business).  Thus, there is a significant financial savings by submitting for classification as part of the parent device submission and potentially more expeditious (MDUFA goal of 150 days for a de novo as compared to 90 days for a 510(k) or 180 days for a PMA).  It is unclear as to how difficult the burden of each submission will be because the 2017 draft guidance does not provide great insight into the type of information necessary to support a classification request.

One important clarification that will be needed for the New Accessory Classification requests is what constitutes “the parent device submission.” Does it mean the first time a parent device is submitted to FDA (e.g., an original PMA or 510(k)) or could it be a change to an existing device (e.g., a PMA supplement or Special 510(k))?  If it is the latter, a PMA Supplement that proposes a Class I or Class II classification for a new accessory or a Traditional or Special 510(k) for a Class I accessory would be far less expensive than a de novo.  We think it would be advisable for FDA to clarify this point in their final guidance.  If New Accessory Classification requests can be submitted as changes to a cleared/approved device, accessory manufacturers may seek out relationships with the parent-device manufacturer in order to be able to take advantage of this cost savings.  Such a relationship may also streamline the process for generating data to support such a submission.

There are two other notable changes in the new draft guidance. First, the draft guidance expressly states that it applies to all accessories, whether required or optional.  In addition, the guidance expressly applies to software accessories.  These points arguably were implied in the 2016 guidance, but it is nice that they are now expressly stated.

The draft guidance has a detailed appendix regarding the type of information to be included in a de novo application for a new accessory. It would also be helpful for FDA to consider including appendices detailing the types of information that should be included in a classification request as part of a parent device submission and a reclassification request.

In sum, we think this is a good draft, which closely follows the statutory requirements for the new program. However, additional details should be added before the final guidance is issued to make it more useful for both industry and FDA.

In a thorough and thoughtful 23-page opinion, Judge Steven Merryday of the Middle District of Florida dismissed a $350 million judgment against the defendants, owners and operators of specialized nursing facilities. The court detailed the rigorous materiality and scienter requirements for liability under the False Claims Act that the U.S. Supreme Court “defined unambiguously and required emphatically” in Universal Health Services, Inc. v. Escobar, 136 S. Ct. 1989 (2016):

Escobar necessarily means that if a service is noncompliant with a statute, a rule, or a contract; if the non-compliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance, the False Claims Act provides a relator no claim for “implied false certification” (although some other claim, maintainable by the United States in its own name, or some regulatory authority, exercisable by the United States, might attach under other law).

In other words, a False Claims Act claim cannot be based on a “minor or unsubstantial” or “garden-variety” regulatory violation; to do so would result in a system of “government traps, zaps, and zingers” that permits the government to retain the benefit of a “substantially conforming” good or service, and to recover under the False Claims Act damages (up to treble times) due to the immaterial regulatory non-compliance.

In United States ex rel. Ruckh v. Salus Rehabilitation, LLC et al., No. 8:11-cv-01303-SDM-TBM (M.D. Fla. Jan. 11, 2018) (Merryday, J.), the relator alleged the nursing facilities violated Medicaid regulations, which rendered fraudulent its claims to the Medicaid program. The alleged non-compliances involved a failure to maintain a comprehensive care plan and a failure to keep proper records of services. After trial, the judgments against defendants totaled $350 million.

In its opinion, the court found compelling the entire absence of evidence of how the government has behaved in comparable circumstances. Given the lack of evidence, the jurors returned “an unwarranted, unjustified, unconscionable, and probably unconstitutional forfeiture – times three – sufficient in proportion and irrationality to deter any prudent business from providing services and products to a government armed with the untethered and hair-trigger artillery of a False Claims Act invoked by a heavily invested relator.”

The court, like many now since Escobar, agreed that Escobar requires that the relator prove “both that the non-compliance was material to the government’s payment decision and that the defendant knew at the moment the defendant sought payment that the non-compliance was material to the government’s payment decision.” Absent this evidence, a False Claims Act cannot stand – whether at a motion to dismiss stage, summary judgment stage, or like in Ruckh, past jury trial and judgment.

It was a somewhat unsettling year for the Drug Enforcement Administration. The Agency faced a barrage of criticism in the press regarding its involvement in passage of the Ensuring Patient Access and Effective Drug Enforcement Act (EPAEDEA), which some criticized as hobbling DEA’s immediate suspension order (ISO) authority (see here). Meanwhile, notwithstanding a D.C. Circuit “win” for the Agency in Masters Pharmaceutical, Inc. v. Drug Enforcement Administration, 861 F.3d 206 (D.C. Cir. 2017), where the court set forth new and significant suspicious order monitoring and reporting requirements, the industry still decried the lack of clarification to DEA’s suspicious order reporting regulations—promulgated by notice-and-comment rulemaking—something the Agency has been promising for years (see post here).

Regardless, DEA’s Diversion Control Division has continued to bring administrative revocation and registration denial cases (see post here for a general description) against DEA registrants (typically practitioner cases). According to DEA, the number of administrative cases brought in 2017 was more than double the number brought in 2014.

Based on our review of the published decisions this year, here are some statistics on DEA’s 2017 administrative docket:

• 46: Number of new final orders (up from 28 in 2016)
• 44: Number of new final orders adjudicating individual (e.g., doctor, dentist, veterinarian) registrations (a pharmacy and a clinic made up the remaining two final orders)
• 1: Number of ISO cases
• 29: Number of cases based solely on loss of state authority (see post here) (up from 15 in 2016)
• 17: Number of cases where the respondent made a timely request for a hearing (i.e., before an ALJ)
• 13: Number of cases with a timely request for a hearing that were decided on summary disposition (i.e., without a hearing)
• 3: Number of cases where the Administrator rejected the presiding ALJ’s recommended decision
• 0: Number of corrective action plans that DEA has accepted (see DEA statement here)

It is important to note that these statistics do not take into account administrative actions where a party surrendered a registration prior to DEA initiating proceedings or cases that DEA and the registrant settled without going to a hearing.

Our readers know that we closely follow DEA’s administrative decisions, and we are committed to keeping you up to date on significant developments in these decisions. Here are some of the highlights of our posts from 2017:

• DEA’s concerning and questionable expanded use of summary disposition to decide cases other than those solely based on a loss of state authority (see posts here and here)
• DEA’s use of official notice (see post here)
• DEA’s finding that the two key elements of a valid prescription contained in 21 C.F.R. § 1306.04(a)—(1) issued for a legitimate medical purpose (2) by an individual practitioner acting in the usual course of professional practice—have no material difference (see post here)
• A new set of requirements (not contained in the regulations) that require practitioners to investigate whether their registrations are being misused for diversion (see post here)

As we embark on a new year, we will continue to keep you posted on new decisions as they are published.

While many were on vacation and preparing to celebrate the New Year, CDRH was announcing yet another pilot program. You may recall FDA recently announced its Digital Health Software Pre-Cert Pilot Program and its Premarket Approval Application Critical to Quality Pilot Program.  The latest pilot program is the Case for Quality Voluntary Medical Device Manufacturing and Product Quality Pilot Program.  The program was announced in the Federal Register.

This pilot program, like others that have come before it, intends to evaluate alternative means of assessing a device company’s quality system. In this program, CDRH has collaborated with the Medical Device Innovation Consortium (MDIC) to develop a “maturity model and appraisal system,” the Capability Maturity Model Integration (CMMI) system.  Details regarding the CMMI system are absent from the Federal Register notice.  Prospective participants would be well-advised to better understand this system prior to enrollment.  Program participants will be required to perform a gap assessment using the CMMI system.  In exchange, FDA intends to forego conducting surveillance inspections of program participants.

CDRH will select up to nine companies to participate in this program, and it began taking applications for enrollment on January 2. The program is scheduled to run through the end of 2018.

Section 513 of the Federal Food, Drug, and Cosmetic Act requires FDA to consider the least burdensome means of evaluating device safety and effectiveness for Class III devices and substantial equivalence for devices requiring 510(k) clearance. Despite this legal requirement, the device industry’s position has been that FDA does not comply with the provisions to require only the “least burdensome” means of establishing device effectiveness or substantial equivalence.  It has often seemed that CDRH was paying lip service to the concept of “least burdensome,” using the phrase but not actually applying it.  The 21st Century Cures Act (Cures), signed into law last December, added language requiring CDRH to assess the implementation of the least burdensome provisions “to ensure that the least burdensome requirements are fully and consistently applied.”

As part of this implementation, on December 15, CDRH issued a revised draft guidance regarding the Least Burdensome provisions.  Once finalized, this guidance will replace FDA’s October 2002 guidance, “The Least Burdensome Provisions of the FDA Modernization Act of 1997: Concept and Principles.”

The draft guidance applies a new definition of “least burdensome,” defining it as “the minimum amount of information necessary to adequately address a regulatory question or issue through the most efficient manner at the right time.” In contrast, the 2002 guidance defined least burdensome as “a successful means of addressing a premarket issue that involves the most appropriate investment of time, effort, and resources on the part of industry and FDA.”  The earlier definition focused on premarket issues, whereas the new guidance is broader.  The scope of the draft guidance includes all premarket submissions, including de novos and Q-submissions, neither of which were expressly included in the 2002 guidance.  Both guidances also cover other regulatory obligations, including, for example postmarket surveillance and post-approval studies.

Although Cures was directed at CDRH, the Center has turned around and applied the concepts to industry. The draft guidance emphasizes that least burdensome applies not only to FDA but also to industry. The guidance states that industry should “submit well-organized, clear, and concise information” that is least burdensome to review.  In practice, it is difficult for industry to predict the minimum amount of information necessary in a premarket submission because the Agency continues to request new and different information to establish a reasonable assurance of safety and effectiveness or substantial equivalence.

The new guidance, like the 2002 guidance, provides a number of examples of how FDA has and will apply its least burdensome provisions. The draft guidance utilizes more recent examples of the least burdensome provisions as compared to the 2002 guidance.  For example, the guidance references use of real world evidence, a current hot topic within the Agency.  With these more recent examples, however, some of the more basic examples from the 2002 guidance have been lost.  For example, the 2002 guidance clearly indicated that 510(k) submissions do not need to include manufacturing information.  This same information is not in the 2017 draft.  This document will supersede what FDA said before.  We recommend that FDA include the examples from the 2002 guidance to the extent that they reflect current policy.  In general, we find the new examples to be helpful; however, omitting examples that have been useful in the past will mean a loss of useful illustrations and could potentially create confusion as to whether leaving out the examples means CDRH has changed its policy.

To prevail on an allegation under the False Claims Act (FCA), a plaintiff must allege that the misrepresentation by defendant was “material to the Government’s payment decision.” Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  The U.S. Supreme Court explained that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” Id. at 2003.

As reported last year, there has been a trend to narrow the types of FCA theories that could survive the more stringent test for materiality established by Escobar, with several circuit courts requiring a rigorous scrutiny of the government’s behavior once it became aware of the alleged misrepresentations.  In July 2017, however, the Ninth Circuit bucked the trend, and concluded that whether allegations are material raised matters of proof that could not be resolved on the pleadings (i.e., at the motion to dismiss stage). See United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017).  The Ninth Circuit’s view was that the plaintiffs alleged “more than the mere possibility that the government would be entitled to refuse payment if it were aware of the violations,” and that was sufficient for materiality purposes “at this stage of the case.”

The U.S. Supreme Court now may be poised to provide further clarity on the materiality required for FCA liability. Gilead requested, but was denied, a rehearing en banc.  Gilead now requests in a petition for a writ of certiorari that the U.S. Supreme Court rule on the following question:

Whether an FCA allegation fails when the Government continued to approve and pay for products after learning of alleged regulatory infractions and the pleadings offer no basis for overcoming the strong inference of immateriality that arises from the Government’s response.

Gilead provides several reasons the Court should grant the writ. First, the Ninth Circuit’s approach conflicts with the decisions of six circuits that have addressed this very question and interpreted Escobar differently.  Second, courts have had, and will have, to consider this question with frequency, and the outcome of this case could impact the availability of drugs and medical products to the marketplace.  Last, this case is well positioned to provide “guidance on a significant and recurring issue by clarifying how the Government’s response upon learning of alleged infractions affects the viability of an FCA complaint.”

Response to the petition is due on February 2, 2018.

Hyman, Phelps & McNamara, P.C. is pleased to present this report summarizing leading cases and settlements from 2017 affecting the FDA-regulated industry. Our goal was to provide a concise summary of issues that most impact our clients, many of whom are drug and medical device manufacturers, compounding facilities, and officers of those companies.

For each case or settlement, we summarize the facts and the key takeaways. And we include at the end of the report the hot-button issues that we are monitoring in 2018.

We hope this report proves useful and interesting to you.

FDA gave us all a New Year’s present on January 2nd when it announced the Agency’s new Data Dashboard. The Dashboard graphically breaks down data on FDA Inspections, Compliance Actions (warning letters, injunctions, and seizures – more commonly known by industry as “enforcement actions”), Recalls, and Imports/Import Refusals, by fiscal year (starting with 2009), product category (drugs, devices, food, cosmetics, etc.), and in other helpful ways depending on the data set.  For example, in addition to filtering by fiscal year and product category, inspection data can also be filtered by the inspection classification (NAI, VAI, or OAI), region (foreign or domestic), country, state, or even company name.

Compliance actions can be filtered by the type of action, firm name, region, state, and country. Each Dashboard page features a map that pinpoints the geographic location of subject facilities, and by using the map’s “lasso” function you can select and see data from a custom geographic region.

Of course, the Data Dashboard does not provide any information that is not already publicly available through FDA’s website. And it does not offer specifics about the subject of FDA compliance actions, inspectional observations, or import refusals.  For these specifics, users may find more detailed information in FDA’s preexisting Inspection Classification Database (updated monthly as of November 2017), Electronic Reading Room – Warning Letters, or ORA FOIA Electronic Reading Room.

Importantly, the new Data Dashboard is limited in that “[t]he datasets are updated semi-annually and only include final actions,” and FDA has not indicated when the next semi-annual update will occur. Given that some inspections and compliance actions are not considered “final” for months or even years, the Data Dashboard may not be the best place to look if you are hoping to find companies or products that have been the subject of recent FDA action.  However, if you want to quickly identify and analyze longer-term trends, find general information on FDA activities relating to a certain product category, country, geographic region, or a certain company, the Dashboard makes existing FDA data significantly more accessible and useful – a welcome start to the New Year.

Federal law continues to prohibit the possession, cultivation or distribution of marijuana and prohibits operating a business for these purposes. A number of states continue to follow Federal law and prohibit the use of marijuana under any circumstance, but a growing majority of other states and the District of Columbia have authorized the use of marijuana for medicinal purposes, limited use of low-THC (e.g. cannabidiol or “CBD”) for medicinal purposes and/or for personal, non-medical use. California started allowing sales of marijuana for recreational use on January 1st.

On January 4th, U.S Attorney General Jeff Sessions issued a Memorandum (“Sessions Memo”) to all U.S. attorneys that rescinds prior U.S. Department of Justice (“DOJ”) guidance on marijuana enforcement, including an August 2013 Memorandum issued by then Deputy Attorney General James Cole (“Cole Memo”).  In brief, the Cole Memo stipulated that the DOJ was unlikely to take enforcement action against a marijuana-related business that was operating in compliance with state law unless it implicated any of the eight marijuana-related enforcement priorities deemed to be “particularly important to the federal government,” including prevention of distribution to minors, diversion from states where marijuana is legal to those where it is not, and prevention of “drugged driving,” to name a few.  It also stated that conduct in accord with state marijuana laws was “less likely to threaten” federal priorities in jurisdictions “that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana.”  Finally, it updated prior guidance on medical marijuana to note that “the size or commercial nature of a marijuana operation alone” did not necessarily implicate federal priorities.

The Sessions Memo directs prosecutors to instead “follow the well-established principles that govern all federal prosecutions” as set out in chapter 9-27.000 of the U.S. Attorneys’ Manual, Principles of Federal Prosecution, and “to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”  The Sessions Memo thus effectively substitutes generally applicable principles for the more tailored principles set out in the Cole Memo – a change unlikely to be welcomed by those who had relied on the Cole Memo to better understand any potential civil and criminal liability associated with state-authorized marijuana-related enterprises.

Also rescinded by the Sessions Memo is guidance in another Memorandum issued by James Cole that addressed marijuana-related financial crimes.  It directed prosecutors to consider the federal priorities outlined in the Cole Memo in deciding whether to prosecute violations of the Bank Secrecy Act, money laundering statutes, and the unlicensed money transmitter statute, when those violations arose from marijuana-related violations of the Controlled Substances Act.  Presumably, those prosecutorial judgments will now also be based on the Principles of Federal Prosecution.

Whether, when, and how, federal prosecutors may exercise their prosecutorial discretion with respect to the budding state marijuana industry remains to be seen.  However, the press release announcing the issuance of the Sessions Memo says that it is returning “local control to federal prosecutors.”  Thus, one very real possibility is that federal prosecutors in different states and even judicial districts within states will exercise their judgment in different ways in deciding which marijuana-related offenses to pursue regardless of whether the marijuana activity is authorized in the state.  We’ll continue to follow developments in this area.

On December 20, 2017, the Department of Health and Human Services, Office of Inspector General (OIG) published a report entitled “Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion in Lost Medicaid Rebates.” This report is the result of Congress’ September 2016 request for OIG to “evaluate the accuracy of manufacturer-reported drug classification data in the Medicaid rebate program, and the extent to which [the Centers for Medicare and Medicaid Services] CMS oversees drug classification data submitted by manufacturers.”

In order to be eligible for Federal payments for their covered outpatient drugs under Medicaid and Medicare Part B, drug manufacturers must enter into rebate agreements and pay quarterly rebates to the States. As part of these agreements, drug manufacturers must provide CMS with their average manufacturer price (AMP) and best price, if applicable, for each covered outpatient drug. Drug manufacturers must also report and certify certain data about each drug, including its “drug category” – i.e., whether the drug is an innovator (generally brand-name) or noninnovator (generic) product – in the Drug Data Reporting for Medicaid System. CMS uses the price and drug category data to calculate the applicable rebate amounts for each drug on a quarterly basis. States then use this to invoice manufacturers for the rebates owed for these drugs. The minimum rebate for innovator drugs is 23.1% of the AMP, while the minimum rebate for noninnovator drugs is only 13% of the AMP.

To conduct its review, OIG compared the drug classification data in the Medicaid System to FDA’s marketing categories for over 30,450 drug products. OIG found that 95% of the drugs in the Medicaid rebate program were appropriately classified. These drugs account for 98% of the $59.7 billion in Medicaid reimbursement in 2016 for the reviewed products. OIG also determined that approximately 3% of drugs were potentially misclassified in 2016; reimbursement for the potentially misclassified drugs totaled $813 million in 2016. OIG found that the majority of the potentially misclassified drugs (97%) were identified as noninnovator products in the Medicaid System but as innovator products in FDA’s data. This discrepancy means that manufacturers may have paid a lower base rebate amount and may not have paid applicable inflation-adjusted rebates for these products in 2016. OIG then took a closer look at the ten potentially misclassified drugs with the highest total Medicaid reimbursement in 2016. All ten drugs were classified as noninnovator products in the Medicaid System but as innovator products in the FDA data. OIG calculated that the manufacturers for these drugs may have owed an additional $1.3 billion in Medicaid rebates from 2012 to 2016. Notably, two drugs accounted for 90% of the potentially lost rebates.

OIG recommended that CMS pursue a means to compel manufacturers to correct inaccurate classification data reported to the Medicaid System; however, CMS indicated that it does not currently have the legal authority to compel such corrections. In response to OIG’s recommendation, CMS stated that it will consider how to improve agency efforts to compel manufacturer corrections. CMS also stated that it shares a joint responsibility with OIG to oversee manufacturers’ compliance with data reporting, and encouraged OIG to use its enforcement authority in this area. OIG confirmed that it has authority to pursue civil monetary penalties against manufacturers for certain violations of the Medicaid rebate statute. However, OIG stated that “it lacks legal authority to affirmatively pursue penalties for the submission of inaccurate drug classification data.” The report does not mention that the Federal False Claims Act (FCA) has been used in several instances to target the knowing submission of false drug category data.

OIG plans to provide CMS with lists of the drugs identified as potentially misclassified, the drugs that were missing from FDA files, and the drugs for which OIG could not determine an appropriate classification. As the Federal government and state Medicaid programs continue to focus on drug expenditures, we may see CMS and OIG take a more active role in requesting updated drug classification information from manufacturers. In fact, since 2016, CMS has increased its efforts to identify instances where the drug category reported by a manufacturer conflicts with its FDA manufacturing application type. At a minimum, we expect that the manufacturers of the 885 drugs that OIG identified as potentially misclassified will receive a follow-up inquiry from CMS, unless they applied for a “special exception” from the definition of an innovator drug by March 31, 2017. We can also expect to see the Department of Justice and whistleblowers continue to use the FCA to challenge the knowing submission of false drug category data.

On December 5, 2017, FDA issued a final guidance: Technical Considerations for Additive Manufactured Medical Devices, Guidance for Industry and Food and Drug Administration Staff. Additive Manufacturing (AM) is “a process that builds an object by iteratively building 2-dimensional (2D) layers and joining each to the layer below, allowing device manufacturers to rapidly alter designs without the need for retooling and to create complex devices built as a single piece.”  This includes so‑called 3D printing.  FDA issued a draft of this guidance in May 2016, as discussed in our prior blog post here. This post discusses the main differences between the draft and final guidance.  For a more in depth overview of the entire content, please refer to the prior blog post.

The guidance provides insight into the unique considerations of AM manufacturers in complying with quality system regulations and device testing considerations (i.e., premarket submission considerations). FDA Commissioner Scott Gottlieb, M.D. issued a statement concurrently with release of the guidance, highlighting that, with this guidance, the “agency is the first in the world to provide a comprehensive technical framework to advise manufacturers creating medical products on 3D printers.” Commissioner Gottlieb also stated that the intention of the guidance is to “help manufacturers bring their innovations to market more efficiently by providing a transparent process for future submissions and making sure our regulatory approach is properly tailored to the unique opportunities and challenges posed by this promising new technology.”

As with the draft, this guidance notes that it is a leapfrog guidance, where the Agency can share initial thoughts regarding emerging technologies that are likely to be of public health importance early in the product development. The Agency notes that the recommendations contained in this guidance may change as more information becomes available.

Noteworthy Changes from the Draft Guidance

The final guidance contains some changes from the draft that are worth highlighting. One of the most notable changes was the inclusion of additional issues in the section regarding Patient-Matched Device (PMD) Designs.  These are products that are matched to a patient’s anatomy.  The finalized guidance includes a section on complex design files and files and cybersecurity and personal identifying information not found in the draft.

Complex Design Files

The guidance notes that PMDs that follow the patient’s anatomy are vulnerable to errors in file conversion because they involve complex anatomic curves that can create difficulties when calculating conversions. The guidance recommends that manufacturers of PMDs follow considerations on maintaining data integrity throughout file conversions.

Cybersecurity and Personal Identifying Information

The guidance does not go into detail on the cybersecurity implications of PMDs, noting that the topic is beyond the scope of the guidance. Instead, the document refers readers to the HHS Guidance on Significant Aspects of the Privacy Rule and Content of Premarket Submissions for Management of Cybersecurity in Medical Devices.

Risk-Based Approach to Imaging Data

Other notable changes specific to PMDs are that manufacturers should be employing a risk-based approach when incorporating imaging data into the final design. The guidance advises manufacturers to take into consideration the intended use of the device and the design methodologies to assess the scenarios that may yield a worst-case match.

Test Coupons

A final notable addition involves the use of test coupons in AM devices. A test coupon is a representative test sample of a device or component.  The draft guidance noted the importance in the design of test coupons and placement within the build volume in the context of AM and recommended the use of coupons to help with process validation and for in-process monitoring.  The final guidance clarifies that test coupons may not be needed if the process is validated per QSR requirements and coupon testing is not a process monitoring activity defined in your quality system.

Because of the nature of this technology and the fact its clinical applications are relatively new to the Agency, we recommend that manufacturers of AM devices seek feedback from FDA on their specific device early in the submission planning process.

Additional Thoughts

The final guidance fails to provide any insight into decision-making on whether or not to file a new 510(k) for modifications to a device or the manufacturing process of an AM device, a major issued we identified in our discussion of the draft guidance. Additionally, the final guidance does not address who FDA considers to be an AM device manufacturer, generally referring to manufacturers without specifically defining what that label encompasses.  This is important because there are many entities that would not be considered manufacturers in the traditional sense, but could arguably be considered AM manufacturers.  For example, if a hospital obtains a 3D printer and creates a device (based on cleared specifications) specific to a patient’s anatomy, does that act make it a manufacturer subject to these requirements?  The answer is not clear.  Notably, however, Commissioner Gottlieb acknowledged in his statement that more insight from the Agency in needed on the topic of who is an AM manufacturer: “Developing a transparent policy on 3D printing remains an important next step for us, and we plan to explore the role of nontraditional manufacturing facilities like a hospital operating room or university laboratory.”  Hopefully the Agency will provide more clarity on this topic soon.

As previously discussed, pursuant to a consent decree, FDA was to finalize the over-the-counter (OTC) topical health care antiseptic drug products monograph with respect to triclosan by January 15, 2018. Rather than limiting the rulemaking to the single active ingredient, triclosan, FDA took it upon itself to finalize the monograph for all OTC health care antiseptic active ingredients.

Ahead of time, on Dec. 20, 2017, FDA issued what it identifies as the final rule for health care antiseptics.  Upon further reading, it turns out that FDA is not yet done, however.  The final rule constitutes a final determination that 24 active ingredients are not generally recognized as safe and effective (GRASE); they are added to the list of unapproved new drugs in 21 C.F.R. § 310.545.  The compliance (or effective) date is Dec. 20, 2018.  On or after that date, any OTC health care antiseptic drug product that contains any of these 24 active ingredients cannot legally be introduced into interstate commerce unless it is the subject of an FDA-approved New Drug Application (NDA).

As we reported earlier this year, in February 2017, FDA deferred action on six active ingredients (benzalkonium chloride, benzethonium chloride, chloroxylenol, alcohol, isopropyl alcohol and povidone-iodine) pending additional data. Thus, the rule making on health care antiseptic drug products remains incomplete.  FDA has not set a specific deadline for final action on these ingredients but instead with address their monograph (GRASE) status “either after completion and analysis of ongoing studies to address the safety and effectiveness data gaps . . . or at a later date, if these studies are not completed.”

In addition to finding the 24 active ingredients non-GRASE, FDA determined that chlorhexidine is not eligible for evaluation under the OTC drug review process because this ingredient was not included in any health care antiseptic product marketed before May 1972. Thus, any chlorhexidine-containing health care antiseptic may be marketed only if approved by FDA.  FDA also has determined that alcohol for use as a surgical hand scrub and benzethonium chloride for use as a health care personnel hand rub and surgical hand rub are ineligible for the OTC drug review for lack of evidence that products containing these ingredients were marketed before May 1972.

The preamble to the final rule discusses FDA’s responses to comments about the new efficacy testing requirements for the various types of health care antiseptics. These testing requirements apply to the six active ingredients for which action has been deferred and will not come as a surprise to the companies working on the collection of data for these ingredients.  The final rule does not address testing of final formulations because, at this time, FDA has not found any of the active ingredients GRASE.  Thus, rule making for testing of final products would be premature.

FDA stresses that the final rule does not cover

• Consumer antiseptic washes
• Consumer antiseptic rubs
• First aid antiseptics
• Antiseptics used by the food industry

Rules for these product categories are in various stages of completion.   FDA must issue a final rule for consumer antiseptic rubs by April 15, 2019. No deadline has been set for completion of the rule making regarding first aid antiseptics and antiseptics used by the food industry because those categories of products were not included in the consent decree.

Obscured last week amidst the tumultuous passage of tax reform, Congress urged the Drug Enforcement Administration (“DEA”) in a bipartisan letter to quickly update its regulations and guidance on the partial filling of schedule II controlled substance prescriptions. The letter notes that “[l]arge amounts of unused medications are a key contributor” to the nationwide opioid crisis and that between 67% and 92% of surgery patients “reported they had unused opioids remaining after the procedures.”  Letter from Congress of the United States, to Robert Patterson, Acting Administrator, DEA (Dec. 21, 2017).

The letter states that Congress passed the Comprehensive Addiction and Recovery Act (“CARA”) in July 2016 in part to prevent further stockpiling of unused prescribed opioids by amending the Controlled Substances Act (“CSA”) to enable patients or physicians to request that pharmacists partially fill schedule II substances that include prescription opioids and to allow remaining quantities to be filled up to 30 days after issuance of a prescription if necessary.

Prior law and current DEA regulations allow pharmacists to partially fill schedule II controlled substance prescriptions only if the pharmacy is unable to dispense the full prescribed quantity. 21 C.F.R. § 1306.13(a).  Pharmacists may dispense the remaining quantity within 72 hours of the first partial dispensing and cannot dispense any further prescribed quantity beyond 72 hours thereby requiring the prescriber to issue a new prescription.  21 C.F.R. § 1306.13(a).  Current regulations also allow partial dispensing of schedule II prescriptions to patients in a Long Term Care Facility or those diagnosed with a documented terminal illness.  21 C.F.R. § 1306.13(b).  Pharmacists can partially fill schedule III-V controlled substance prescriptions as long as no dispensing occurs after six months from the date of issue.  21 C.F.R. § 1306.23.

CARA amended the CSA to allow for the partial dispensing of a schedule II prescription if not prohibited by state law, requested by the patient or prescriber and the total quantity dispensed in partial fillings does not exceed the total quantity prescribed. 21 U.S.C. § 829(f)(1).  The amended CSA prohibits further partial dispensings later than 30 days after the prescription is written and no later than 72 hours in emergency situations.  21 U.S.C. § 829(f)(2).  The letter urges DEA to “swiftly” update its regulation and guidance as pharmacists and prescribers, “critical partners in the fight against the opioid epidemic,” are reluctant to comply with the amended CSA’s partial dispensing provisions until the agency does so.

The U.S. Court of Appeals for the Second Circuit issued a decision a couple of weeks ago reversing the conspiracy conviction of a defendant for distribution of unapproved drugs, among other things.  The trial court had rejected evidence relating to an advice-of-counsel defense asserted by the defendant.  The Second Circuit’s decision is important to the issue of the advice of counsel in connection with regulatory decisions.

A summary of the factual background included in the appellate decision follows:

• Mr. Scully was one of the founders of “Pharmalogical, Inc.,” named either pursuant to a dastardly misspelling of “pharmacological” or as a clever marketing device.
• The company registered with New York State authorities as a wholesale distributor of pharmaceutical products.
• Mr. Scully managed the day-to-day operations of the company, which imported European or Canadian versions of FDA-approved drugs and medical devices at prices substantially below what the products are available for in the United States, and resold the products to customers in the United States.
• Mr. Scully sought and received from a lawyer a letter that the Second Circuit found led Mr. Scully to believe he was authorized to import and sell the products. The opinion said, according to the Second Circuit, that Pharmalogical had not received any notification from FDA that it was operating in violation of the Federal Food, Drug, and Cosmetic Act, and that Pharmalogical had “no reason to believe it was not operating in compliance” with that statute.
• If Mr. Scully, the lawyer, the trial judge, or members of the Second Circuit panel deciding the case were regular and longstanding readers of this blog, they may have remembered that FDA has steadfastly asserted that the importation of prescription drugs into the United States is illegal, either because the drugs are drugs that are reimported into the United States, or because they are unapproved new drugs, or because they lack adequate directions for use (see our previous posts here, here, and here).
• Mr. Scully used the letter to convince customers that it was legal for him to wholesale Botox (a prescription drug).
• Mr. Scully then decided to branch into the importation from Europe of Mirena intrauterine contraceptive devices (medical devices), which he wholesaled in the United States without registering as being the initial importer of those devices. He secured a similar letter from the same lawyer asserting that “the importation of Mirena . . . from Finland into the United States by Pharmalogical, Inc. for resale to the end user, would not violate the criminal laws of the United States.”
• Mr. Scully then branched into the importation of oncology products, according to the Second Circuit.

At trial, the lawyer who provided the advice discussed above testified and was cross-examined. Following traditional prosecutorial tactics, the government established the Mr. Scully had not shared pertinent information with the attorney, including that he advertised products as being FDA-approved when they were not, and that U.S. customs officials had seized some of the drugs Mr. Scully attempted to import because they had foreign-language labeling that was not consistent with FDA-approved versions of the drugs.

Mr. Scully’s attorney also attempted to introduce evidence from Mr. Scully’s testimony that a second lawyer had also told Mr. Scully that Mr. Scully’s conduct was not illegal (the lawyer did not call that lawyer as a witness). The trial judge refused, at first, to allow hearsay testimony from Mr. Scully about the second lawyer’s opinion.  Then, the trial judge reconsidered, conceding that the defense lawyer was correct that the evidence was not inadmissible as hearsay (it was not offered for the truth of the matter asserted), but ruled the testimony was inadmissible because it was unduly prejudicial.

Mr. Scully was convicted by a jury after a five-week trial on several counts of mail and wire fraud, conspiracy to defraud the federal government, illegal distribution of unapproved drugs, unregistered wholesale distribution of drugs, and distribution of misbranded drugs. He was sentenced to 60 months in prison.

Mr. Scully then argued to the Second Circuit that the second lawyer’s opinion was important, and should not have been excluded. The Second Circuit agreed.

The Second Circuit went on to discuss the jury instruction delivered by the trial judge, saying it inappropriately placed the burden on the defendant to prove advice of counsel. The Second Circuit panel reiterated the standards set forth by its predecessor in United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181 (2d Cir. 1989), a decision on a criminal trial handled by John Fleder, one of our esteemed Senior Counsel, when he worked for the Department of Justice.  The discussion is informative and interesting for those who are concerned about clients’ reliance on attorney advice, in our field.  But you can read the decision, or read Beech-Nut, or call John, because the length of this blog post already exceeds the extent of concentration appropriate for a blog post.  Mindful of that, we are still persuaded by John to add the following points.  In industries closely regulated by FDA, companies and individuals can get important protection from abusive criminal prosecutions by establishing that their actions were taken in good-faith reliance on advice given by legal counsel, as long as:

(1)       That advice is rendered by a lawyer, not a non-lawyer consultant;

(2)       The client discloses all material facts to the lawyer before the client undertakes the activity in question, rather than afterwards; and

(3)       The advice is legal advice, not business advice.

John also suggests making a contemporaneous record that the client has disclosed all material facts to the lawyer before acting and that the lawyer in good faith tells the client that the proposed conduct is legal. Even if the lawyer’s advice is not legally correct or is inconsistent with how FDA construes the relevant law, the defense should still be available.  But a court is more likely to conclude the advice was sought and rendered in good faith if the client solicits the advice from a recognized expert in the field.

Mr. Scully will get a new trial, unless the government settles or decides not to pursue a second trial.