Compounding Pharmacies Strike back Against Government Actions

By John R. Fleder –

It is hardly a secret that FDA’s favorite regulated industry is certainly not the businesses that compound pharmaceutical products.  For years FDA has struggled to establish an enforcement mechanism that passes muster with Congress and the courts.  Two compounding pharmacies have recently fought back against government regulation.

Earlier this year, FDA (through the Department of Justice) filed an injunction suit against Franck’s Lab, Inc. and others (collectively “Franck’s”) in the Middle District of Florida.  Franck’s compounds veterinary drugs for non-food producing animals.  On July 1, 2010, the defendants filed a Motion to Dismiss that action, arguing among things, that the government’s Complaint is deficient.

Perhaps one of the main poster children of FDA’s fight against compounding pharmacies has been with regard to Signature Pharmacy, Inc. (Signature) which is also based in Florida.  Signature has been aggressively defending itself in federal and state court actions for several years.  Recent court rulings (here, here, and here), which are summarized below, have been quite sympathetic to Signature.  Although the proceedings began in Florida state court, a federal district court in the Middle District of Florida has now gotten involved in three actions concerning Signature.

In November 2005, authorities began investigating Signature and its principals for possible violations of various federal and state laws.  Signature is owned by Stan Loomis, his wife Naomi Loomis, and Mike Loomis.

On August 4, 2006, two Florida officials presented a 144 page application for a wiretap, and an affidavit to a Florida state court.  The court entered an order approving the wiretap that same day and Signature’s phone and fax lines were monitored for the next 60 days.

On February 27, 2007, state officials from New York and Florida, working in conjunction with FDA and other agencies, executed criminal search warrants at Signature’s Orlando and Winter Park Florida locations.  Government agents arrived at the premises with large U-haul trucks and proceeded to seize virtually everything within Signature’s stores.  The agents seized hundreds of thousands of patient prescriptions, all of Signature’s electronically stored information, and many of its drug inventories and financial records.  In short, according to the court, law enforcement seized everything essential to Signature’s business.  This led to four state indictments all of which were dismissed.  A fifth indictment was returned on June 16, 2010.

On the day of the raids, the Loomises and one other person were arrested and transported to New York.  The Florida federal court recently noted that the indicted defendants had never set foot in the State of New York prior to their arraignment, and Signature had no physical presence in New York.  New York simply appears to have been just one of the many states to which Signature shipped or filled prescriptions.

The federal court found that the media presence during the raids and arrests was intense.  The raids were even conducted in the presence of the media and were highly publicized.  In the months that followed, media from around the country implicated or mentioned numerous professional athletes and celebrities in connection with the investigation, including boxer Evander Holyfield, and former baseball player Jose Canseco.  Indeed, the Florida federal court found that state officials began a public relations campaign by attempting to connect Signature to professional athletes who were allegedly taking steroids, and the officials made deals with various media outlets to scoop the story.

During the two years after the raids, the Florida state court received over 2,600 objections from patients expressing privacy concerns about the seizure of their prescription records.  On November 24, 2009, that court entered an order establishing a procedure for holding individual hearings on the thousands of objections.

During a hearing on December 22, 2009, the Florida state court learned that the evidence seized during the raids had been transferred to the United States Attorneys’ Office in Florida, in violation of the state court’s order.  The United States Attorney’s office had issued a grand jury subpoena in an effort to keep the Florida state court from returning Signature’s property. In light of the State’s “Formal Notice of Intent Not to Prosecute,” the state court had ordered the evidence seized during the raids to be immediately returned to Signature.

The Florida federal court judge also was clearly troubled by many actions taken by the various governments.  For instance, the court noted that during the flight from Florida to New York after the arrests, one of the agents sat next to Mrs. Loomis and according to the Court, the agent lifted up the armrest between himself and Mrs. Loomis and rubbed up against her body while talking to others on the plane.

The federal court concluded that since the raids and arrests, Signature has been unable to conduct any pharmacy business, its reputation having been severely damaged and its inventory, business records and other items essential to its operations have been unlawfully retained by law enforcement for nearly three years. The court found that although Signature was never found guilty of any crime, Signature’s bank and merchant accounts were frozen, and its shipping accounts with Federal Express were suspended.

On April 12, 2010, the U.S. Attorneys’ Office issued yet another grand jury subpoena, this time to Signature.  On April 26, 2010, Signature moved to quash the grand jury’s subpoena.  On June 10, 2010, the federal court granted that Motion.  It found that grand juries are not licensed to engage in arbitrary fishing expeditions and cannot select targets of investigation out of malice or an intent to harass. It ruled that the grand jury subpoena must be quashed. First, the subpoena was deemed to be clearly overbroad, and compliance would, as a practical matter, be unreasonable.  Second, it ruled that the subpoena, without more, cannot substitute for a search warrant and alienate Signature from property that the Florida state court had earlier ordered should be immediately returned to Signature.  The federal court ruled that the grand jury’s continued and indefinite possession of all the property taken from Signature would certainly preclude Signature from reopening its doors.

The Court also raised serious concerns about the search warrants.  It found that there appeared to be at least colorable constitutional infirmities in the probable cause affidavits upon which the warrants used to originally seize the evidence were issued.  It ordered that the United States Attorneys’ Office and its agents immediately return to Signature any and all property, including copies of Signature’s electronically-stored information.

Unhappy with their treatment by the governments, Signature and its principals took an aggressive action by suing various state officials who the plaintiffs believed had wronged Signature.  They sued the District and Assistant District Attorney, respectively, for New York’s Albany County; a peace officer with the New York Bureau of Narcotics Enforcement; the City of Orlando; and a police officer with the Orlando Police Department.  One or more of the defendants in that action argued that they were exempt from being sued on “immunity” grounds.  The federal court generally rejected that argument and has ruled that the plaintiffs are entitled to go to trial on at least some their claims against the state officials.

Judges have sometimes referred to FDA as the “jail keeper” of firms that the agency regulates.  Government’s role becomes particularly troublesome when officials fall into the “bad guy” mindset.  When officials decide to investigate someone simply because the agents believe that the investigated person is one of the “bad guys”, they slip into the mode we often see on television, namely that the ends justify the means as a vehicle to “bring the bad guys to justice.” Companies do have many opportunities to defend themselves but they should not have to do so just because an investigation is designed to punish someone who the government believes is a “bad guy.”