On September 13, 2019 FDA issued a final guidance document The Special 510(k) Program (“Guidance”).  We blogged about the prior draft guidance here.  This Guidance, along with The Abbreviated 510(k) Program, supersedes the 1998 guidance document The New 510(k) Paradigm – Alternate Approaches to Demonstrating Substantial Equivalence in Premarket Notifications.  The Abbreviated 510(k) Program reflects the Abbreviated 510(k) information from the superseded guidance. In parallel, FDA also updated Format for Traditional and Abbreviated (510(k)s) and Refuse to Accept Policy for 510(k)s (“RTA Guidance”) to reflect the updated Special 510(k) Program.  The RTA Guidance includes an introductory note that FDA will not begin using this version until November 13, 2019, allowing a period for transition.

The Special 510(k) program was established to create a streamlined review of technological changes made to a manufacturer’s own cleared device, leveraging design control requirements.  In its original form, changes reviewed under the Special 510(k) program were limited to those that did not affect the intended use of the device or alter the fundamental scientific technology.  Over years of use, many sponsor’s experienced frustration with Special 510(k)s being converted to Traditional 510(k)s in situations where FDA wanted to review the data associated with a change, even though the change met the criteria of not affecting the indications for use or fundamental scientific technology.  FDA’s focus for Special 510(k)s is now on “whether method(s) to evaluate the change(s) are well-established, and whether the results can be sufficiently reviewed in a summary or risk analysis format,” which better reflects the past practice. Guidance at 6.

There are not many differences between the previous draft and the final guidance.  The overall basis for when a Special 510(k) may be appropriate is unchanged:

• “The proposed change is submitted by the manufacturer legally authorized to market the existing device;
• Performance data are unnecessary, or if performance data are necessary, well-established methods are available to evaluate the change; and
• All performance data necessary to support SE can be reviewed in a summary or risk analysis format.” at 8.

Most changes provide clarification of specific points and several new examples have been included, including five new IVD examples in Appendix B describing IVD changes that would be suitable for a Special 510(k).  Also, a statement was added within the background that a “Special 510(k) would generally not be appropriate for devices that manufacture a biological product at the point of care, because there would likely be no well-established method to evaluate such changes and/or the performance data would not be reviewable in a summary or risk-analysis format.”  The Guidance now also clarifies that it does not supersede device-specific policies.  Thus, if another FDA document recommends submission of complete test reports, a Special 510(k) would not be appropriate even if the change met criteria with the Guidance.

With respect to discussion of “well-established methods,” there are several changes worth noting.  The Guidance provides clarity that “minor deviations to a well-established method may be acceptable within the context of a Special 510(k), but significant deviations to the protocol or acceptance criteria of a well-established method can result in the 510(k) no longer being appropriate for review as a Special 510(k).” Id. at 11.  It also now states that well-established methods may include qualified medical device development tools (MDDTs) and methods found in an FDA guidance document.  Finally, with respect to IVD verification and validation, the Guidance clarifies that use of clinical specimens does not necessarily mean that a well-established method does not exist to evaluate the change.

In discussion of “Additional Considerations,” the draft guidance had stated that a Special 510(k) may not be appropriate when “several” scientific disciplines were necessary to evaluate the change.  In the final guidance, FDA has provided a number, indicating that reviews involving “greater than three scientific disciplines (e.g., biocompatibility, sterility, electromagnetic compatibility)” would likely be too difficult to review in 30 days and would not be appropriate in a Special 510(k).  Id. at 13.  The list of common scenarios where FDA anticipates necessary review of complete test reports has also been amended to include submissions where use of analytical chemistry testing per ISO 10993-18 and/or toxicological risk assessment using ISO 10993-17 are used to address biocompatibility.  This is noteworthy as Example C.2 for example design control activities describes material changes evaluated by biocompatibility testing in a Special 510(k) format.  When deciding whether to perform biocompatibility testing or chemical characterization with toxicological risk analysis to address the biocompatibility of a device modification, the possibility of submitting a Special 510(k) should be considered.

In conjunction with release of the draft guidance, FDA began a pilot program intended to test the process to determine if it could achieve FDA’s goal of an increase to the number of 510(k)s appropriate for the Special 510(k) program.  Results of the pilot have not been released, but finalization of the guidance without significant changes suggests it was deemed successful.  One final clarification in the Guidance is that in cases where they do not agree that a Special 510(k) is appropriate, FDA intends to explain the basis for the conversion of the submission to a Traditional 510(k).  We are hopeful that the combination of the final guidance and better information when a submission is converted will lead to a more predictable Special 510(k) review process.

Following the recent trend of state intervention where federal legislative action has failed, California passed a bill last week discouraging patent infringement settlements that delay drug competition.  Pay-for-delay settlements or “reverse-payment agreements” arise when the RLD-sponsor pays the putative generic sponsor to drop any Paragraph IV litigation, to delay market entry, and/or to not enter the market at all.  Long criticized as anticompetitive, these agreements have been challenged repeatedly in federal court but not with overwhelming success.  The closest the federal government has come to prohibiting them is a 2013 case in which the Supreme Court (FTC v. Actavis) held that such agreements are not presumptively illegal, but they may be subject to antitrust scrutiny.

While the California Bill, AB 824 Business: Preserving Access to Affordable Drugs, does not prohibit pay-for-delay settlements, it presumes an anticompetitive effect if, as part of a Paragraph IV litigation settlement, an ANDA sponsor receives anything of value in exchange to limiting or foregoing entry of a generic drug product.  “Anything of value” includes an exclusive license or promise that the brand company will not launch an authorized generic version of the RLD, but the term is not specifically defined, leaving room for interpretation (though there are several provisions explaining what the term does not include).   Parties to a Paragraph IV settlement agreement can overcome the anticompetitive presumption if they can demonstrate that the value received by the ANDA sponsor is fair and reasonable compensation solely for other goods or services or that the agreement has directly generated procompetitive benefits that outweigh the anticompetitive effects of the agreement.  In effect, this shifts the burden from the government to demonstrate that a settlement is anticompetitive to the parties to show that it is not anticompetitive, making it significantly easier for the government to challenge these settlements.  Further, as a result of this presumption, companies will be forced to disclose more information to the California Attorney General’s Office about Paragraph IV settlements, thereby increasing transparency.

The California Bill was passed on the heels of $70 million in settlement agreements that California entered into with pharmaceutical companies in July 2019 based on pay-for-delay agreements.  Teva, Endo Pharmaceuticals, and Teikoku allegedly entered into agreements that prevented a generic version of Lidoderm from entering the market for almost two years while Teva (again) entered into an agreement that delayed market entry of a generic Provigil for almost 6 years.  This bill would have made it markedly easier for California to have imposed up to $20 million or three times the value received by the ANDA sponsor for each violation.  The Bill was passed on September 12, 2019 and awaits the governor’s signature.

The FTC already has the authority to review Paragraph IV settlements and, as evident from the 2013 Supreme Court case, clearly does so.  Specific information relating to agreements between generic and brand pharmaceutical companies must be filed with the FTC in accordance with the Medicare Modernization Act of 2003.  The FTC has the same authority to review biosimilar patent settlement agreements.  The FTC has noted that, despite increased antitrust scrutiny, companies continue to settle patent litigation.  For example, in FY 2016, the FTC reviewed 232 final settlements relating to 103 brand products – as many as 44 of them could have been classified as anticompetitive under the California bill. Had the California Bill been in effect in FY 2016, parties to all of these agreements would have to have demonstrated to the satisfaction of the California Attorney General’s Office that the value received by the putative patent infringer is fair and reasonable or that the agreement has procompetitive benefits to avoid ample fines and penalties.

California AB 824 is reminiscent of a federal bill first introduced by Sens. Amy Klobuchar and Chuck Grassley in the Senate in January 2017 and reintroduced in January 2019.  A similar bill was introduced in the House of Representatives by Rep. Jerry Nadler in April 2019.  So far, none of these bills has gone anywhere.  Given the lack of traction on a federal stage, California appears to have taken a page from the drug pricing control effort to try to regulate at the state level.  However, this increasingly common tactic is bait for constitutional challenges, so it wouldn’t be surprising if California AB 824 is challenged – especially since industry is not in favor of this type of legislation.  Until then, we can only wait to see whether California AB 824 will have any more effect on pay-for-delay settlements than the 2013 Supreme Court decision – or whether California is only dreaming.

On August 29, 2019, the Center for Science and Public Interest (CSPI) and Consumer Reports (CR)  submitted a Petition to the Food Safety and Inspection Service (FSIS) of USDA concerning FSIS labeling requirements for meat and poultry products, such as bacon, hot dogs, and pepperoni, that have been processed with nitrates or nitrites.

Specifically, the petition requests that

1. FSIS amend its labeling regulations to prohibit the statements “No Nitrate or Nitrite Added” and “Uncured” on meat products that have been processed using any source of nitrates or nitrites;
2. FSIS require that labeling of products processed with nitrite/nitrate containing ingredients include the statement “nitrates or nitrites added” in lettering at least one-half the size and prominence of the product name;
3. FSIS require identification of ingredients used as a source of nitrates or nitrites in the product labeling, e.g., “celery powder (source of nitrates or nitrites for curing);”
4. FSIS take steps to minimize levels of residual nitrates, nitrites, and nitrosamines in these products.

Traditionally, meat products have been cured by adding salt, nitrate, and/or nitrite to fresh-cut meats.  Technological advances mean that meat and poultry products that used to be cured with synthetic sources of nitrates and nitrites are now manufactured using celery powder and other non-synthetic sources. However, these “natural” source of nitrite/nitrate are not approved as curing agents.  Therefore, FSIS requires that products that are subject to a standard of identity regulation that requires a curing agent be labeled as “uncured” and “no nitrates or nitrites added.”  Petitioners claim that these labeling requirements are misleading because they cause the consumer to believe that products containing nitrite or nitrate from natural sources (e.g., celery) and labeled “uncured” and “no nitrate or nitrite added” are healthier than they are.  Yet, as data from Petitioners purportedly show, these uncured products contain nitrites and nitrates at similar levels as their cured counterparts.

On Sept. 13, 2019, FSIS announced that it is seeking comments on the Petition.  FSIS would like feedback as to how to distinguish labels for products with synthetic nitrites from labels for products with non-synthetic sources of nitrites, and data on consumer perception of the designations “uncured” vs. “cured.”  Anticipating that it may receive a “significant” number of comments, the Agency has decided to open a docket on regulations.gov.  Comments must be submitted by November 12, 2019.

FDA published a statement on September 9, 2019, linking to an article by Janet Woodcock and others concerning reporting of adverse events involving compounded bioidentical hormone replacement therapy (BHRT) products, including ingredients such as progesterone and testosterone.  FDA states there were over 4,200 adverse events from the use of these products (specifically, hormone pellets) from a single entity that were discovered during a routine 2018 FDA inspection (unrelated to compounded drugs), which had never been reported to the Agency.  The adverse events allegedly included possible association with endometrial cancer, prostate cancer, strokes, heart attacks, deep vein thrombosis, cellulitis and pellet extrusion.  Due to an alleged lack of certain “critical information” (and likely the lack of any requirement to report) FDA was only able to attribute about 61 reports (such as pellet extrusion and cellulitis) at the facility between 2013-2018 to pellets containing testosterone.  FDA notes that patients are using these BHRT products in lieu of FDA-approved products.  Evidently, FDA claims that some compounders state these products are not only “natural” but also safer than their FDA-approved counterparts.  FDA adds that there is no assurance of safety and efficacy with compounded BHRT formulations.

FDA also states that outsourcing facilities, unlike compounding pharmacies, are required to report adverse events.  FDA notes that two outsourcing facilities produced certain BHRT pellets at issue, but the pellets were marketed by BioTe Medical, which was not registered with FDA as an outsourcing facility, yet it collected adverse event data for products it marketed.   While BioTe Medical (who was inspected by FDA) evidently had an online portal to collect adverse drug event information, and collected over 4000 averse events concerning BHRT, these events were not reported to FDA.  FDA states it is using this episode to take steps to improve adverse event reporting, and to do the “most we can to protect patients.”  To that end, FDA states it will work with outsourcing facilities on reporting adverse events, and will work with states to finalize the Memorandum of Understanding between FDA and states, which likely will contain requirements for adverse event reporting for products shipped interstate for those states that ultimately sign the final MOU.  FDA reminds readers that it has contacted with the National Academy of Sciences, Engineering and Medicine (NASEM) to conduct a study on the risks of compounding BHTR (back in 2018, mentioned here).

FDA states it is still investigating the BHRT matter involving the two outsourcing facilities and BioTe Medical, and thus cannot discuss the case.  FDA continues on, stating that outsourcing facilities are subject to enforcement action if they do not appropriately “labeled their drugs with adverse event reporting information.”  Is FDA telegraphing that it will take some form of enforcement action against outsourcing facilities that allegedly provided the compounded formulations to the patients for failure to appropriately label a compounded formulation?  Were the formulations at issue actually improperly “labeled”?  Whose name(s) were on the label, and did the label warn about adverse events, including required reporting instructions?  What about Congress’ prohibition in section 503B against wholesaling and transfer of a drug product (503B(a)(8))?  What happened here?  Does that section come into play?  Were the compounded formulations transferred or resold, or were they simply marketed and advertised by BioTe Medical?  So many questions…. We will stay tuned as FDA’s investigation – which FDA has generally chosen to cast into a cautionary public tale, with little specifics revealed – moves forward.

On September 9, 2019, FDA issued a final guidance, Acceptance Review for De Novo Classification Requests.  The guidance is meant to provide clarity on the Agency’s expectations for information to be submitted in a De Novo request and to ensure predictability and consistency for sponsors.  The final version supersedes the draft guidance issued on October 30, 2017, both of which FDA agreed to issue as part of its performance goals under MDUFA IV.  See Title II of the FDA Reauthorization Act of 2017 (Public Law 115-52).  A discussion of the draft guidance on our blog can be found here.

As was the case with the draft, there is nothing remarkable about this guidance, nor are there many changes between the draft and the final version.  There were four comments submitted to the docket for the draft guidance, none of which FDA incorporated into the final version.  Unlike the draft, the final guidance provides additional clarity around De Novo requests involving combination products as well as statements of compliance for clinical investigations and declarations of conformity.  All of the changes discussed below are included not only in the narrative of the guidance but are also reflected in changes to the checklists FDA provides as Appendices A (Acceptance Checklist for De Novo Classification Requests) and B (Recommended Content Checklist for De Novo Classification Requests).  FDA acknowledged that both the Agency and industry would need time to “operationalize the policies and procedures within the guidance.”  As a result, FDA expressed its intent to exercise leniency in reviewing De Novo requests for the 60 days following the publication of the final guidance.

A quick overview of De Novo requests:  New devices (i.e. devices not substantially equivalent to a previously cleared or pre-amendment device) are automatically classified as class III without any action by FDA, regardless of the level of risk posed by the device.  This is the case unless and until FDA takes an action to classify or reclassify the device, as per section 513(f)(1) of the Federal Food, Drug, and Cosmetic Act (FDCA) (21 U.S.C. 360c(f)(1)).  One mechanism to classify a device is through the De Novo classification process, a pathway authorized under section 513(f)(2) of the FDCA.  Upon receipt of a De Novo request, FDA is required to classify the device by written order according to the criteria under section 513(a)(1) of the FDCA.  Before this substantive review FDA staff conducts an acceptance review of all De Novo requests based on objective criteria using the Acceptance Checklist to ensure that it is administratively complete.

The Checklist – Preliminary Questions

FDA identifies a series of preliminary questions intended to serve as an initial screening of the De Novo request.  Depending upon the answers to these preliminary questions, the remainder of the acceptance review may or may not be necessary.  As part of FDA’s preliminary analysis, the final guidance instructs the reviewer to determine whether a De Novo request for a combination product contains as a constituent a drug that has the same active moiety as an approved drug with exclusivity, as described in section 503(g)(5)(C)(ii)-(v).  In such a case, the lead reviewer should contact the CDRH Product Jurisdiction Officer or CBER Product Jurisdiction Officer to determine the appropriate action and inform management.

FDA clarifies that, should De Novo requests for the same device type from different requesters be under review concurrently, this would not result in an automatic Refuse to Accept decision.  FDA directs readers to its guidance document, “De Novo Classification Process (Evaluation of Automatic Class III Designation),” for additional information regarding this situation.

The Checklist – Acceptance Review

The main elements of the acceptance review are largely unchanged from the draft guidance.  However, the final guidance includes additional information regarding combination products.  The 21st Century Cures Act, which amended section 503(g) of the FDCA, requires requesters seeking action on a combination product to identify it as such.  Requests for combination products with a device primary mode of action that contain an approved drug as a constituent product must include patent information and one of four patent certifications such as,

• That the patent information has not been filed (Paragraph I),
• That the patent has expired (Paragraph II),
• The date on which the patent will expire (Paragraph III),
• That the patent is invalid or will not be infringed by the manufacture, use, or sale of the drug for which this submission was made (Paragraph IV).

If it is asserted that the patent is invalid or will not otherwise be infringed, the sponsor must also provide notice to the owner of the patent and the holder of the approved application that lists the patents that are being challenged, as set forth in section 505(b)(3) of the FDCA.

The sponsor must also submit to FDA the documentation of the date of receipt of notice by the holder of the approved application and the owner of the patents (see our previous post here).

Checklists

As part of the classification information for the De Novo request, FDA added that, to the extent the request recommends classification as class II, it also identifies proposed special controls and describes how those special controls provide a reasonable assurance of safety and effectiveness.

FDA also added a section on Statements of Compliance for Clinical Investigations to the checklist.  For each clinical investigation conducted in the U.S. that is used to support the request, it must include either a statement of compliance with 21 C.F.R. Parts 50, 56, and 812 or a brief statement explaining the reason for the noncompliance.  For each clinical investigation conducted outside the U.S. that is used to support the request, the request must include either

• a statement that the clinical investigations were conducted in accordance with good clinical practice;
• evidence that the clinical investigations were subject to a waiver of GCPs pursuant to 21 C.F.R. § 812.28(c);
• or an explanation as to why the studies did not comply with GCPs and the steps taken to ensure the data and results from the study were credible and accurate.

Lastly, the final guidance checklist includes a section on the use of voluntary consensus standards.  If using such standards, the request should include a declaration of conformity or an explanation of how the data support the use of the standard.  To the extent a request references a non-FDA-recognized voluntary consensus standard, the request must include the basis of use of that standard with the underlying information or data that support how it was used.

Impacts of Government Shutdowns

Likely a result of the government shutdown from 2018 to 2019 that closed FDA’s doors for 35 days, FDA provides clarification on how a future shutdown would impact the timing for an acceptance review.  In such an instance, the 15-day review period would be expanded by a comparable number of business days that the FDA buildings are closed.  FDA notes that, in the event of a shutdown, the requester may receive an automated notice that the acceptance review was not completed because the screening period exceeded 15 days, but that this notice would be corrected upon FDA becoming operational.

As noted above, the issuance of this final guidance does nothing to change the landscape of the De Novo review process.  It is, however, an important step in increasing transparency of Agency expectations, resulting in a more efficient review process for De Novo requests.

On September 5, 2019, FDA published its proposal to amend its Section 503A bulk substances regulation, 21 C.F.R. § 216.23, to add five bulk drug substances that FDA considered to the Section 503A Bulks List, and not to add 26 substances.  Prior to this latest proposed rule, FDA has only finalized via the final rulemaking process its Section 503A Bulks List for ten substances (as blogged about here).  Six of those substances made the cut (and can be used in compounding) and four did not.  Importantly, FDA’s Current Interim List 1 (as of April 2019) of substances that may be used by Section 503A compounders may change significantly as a result of FDA’s latest proposal.  Those that are interested in the substances either remaining on FDA’s list or their removal should submit a comment to Docket No. 2018-N-4845, by December 4, 2019.

For ease of reference, FDA proposes the following:

Addition to the Section 503A Bulks List:

• Glutaraldehyde (topical use at concentrations of 10% or lower)
• Glycolic acid (topical use at concentrations up to 70%)
• L-citrulline (oral use)
• Pyruvic acid (topical use)
• Trichloroacetic acid (TCA) (topical use)

Of important note for compounding pharmacies: FDA specifically states that when a salt or ester of an active moiety is listed on FDA’s Bulks List, only that particular salt or ester may be used for compounding.  The base compound and other salts or esters of the same active moiety must be evaluated separately for inclusion on FDA’s List.  Furthermore, where a substance is included subject to certain restrictions (i.e., topical use only), only those drug products that conform to that restriction may qualify for Section 503A’s exemptions.  So, in short, compounders should pay attention to any limitations that FDA places on substances that it adds to the Bulks List, and should limit compounding to the specifically identified substances.

Non-inclusion/removal from the Section 503A Bulks list:

• 7-keto dehydroepiandrosterone (DHEA)
• Acetyl-L-carnitine (ALC)
• Alanyl-L-glutamine
• Aloe vera 200:1 freeze dried
• Artemisinin
• Astragalus extract 10:1
• Boswellia serrata extract (BWSE)
• Cesium chloride
• Chondroitin sulfate
• Chrysin
• Curcumin
• D-ribose
• Deoxy-D-glucose
• Diindolylmethane
• Domperidone
• Epigallocatechin gallate (EGCG)
• Germanium sesquioxide
• Glycyrrhizin
• Kojic acid
• Nettle
• Nicotinamide adenine dinucleotide (NAD)
• Nicotinamide adenine dinucleotide disodium reduced (NADH)
• Rubidium chloride
• Sodium dichloroacetat
• Vanadyl sulfate
• Vasoactive intestinal peptide (VIP)

FDA states that it consulted with both the Pharmacy Compounding Advisory Committee (PCAC) and USP in its evaluation of the substances, and included criteria considered for the substances’ addition or exclusion as required by Section 503A.  FDA will publish its Final Rule amending 21 C.F.R. § 216.23 based on FDA’s consideration of the public comments received.  It will also continue to add or decline to add other substances to its final list on a rolling basis.  FDA notes that, concerning other substances that have already been either added or removed from the list, interested individuals and organizations may petition FDA to amend the Section 503A Bulks List to consider information that is “different from that which FDA presented to the PCAC” (citing the citizens petition rule at 21 C.F.R. § 10.20).  FDA also states that, for substances that have not “yet been addressed in a rulemaking,” interested individuals and entities should submit comments to FDA’s bulks docket (FDA-2015-N-3534).  Lastly, it is important to remember that Section 503A pharmacies can also compound drug products from substances that are the subject of a USP/NF drug monograph, or substances that are components of FDA-approved drug products.

After the D.C. District Court released its decision, blogged about here, affirming FDA’s revised bulks nomination process and FDA’s removal of vasopressin from the Section 503B bulks list, FDA touted the court’s favorable decision in a press release here.  Still basking in the wake of its “victory for public health in the first such case since the Drug Quality and Security Act (DQSA) was enacted” FDA next released its preliminary determination to remove nine other substances from FDA’s Section 503B bulks list.  Is this the slow demise of the interim bulks list for Section 503B facilities …  if there is an FDA-approved product that contains that bulk substance? Will Section 503B facilities need to rely mostly on the business of compounding shortage medications?

The nine substances, which are currently on FDA’s interim bulks list for Section 503B that FDA proposes to remove from its list include the following: dipyridamole, ephedrine sulfate, famotidine, hydralazine hydrochloride, methacholine chloride, sodium bicarbonate, sodium tetradecyl sulfate, trypan blue, and vecuronium bromide. Other bulk drug substances nominated by the public for inclusion on this list are currently under consideration pursuant to FDA’s March 2019 revised nominations guidance.  Note that these nine substances are important ingredients, which are widely compounded and used ubiquitously in hospitals and clinics.  Some (i.e., sodium bicarbonate) have also been on FDA’s shortage list for a long period of time.  FDA’s removal of the substances from the Section 503B list will not affect an outsourcing facility’s ability to compound drug products to relieve FDA’s published drug shortages, however.

Most notably, however, these substances were nominated by industry pursuant to a standard promulgated and published by FDA several years back – in July of 2014 (blogged about here).  FDA published the 2014 nomination process only after FDA ran into problems with its first attempt (in December 2013) to establish a nomination process for placing bulk substances on a list for outsourcing facilities to use in compounding.  After the July 2014 nomination process, FDA reviewed hundreds of nominations and created a salient “interim” list of substances that may be used by outsourcing facilities.  FDA continued to review and accept at a good pace nominations for bulk substances to be used by outsourcing facilities until FDA was sued by Endo Pharmaceuticals in October 2017 concerning FDA’s placement of vasopressin (the bulk substance in Endo’s Vasostrict®) on FDA’s interim list.

Now, roughly five years after industry nominated these substances pursuant to the 2014 standard (in effect at the time), after FDA reviewed and approved those nominations, after facilities expended significant resources conducting stability and other studies specific to these substances to ensure their use in compounding was consistent with FDA’s current good manufacturing practice regulations, FDA intends to pull the plug (so to speak) on their use based on the new, March 2019 nominations process.  Notwithstanding a prior successful nomination and review for the nine substances, which the facilities relied on, facilities now must submit significant additional information consistent with FDA’s new evaluation standard articulated in FDA’s March 2019 final guidance,  The new submissions must address at a minimum the clinical need for the compounded formulation, and must specifically consider that need, along with the medical suitability of the FDA-approved finished drug product to meet that clinical need.  Interested parties have until November 4, 2019, to resubmit nominations for these nine substances.  

Claiming that DMAA (1,3-dimethylamylamine) is a “constituent” of geraniums, Hi-Tech Pharmaceuticals, Inc. sold DMAA as a dietary supplement, in products intended for body-builders.  The U.S. Food and Drug Administration seized the products, claiming that DMAA is a food additive because it is not generally recognized as safe and is not a dietary supplement, as Hi-Tech claimed.  The U.S. District Court ruled that FDA was right.  On appeal of that decision by Hi-Tech, two judges on the 11th Circuit Court of Appeals last Friday issued a decision, over a dissent, supporting FDA’s interpretation of statutory provisions in determining that DMAA is not a “botanical” or a “constituent” of a botanical (namely geraniums), which would have qualified DMAA as a dietary supplement.  The dissenting judge believed that Hi-Tech was entitled to a hearing about whether DMAA is a constituent of geraniums, so it seems likely that Hi-Tech will seek a rehearing of its appeal before all judges on the 11th Circuit.  If that petition for en banc review is granted, this case may not be over, yet.

Moreover, Hi-Tech also filed a lawsuit that we blogged about here, in which Hi-Tech seeks an injunction that would permit it to continue marketing the dietary supplement confusingly named DMHA (and bearing the even more complicated chemical name of 2-Aminoisopheptane HCI, also known as, 1,5 DMHA, 2-amino-6-methylheptane, 2-amino-5methylheptane, 1,5-Dimethylhexylamine, 2-Isooctyl amine, and Octodrine).  Hi-Tech claims this chemical naturally occurs in walnut trees.  That case is pending: FDA has filed a Motion to Dismiss the case claiming that the court does not have jurisdiction to hear the case because the Warning Letter that was sent to Hi-Tech about DMHA is not a “final agency action” subject to judicial review.  If Judge Reggie Walton decides to hear the case, and his decision is appealed to the D.C. Circuit Court of Appeals, litigation involving Hi-Tech may lead to conflicting appellate court decisions on what constitutes a “botanical” that can be legally marketed in or as a dietary supplement.

Back to the geraniums, though.  FDA claimed that DMAA is a food additive (and therefore was required to receive premarket approval from FDA) because it (1) is not “generally recognized, among experts qualified by scientific training and experience to evaluate its safety, as having been adequately shown through scientific procedures . . . to be safe under the conditions of its intended use,” and (2) is not a dietary supplement (the FD&C Act’s definition of “food additive” excludes ingredients described in the definition of “dietary supplement.”)  Key to FDA’s second argument is whether DMAA fails to qualify as a dietary ingredient because it is not an “herb or other botanical,” or an “extract” or a “constituent” of an herb or other botanical.  As the 11th Circuit said in the majority opinion, “This case presents the question whether these terms apply to a substance that was invented in a laboratory and is artificially produced for commercial sale but that, entirely coincidentally, may be found in trace amounts in a plant.”

None of the judges thought that there was sufficient evidence that DMAA was “generally recognized” as being safe.  Hi-Tech argued that DMAA is generally recognized as safe. The majority opinion noted FDA’s regulation that a substance meets this standard only when, based on “common knowledge throughout the scientific community knowledgeable about the safety of substances directly or indirectly added to food,” there is “reasonable certainty that the substance is not harmful under the conditions of its intended use.” 21 C.F.R. § 170.30(a).  According to the opinion, FDA “need only show the lack of the proper reputation . . . for safety of the [substance] among the appropriate experts, or that what reputation there is, is not based on adequate studies.”  The opinion found that FDA “made the required showing,” saying that, “[m]ultiple sources, including in peer-reviewed publications, call into question DMAA’s safety.”  FDA concluded that: “DMAA may cause increases in blood pressure and hemorrhagic stroke; individuals with blood pressure of 120/80 mmHg or higher (much of the American population) should avoid DMAA; use of DMAA has been associated with multiple adverse events, including deaths; and DMAA may inhibit activity of liver enzymes and cause liver toxicity.”  The court rejected Hi-Tech’s citation of “studies and . . . expert testimony concluding that DMAA is safe at the recommended doses,” because, the opinion said, “The studies use small sample sizes and look at short-term results,” and none “measure the effect of DMAA in high-risk populations or on individuals with elevated blood pressure.”

The opinion also addressed Hi-Tech’s contention that DMAA is a botanical, or an extract or constituent of a botanical.  Trace amounts of DMAA have been identified in geraniums, although the 11th Circuit said it is unclear whether that DMAA is a naturally occurring compound, or may come from fertilizer.  At any rate, the opinion stated, DMAA used by Hi-Tech was not extracted or derived from geraniums.  While it might be present in trace amounts, Hi-Tech uses DMAA that is fabricated commercially, rather than extracted.  The majority rejected Hi-Tech’s “broad view” that “all flora” qualify as a botanical, and, instead held that “the use of ‘herb or other botanical’ in the statute, together with the dictionary definitions of a botanical as ‘derived from a plant,’ supports a much narrower construction.”  The opinion credited a dictionary definition that botanical is a “a plant part or extract used esp[ecially] in skin and hair care products,” and ruled that DMAA did not meet that definition.

As to whether DMAA is a “constituent” of a botanical (which Hi-Tech argued meant any part of the composition of a plant), the majority opinion said that Congress, in enacting the Dietary Supplement Health and Education Act (“DSHEA”) likely intended “to treat any product derived from a plant” as a potential dietary supplement.  But, the majority said, the definition would not “stretch . . . to apply the same reasoning to a substance invented in a laboratory and artificially produced, that can be found in a plant, if at all, only in trace amounts, only coincidentally, and that has never been derived from a plant for use in any medicinal, cosmetic, or dietary product.”

Notably, the majority opinion appeared to leave open the possibility that a synthetic version of an herb or other botanical could be marketed in or as a dietary supplement:

This does not mean that DSHEA applies only to products actually derived from plants, not those artificially manufactured. If a product is indeed a dietary supplement because it contains a qualifying dietary ingredient—including, for example, an herb or other botanical—a manufacturer may take the dietary ingredient from nature or produce it artificially. But there must be a qualifying dietary ingredient. The ability to create a substance in a laboratory and manufacture it artificially does not give a substance that status. Nor does coincidentally identifying the substance in trace amounts in some plant somewhere in the world.

The dissenting judge said he would have remanded the case to the District Court “for a trial on whether DMAA is a ‘constituent’ of geraniums.”  He said he did not think DSHEA provided “a basis for the district court’s conclusion that a ‘constituent’ of a ‘botanical’ must have a history of being extracted in usable quantities, or for the majority’s holding that to be a ‘constituent’ an ingredient must have been derived from a plant for use in a medicinal, cosmetic, or dietary product.”

We will follow further developments in both Hi-Tech cases, and share “extracts” of decisions with our “constituents,” in this blog.

Fall is in the air.  We know that not only beacuse the kids are off to school and the Summer heat is tailing off, but because of the uptick in questions we field on a daily basis concerning user fees under both the Prescription Drug User Fee Act (“PDUFA”) and the Generic Drug User Fee Amendments (“GDUFA”).  After all, the fee payment due date is fast approaching—no later than the first business day on or after October 1 of each year—and folks are rushing to see if there’s a way to save a buck.  But before we get to how to do that (under GDUFA at least), let’s take a Big Yellow Taxi (thanks Joni Mitchell!) back in time to see where we’ve been over both GDUFA I and GDUFA II.

Under GDUFA I, Congress charged FDA with assessing a host of application- and facility-related fees (as well as a so-called “backlog fee” that we won’t get into here).  Unlike historical PDUFA user fee rates, which generally increase year-over-year (see our previous post here), GDUFA I user fee rates fluctuated up and down year-over-year as shown in the table below.

GDUFA II radically altered the generic drug user fee regime, creating new Contract Manufacturing Organization (“CMO”) facility fees and program fees (and also eliminating a single fee—the Prior Approval Supplement (“PAS”) fee).  (Or, to borrow from Joni Mitchell, “They took all the fees; And put ’em in a fee museum; And then they charged the people; A whole lot more than a dollar and a half to file and maintain ‘em”.)

Despite the change in user fee structure, the year-over-year up and down fluctuations in user fee rates seen under GDUFA I have continued under GDUFA II—and this is particularly true for the annual program fee—as shown in the tables below.  Those fluctuations are attributable to several factors, including the changing landscape of generic drug manufacturers: there were 258, 177, and 199 small size operations in FYs 2018, 2019, and 2020, respectively; 52, 49, and 63 medium size operations in FYs 2018, 2019, and 2020, respectively; and 62, 57, and 63 large size operations in FYs 2018, 2019, and 2020, respectively.

And that bring us to how a company in the small and medium size operation tiers—and perhaps one or two companies in the large size operation tier—might save a buck or two.  Back in June 2017, we introduced folks to a system we dubbed “ANDA Arbitrage.”  It’s an effort undertaken by a company called ANDA Repository, LLC to help companies potentially decrease annual user fee liability under GDUFA II.

Imagine a parking lot. The owner of a car that is not being used on a daily basis needs a parking space for that car.  In exchange for that parking space (and an annual fee) the car’s owner transfers title of the automobile to the parking lot owner.  The old owner of the car can, with appropriate notice, take back ownership when he decides that he wants to use the automobile again.  Provided the parking lot owner has enough cars, this can be a beneficial venture for all of the parties involved.

In the imagery above, the automobile owner is an ANDA sponsor (typically with a discontinued, but not withdrawn approval, ANDA), and the parking lot owner and attendant is ANDA Repository, LLC. As a “large size” operation, ANDA Repository, LLC pays a flat ANDA Holder Program Fee regardless of how many ANDAs are owned.  In exchange for its services, ANDA Repository, LLC charges an ANDA sponsor an annual fee, which we understand is significantly less than the ANDA Holder Program Fee such ANDA sponsor would otherwise pay as a small or medium size operation.

If you’re interested in the program, you should reach out to ANDA Repository, LLC soon. The mechanism to communicate to FDA a transfer in ANDA ownership prior to October 1, 2019 should be relatively painless: (1) Transfer of Ownership Letters (Seller) and Acknowledgment of Transfer of Ownership letters (Buyer) to the Office of Generic Drugs; and (2) Email and call CDER Collections notifying them of the change in ownership.

The last time we blogged on news from a recent pharmaconference.com industry conference about current Good Manufacturing Practice (“GMP by the Sea,” agenda linked here), we provided some cute references to corn pudding recipes (blogpost linked here).  Despite universally positive feedback about those culinary diversions, this blogpost will simply report other Food and Drug Administration (FDA) compliance developments reported at the conference, supplemented by statistics identified by independent snooping.

On the drug side, FDA statistics shown at the GMP by the Sea conference indicate that the number of FDA inspections at drug manufacturing facilities outside the United States actually have dropped in recent months, although warning letters issued by FDA’s Center for Drug Evaluation and Research (CDER) have risen dramatically.  Specifically, FDA inspections of domestic drug establishments dropped slightly, from about 1,900 in fiscal year 2014 to about 1,800 in fiscal year 2018 (these numbers include more data than the inspection data in Chart 1 below).  At the GMP by the Sea Conference, data were only available for inspections of drug establishments in foreign countries through fiscal year 2017.  So we checked the publicly available database from FDA (which can be found here) and determined that, indeed, the number of foreign drug inspections peaked at 1,061 in fiscal year 2016, dropped to 981 in fiscal year 2017, and rose slightly to 991 in the last fiscal year.  (The total for fiscal year 2019 is incomplete, since that fiscal year doesn’t end until October 31, 2019.)

Chart 1: Drug inspections by FDA by Fiscal Year

FDA officials at the conference said that they believe that the reduced number of FDA foreign inspections is partially due to the government shutdown last year, but also increased FDA recognition of inspections performed by foreign inspectorates under the Mutual Recognition Agreement, the subject of many blogposts, the most recent being here.  Relying on inspections by European equivalents of FDA reduces the need for FDA to duplicate those inspections.

Even though the number of foreign and domestic inspections has dropped recently, the number of Warning Letters issued by CDER has increased, as discussed at GMP by the Sea in a presentation by Scott McIntire, Director of the Division of Enforcement for FDA’s Office of Regulatory Affairs.  The number of Warning Letters issued by CDER rose from about 80 in 2015 (not clear whether this is fiscal year or calendar year) to more than 150 in 2016 and a few more in both 2017 and 2018.

We have noticed that a lot of the GMP Warning Letters from CDER emanate from inspections FDA conducted in China and India, so we performed further analysis.  Over the last nine years, selected types of drug inspections in India and China showed a higher rate of classifications of Official Action Indicated (OAI; which result in enforcement actions) and Voluntary Action Indicated (VAI; meaning that there are significant corrections that inspected facilities are required to perform) than do FDA inspections of facilities in the United States.  Significantly, looking at the most serious classification of inspections (OAI), the percentage of inspections in China and in India over the last nine years that were classified OAI was 12%, whereas the comparable number in the United States was 8%.

Table 2 Classifications of Drug Inspections by Calendar Year

(looking at inspections relating to Drug Quality Assurance, Over-the-Counter Drug Evaluation, and Unapproved and Misbranded Drugs, CDER Projects ONLY)

2010

2011

2012

2013

2014

2015

2016

2017

2018

As for devices, the number of FDA inspections of medical device manufacturing facilities outside the United States increased by 243 percent from 2007 to 2017, according to Sean Boyd, Director of the Office of Regulatory Programs within the Office of Product Evaluation Quality at FDA’s Center for Devices and Radiological Health.  These figures are borne out by manipulating the publicly available inspection database from FDA which can be found here.  While the numbers don’t line up exactly with Capt. Boyd’s (some types of device inspections were not included on the database available on FDA’s website), the database shows 245 FDA foreign inspections of device establishments in fiscal year 2009 and 614 in fiscal year 2017.  The number of such inspections actually dropped off slightly in fiscal year 2018.  See chart below:

Chart 3 Device Inspections by Fiscal Year

Also on the device side, in response to a question, Capt. Boyd reported that he estimated that about 40% of the inspections that FDA conducts at medical device facilities result in delivery of an FDA Form 483 (Report of Observations) relating to Quality System Regulation deviations identified by FDA Investigators.

We could provide some analysis of these data by providing obvious advice to companies operating in India and China and subject to FDA regulation: you can expect increasing rates of FDA inspections and you need to be especially vigilant to avoid Warning Letters, which can lead to crippling Import Alerts.  We could also say that, while all OAI inspections are not created equal, the larger rate of OAI inspections in India and China is more damaging to the recipients of those inspections because it is very easy for FDA to impose Import Alerts on overseas manufacturers shipping drug products into the United States.  But to provide that level of analysis would violate Sgt. Joe Friday’s frequent admonition to provide, “Just the facts, ma’am,” or sir.

Young people who don’t listen to reruns of old radio programs can find further information about the fictional Sgt. Friday and the “Dragnet” radio program here.  He was notorious for, when interviewing women whose narratives began to stray, telling them, “Just the facts, ma’am.”

* Scott and Jasmin are legal assistants who provided research assistance for this blog post.

In a September 2018 post, we observed that the Drug Enforcement Administration (“DEA”) had come to a fork in the road with respect to DEA’s August 12, 2016 policy statement that it would be accepting applications and would in fact issue additional marijuana manufacturer registrations for research.  Given Congressional pressure to act and DEA’s doubling of the 2019 aggregate production quota for marijuana, it appeared that DEA had finally reached the point of needing to act on the significant number of pending applications for manufacturer registrations it had received to meet legitimate medical need.

There was bit of a buzz when DEA announced yesterday that it “is moving forward to facilitate and expand scientific and medical research for marijuana in the United States…and is providing notice of the pending applications from entities applying to be registered to manufacture marijuana for researchers.”  DEA, Press Release, DEA Announces Steps Necessary to Improve Access to Marijuana Research (Aug. 26, 2019).  However, DEA’s recent notice indicates that DEA is still not ready to evaluate these applications and will need to propose additional regulations to address the process.  So, having come to the fork in the road, it appears that Agency intends to proceed way below the speed limit.

DEA’s press release stated that the number of individuals registered to conduct research with marijuana, marijuana extracts, or THC increased more than forty percent, from 384 researchers in January 2017 to 542 in January 2019.  Id.  The DEA published notice earlier this week that it has received thirty-three applications to manufacture marijuana, marijuana extract and/or THC for research, having received the first application in July 2014.  Bulk Manufacturer of Controlled Substances Applications: Bulk Manufacturers of Marihuana, 84 Fed. Reg. 44,920 (Aug. 27, 2019).  The notice lists the thirty-three applicants, and invites registered bulk manufacturers of marijuana (there is only one, the University of Mississippi) and other applicants to file written comments on, or objections to, issuing registrations to those listed on or before October 28, 2019.  Id. at 44,921.

However, DEA states that before it can complete the application evaluation and registration process, it “intends to propose regulations in the near future” governing applicants growing marijuana for medical and scientific research.  Id.  In addition, DOJ has reviewed its own policies since August 2016 “to ensure that the marihuana growers program is consistent with applicable law and treaties.”  Id.  What does DEA mean by “near future?”  We have not seen anything on the OMB regulatory agenda that indicates regulations are in the works.

DEA’s notice statements rekindle questions initially raised by DEA’s August 2016 policy statement as to how DEA will evaluate and consider whether an application is consistent with the public interest.  DEA indicated in its 2016 policy statement that in evaluating applications, it intended to place specific emphasis on whether the applicant “has previous experience handling controlled substances in a lawful manner and whether the applicant engaged in illegal activity involving controlled substances.”  Applications to Become Registered Under the Controlled Substances Act to Manufacture Marijuana to Supply Researchers, 81 Fed. Reg. 53,846, 53,847 (Aug. 12, 2019).  DEA quickly pointed out that relevant illegal activity “includes any activity in violation of the CSA (regardless of whether such activity is permissible under State law) as well as activity in violation of State or local law.”  Id.  But DEA further stated that “[w]hile past illegal conduct involving controlled substances does not automatically disqualify an applicant, it may weigh heavily against granting the registration.”  Id.

DEA stated that under 21 U.S.C. § 823(a)(1) it “is obligated to register only the number of bulk manufacturers of a given schedule I or II controlled substance that is necessary to ‘produce an adequate and uninterrupted supply of these substances under adequately competitive conditions for legitimate medical, scientific, research, and industrial purposes.’”  Id.  Therefore, DEA will evaluate the applications, and of the applications it finds are compliant with “relevant laws, regulations and treaties,” will register the number of applicants it determines is necessary to ensure an adequate and uninterrupted supply under adequate competitive conditions.  Bulk Manufacturer of Controlled Substances Applications, at 44,921.

It is worth noting that the DEA notice cites to the Agency’s decision in Lyle E. Craker, Denial of Application, 74 Fed. Reg. 2101 (Jan. 14, 2009) (denying an application for a bulk manufacturer of marijuana).  That opinion provided an exhaustive discussion of the standard related to adequate supply under adequate competition.  Thus, the question is how will DEA apply this standard to limit issuing marijuana manufacturer registrations to the number of applicants that can provide an adequate and uninterrupted supply of marijuana to researchers?  How will DEA choose between registering applicants who conducted state-authorized, though federally-illegal, marijuana activities versus those that have not, with all else being equal?  Will DEA choose to register the latter over the former?  And will there be some intermediate ground for those applicants who conducted state-authorized activities and did not violate the Cole memorandum?  Undoubtedly, these application evaluation questions will form the basis of DEA’s proposed marijuana growing regulations.

Lastly, the notice expressly confirms that as a result of the Farm Bill, the definition of marijuana under the CSA no longer includes “hemp.”  Id.  “Hemp” is defined as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9-tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”  Id.  Thus, cannabis plant material containing 0.3 percent or less THC on a dry weight basis is not federally-controlled and therefore does not require a DEA registration to cultivate.  Id.  Because hemp is not controlled, handlers of that material are not subject to DEA controlled substance recordkeeping, reporting and security requirements.

Given that DEA has still not registered any additional manufacturers, we wonder whether the researchers have been able to obtain the necessary material to conduct their research.  So, as DEA inches forward on the road towards acting on these registrations, the notice may disappoint those who had hoped DEA would finally evaluate their applications or to conduct research with marijuana from those new registrants.

On August 19, the Center for Food Safety (CFS) and Center for Environmental Health (CEH) filed suit against the FDA. According to the two consumer groups, FDA has failed to promulgate final regulations and complete actions by mandatory deadlines set by the Food Safety Modernization Act (FSMA).

FSMA required that by Jan. 4, 2013, FDA establish a program for the testing of food by accredited laboratories; establish a publicly available registry of accreditation; and develop model standards that a laboratory must meet in order to be accredited by a recognized accreditation body.  Now, more than six years later, FDA has not accomplished this task.

Plaintiffs allege that “FDA’s failure to implement FSMA’s laboratory accreditation provisions by their statutory deadlines is an abdication of the agency’s fundamental responsibilities . . . and is putting millions of lives at continued risk from contracting foodborne illnesses, contrary to Congress’ commands.”

This is certainly not the first time that FDA has been sued for failing to meet FSMA mandatory deadlines, as FSMA included an ambitious plan without consideration of the resources.  Plaintiffs have sued FDA two times for failing to meet deadlines for what they claim are critical regulations.  Just recently, in a consent decree filed on June 7, 2019, FDA agreed to a schedule for FDA action regarding the designation of high risk foods, including development of a list of “high risk” foods.

According to the Spring 2019 Unified Agenda, FDA planned (but failed) to issue the proposed rule for laboratory accreditations in May 2019.  It will be interesting to see if and how much this lawsuit will speed up FDA’s rulemaking.

Companies challenging FDA in court typically face a steep uphill battle given the long-standing doctrine known as Auer deference, which (in simplified terms) requires courts to defer to FDA’s interpretation of its own regulations if they are ambiguous.  The recent Supreme Court ruling in Kisor v. Wilkie did not overturn Auer deference, as many predicted given the change in Court composition, but even in deferring to deference, the Court significantly cabined the scope and application of it.  Under this revised framework, courts first must pressure test whether a challenged regulation is genuinely ambiguous – exhausting tools of construction – and if so, courts then must make an independent inquiry of the regulation to determine whether it is entitled to Auer deference.

The majority opinion spends considerable time describing the background facts of the case and the history of Auer deference.   Of note to our blog readers, even though the underlying action is not even peripherally related to FDA regulation (Kisor challenges a decision by the Department of Veterans Affairs), the Court references FDA and its regulations in discussing when deference would be appropriate.  As an example, the Court points to an earlier challenge to an FDA regulation that grants exclusivity for drugs if they contain no “active moiety” that has been approved by FDA for any other drug.  The D.C. Circuit was asked to determine whether a company created a new active moiety “by joining a previously approved moiety to lysine through a non-ester covalent bond.”  This type of question, for the last 20 or so years, would have been entitled to Auer deference, and as related to the definition of “active moiety” specifically, the D.C. Circuit did defer to the Agency’s construction of its own regulation.  In Kisor, the Court specifically recognized the importance of preserving FDA’s ability to interpret its regulations using its expertise and policymaking function.

Nevertheless, the Court limits the situations in which Auer deference applies and sets forth the following step-wise analysis.

• The first step in a court’s analysis is to determine whether the regulation is genuinely ambiguous. To do this, a court must carefully consider the text, structure, history, and purpose of a regulation, “exhausting” all the traditional tools of construction.
• If there is genuine ambiguity, a court must then determine whether the agency’s reading of the regulation is “within the bounds of reasonable”
• And even then, Auer deference is not automatic. Rather, a court must make an independent inquiry into whether the “character and context of the agency interpretation entitles it to controlling weight.”  This inquiry requires a review of:

1. 1. Whether the regulatory interpretation is consistent with the agency’s authoritative or official position;
   2. Whether the agency’s interpretation implicates the agency’s substantive expertise; and
   3. Whether the agency’s interpretation reflects its “fair and considered judgment.”

From the Court’s perspective, this approach maintains the spirit of Auer deference, but avoids its application when the agency takes a position that is a “convenient litigation position” or that creates “unfair surprise” to regulated parties.

Even though it has not even been two months since the Kisor decision, this case already has been cited by litigants at least 16 times.  It will be interesting whether the number of challenges to FDA’s interpretations increases as companies are more optimistic about their chances of having a court freshly review rather than defer to FDA.

Note that none of this discussion of Auer or Kisor relates to an agency’s interpretation of a statute it enforces, which remains governed by the well-known Chevron test.  Perhaps the Kisor decision reflects a baby step toward the demise of Chevron, which also has been criticized.  Or a more cynical view could be that all the discussion of “deference” is merely a judicial cover to achieve a predetermined result in favor of the agency.

In the August 21 split panel decision issued in Federal Trade Commission v. Credit Bureau Center LLC, the Seventh Circuit held that section 13(b) of the Federal Trade Commission Act (“FTCA”), 15 U.S.C. § 53(b), does not authorize an award of restitution.  In overturning its earlier precedent, the Seventh Circuit created a circuit split.  We expect that the FTC likely will seek Supreme Court review, and if that happens, it is unclear if the Court will accept the case.  This decision, at least temporarily, represents further weakening of the Federal Trade Commission’s (“FTC”) ability to obtain monetary relief.  It also could support an argument that the authority of other agencies, such as the Food and Drug Administration (“FDA”), should be revisited.

Background

The specifics of the case against Michael Brown and his company, Credit Bureau Center, are not important to the key holding in this case.  The long and short of it is that Michael Brown defrauded consumers into signing up for a monthly credit-monitoring service, resulting in millions of dollars of revenue.  Consumers complained to the FTC, which opened an investigation.  Under Section 13(b), the FTC may seek an injunction in federal court “[w]henever the Commission has reason to believe … that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC].”  In January 2017, the FTC sued Brown under section 13(b) of the FTCA seeking an injunction and restitution.

On the Commission’s motion, the district court issued a temporary injunction, froze Brown’s assets, and appointed a receiver to manage his company.  Brown and the Commission later filed cross-motions for summary judgment.  In addition to contesting liability, Brown argued that section 13(b) does not authorize an award of restitution.

The Majority Opinion

The Seventh Circuit dedicated the bulk of its 66-page majority opinion to the issue of whether section 13(b) allows for restitution.  (It summarily upheld the lower court’s finding of liability and the permanent injunction.)  FTC did not seriously contest that the statutory authorization for injunctions in section 13(b) encompasses other forms of equitable relief like restitution, but contended that section 13(b) implicitly authorized restitution, pointing to Seventh Circuit precedent in FTC v. Amy Travel Service, Inc., 875 F.2d 564, 571 (7th Cir. 1989).

The court overturned Amy Travel, stating that it had erred in endorsing the notion that section 13(b) authorizes awards of restitution, not just restraining orders and injunctions.  The court noted that its current analysis was primarily one of statutory interpretation that had previously been “obscured in layers of caselaw.”  In acknowledging its creation of a circuit split, with the Ninth and Eleventh Circuits pitted directly against the finding here, the Seventh Circuit noted, “No circuit has examined whether reading a restitution remedy into section 13(b) comports with the FTCA’s text and structure.  Nor has anyone determined whether § 45 forecloses this remedy.”  Note that this very issue has arisen in other courts, including a district court case within the Eleventh Circuit that reached the same result as the Seventh Circuit did here.

Further, the court stated that stare decisis alone could not overcome the earlier case’s clear incompatibilities with the FTCA’s text and structure as well as the U.S. Supreme Court’s instruction in Meghrig v. KFC W., Inc., 516 U.S. 479, 487–88 (1996), “not to assume that a statute with ‘elaborate enforcement provisions’ implicitly authorizes other remedies.”  Because the FTCA has two detailed remedial provisions that expressly authorize restitution if the Commission follows certain procedures, allowing implied restitution through section 13(b) allows the Commission to circumvent these elaborate enforcement provisions.  Moreover, reading an implied restitution remedy into section 13(b) would make these other provisions largely pointless.  Thus, the court concluded that section 13(b)’s grant of authority to order injunctive relief does not authorize an award of restitution.

The Dissent

Chief Judge Wood, joined by Circuit Judges Rovner and Hamilton, wrote a dissent that focused on both a belief that the majority was making a mistake, and that it was doing so in a procedurally inappropriate way by avoiding en banc review.  The dissent characterized the majority opinion as incorrectly extrapolating from cases addressing whether a private party has an implied right of action to whether a government agency, which enjoys an express right of action under a statute for injunctive relief, is entitled to a restitutionary remedy that is ancillary to, or part of, the injunction.  The dissent further noted that the distinction of a government plaintiff “is especially important to the public-interest component of the analysis when the government seeks remedies that (1) lie uniquely within its toolbox and (2) are aimed squarely at undoing public harms and preventing future ones through deterrence.”

According to the dissent, the majority opinion “upends what the agency and Congress have understood to be the status quo for thirty years, and in so doing grants a needless measure of impunity to brazen scammers like the defendant in this case.”

The Final Word?

As the court noted, for 30 years the FTC has employed Section 13(b) as its go-to mechanism for obtaining restitution and other equitable remedies from entities that the FTC believes have violated the law.  As noted above, this case creates a circuit split about the authority of a federal government agency, which seemingly sets the stage for an FTC cert petition and a better than average chance for Supreme Court review.  So what would happen if the Supreme Court were to agree with the Seventh Circuit’s ruling?  Barring a change in the statute (which one FTC Commissioner recently sought in Congressional testimony) the FTC would be precluded from seeking restitution without going through the time-consuming and burdensome process of seeking and obtaining an administrative cease and desist order after a full trial, and then having to file a separate court action to get that relief.  For all practical purposes, an adverse ruling by the Supreme Court without a change in the wording of the statute would effectively take the FTC out of the business of obtaining restitution and other equitable remedies.

In the meantime, this decision represents yet another blow to how the FTC has historically asserted its authority.  As we covered here, here, here, here, and here, the Third Circuit earlier held that the FTC may only bring a case under Section 13(b) of the FTCA when it can articulate specific facts that a defendant “is violating” or “is about to violate” the law.  And there could be broader implications to other government agencies that seek restitution without explicit authority to do so.  As noted in articles published by John Fleder and Jeff Gibbs in 2003 and 2006, here and here, FDA’s authority to obtain restitution or disgorgement is not grounded in statute, and may not withstand scrutiny if subject to the same analysis the Seventh Circuit applied here.

At the cGMP conference sponsored by pharmaconference.com earlier this month, FDA’s compliance wing encouraged pharmaceutical companies to ensure that they demonstrate “quality maturity,” and offered specifics about what FDA wants to see.  Like my grandmother used to say this time of year about the best corn to make corn pudding, there is a difference between “old” and “mature.”  You don’t have to be old, to be mature.  The quality organization recipe FDA is promoting applies equally to startups and to established manufacturers and sponsors of medical products.  FDA’s advice on mature quality systems also applies equally to medical device companies and to pharmaceutical companies.

Preliminarily (a word I doubt my grandmother used very often), we should note that FDA’s advice on these points is not incorporated in binding statute or regulations, or even in published guidance documents.  Nonetheless, by following the advice offered by FDA on these issues, regulated industry can more likely avoid adverse findings during regulatory inspections, and find pathways to remediation that FDA will more likely accept, after adverse inspections.

Several FDA speakers at the conference (agenda here) discussed the importance of having mature quality systems, but the most specific advice was offered in a PowerPoint delivered by Theresa Mullin, FDA’s Associate Director for Strategic Initiatives for the Center for Drug Evaluation and Research and entitled “Update from FDA CDER.”

Summarizing the Quality Metrics Research Final Report by the University of St. Gallen in Switzerland, Morrison described the appropriate steps to ensure “quality maturity” as follows (emphasis is added):

1. Optimized set-up and cleaning procedures are documented as best practice process and rolled out throughout the whole plant.
2. A large percentage of equipment on the shop floor is currently under statistical process control.
3. For root cause analysis, the firm has standardized tools to get a deeper understanding of the influencing factors for problems.
4. Goals and objectives of the manufacturing unit are closely linked and consistent with corporate objectives and the site has a clear focus.
5. Manufacturers have joint improvement programs with suppliers to increase performance.
6. All potential bottleneck machines are identified and supplied with additional spare parts.
7. For product and process transfers between different units or sites, standardized procedures exist that ensure a fast, stable and complied [probably should read “compliant” instead of “complied”] knowledge transfer.
8. Charts showing the current performance status such as current scrap rates and current up times are posted on the shop floor and visible for everyone.
9. The firm regularly surveys customers’ requirements.
10. The firm ranks its suppliers and conducts supplier qualifications and audits.

Critically, a mature quality system should not be stagnant, nor should advice about the maturity of the quality system be considered in isolation.  FDA wants industry to produce and report quality metrics, as discussed in prior blogposts (here, here, and here).  Moreover, FDA encourages industry to aim for continuous improvement in manufacturing, laboratory, and quality systems.

So, back to corn pudding recipes.  What my grandmother meant by “mature” was that corn that had stayed a long time on the stalk might be past its prime, if eaten on the cob, but was the best to use to make corn pudding.  She didn’t recommend corn that had been picked days ago (“old” corn).  As to whether the best corn pudding is made just with eggs, or with eggs and flour, that is a whole ’nother controversy (here).