Category: FDA

Supreme Court Will Rule on Whether Agency-Approved Beverage Label Can Be Challenged as ‘False Advertising’ in Federal Court

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On January 10, 2014, the U.S. Supreme Court agreed to hear an appeal by Pom Wonderful LLC against The Coca-Cola Company.  The Court will examine whether Pom can bring a federal Lanham Act false advertising claim against a Minute Maid juice product label that had been approved by the U.S. Food and Drug Administration (FDA).  (Pom Wonderful LLC v. The Coca-Cola Co., U.S. Supreme Court case no. 12-761).

At issue in the lawsuit is a Minute Maid label for “Pomegranate Blueberry Flavored Blend of 5 Juices.”  The label presents the words “Pomegranate Blueberry” in larger type than the remainder of the phrase.  Pom claimed that the label was misleading because the product contains 0.3 percent pomegranate juice and 0.2 percent blueberry juice.

A California federal trial court and the 9th Circuit federal appeals court in California both ruled that Pom could not bring a Lanham Act false advertising claim against the label, since it had been specifically examined and approved by the FDA.  Pom has argued that the decisions were contrary to established law in other U.S. courts, and that federal regulations establish a floor –but not a ceiling — on what an advertiser is required to do to avoid a claim that the advertising is false and misleading.  Coca-Cola has argued that product labeling that is specifically authorized by the Food, Drug and Cosmetic Act (FDCA) and approved by the FDA cannot be charged as false or misleading under another federal statute such as the Lanham Act.

Although the question before the Supreme Court is whether a private party can bring a Lanham Act claim challenging a product label regulated under the FDCA, the Supreme Court’s decision could potentially have significant implications for the alcohol beverage industry.  For example:

  • If the Supreme Court rules that a competitor cannot bring a Lanham Act claim against a label that has been approved by the FDA, a natural question is whether the same rule will apply with regard to alcohol beverage labels that have been reviewed and approved by the Alcohol and Tobacco Tax and Trade Bureau (TTB) (by its terms, the Federal Alcohol Administration Act does not preempt the Lanham Act); and
  • If a Lanham Act claim would be barred against labels approved by TTB, a question may arise about whether a Lanham Act claim would be barred on elements of the label that TTB does not specifically review as a matter of policy – such as contrast, size and placement of label elements.

The Supreme Court is expected to hear argument this spring and decide the case by June 2014.  Depending on the decision, alcohol beverage industry members could find they have additional insulation against a federal false advertising claim, but they may likewise be limited in bringing a federal false advertising lawsuit against a competitor’s label that has been approved by TTB.

Article by:

Robert W. Zelnick

Of:

McDermott Will & Emery

FDA (Food and Drug Administration) Declines Courts’ Requests to Define “Natural” with respect to GMO (Genetically-Modified Organisms) Foods

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The FDA recently issued a letter to three federal district court judges declining the courts’ requests to adopt a definition of “natural” or to state whether the terms “natural” or “all natural” can be used to refer to foods containing genetically-modified organisms (GMOs) to help resolve pending consumer class actions over the term. The FDA cited three reasons for its decision not to define the term(s): (1) it would prefer to use a public, administrative process than to define the term in the context of private litigation; (2) the definition implicates other agencies, most notably, the USDA; and, (3) the FDA has limited resources and other matters currently take priority.

As noted in our August 2013 Alert on the issue, Judge Yvonne Gonzalez Rogers of theNorthern District of California started the trend in Cox v. Gruma Corp., a case in which the plaintiff alleges that Gruma’s use of “all natural” on its tortilla shells violates various consumer protection laws because they contain genetically-modified corn. In Van Atta v. General Mills, pending in Colorado and involving GMOs in granola products, a magistrate judge agreed with Judge Rogers and recommended a stay of proceedings in the case pending the FDA’s response to Judge Rogers’s request. Most recently, in Barnes v. Campbell Soup Co., also pending in the Northern District of California and involving GMOs in various soups, a different judge also stayed the case pending the FDA’s response.

These cases are potentially quite important because there are many pending consumer class actions, particularly in California, over whether the use of some variant of the term “all natural” is proper in light of one or more ingredients in the food at issue. Indeed, some quip that food labeling litigation has replaced tobacco and asbestos as the favorite category of suit for the plaintiffs’ bar. Thus, the FDA’s response to the request by these courts, and the courts’ further actions based on the response, could resolve or guide the resolution of many of these cases.

In a related development, the Grocery Manufacturers’ Association has recently filed a citizen’s petition asking FDA to state that GMO foods may be labeled “natural.” The FDA alluded to the possible filing of this petition in its letter, but did not state whether it is willing to take up the issue using that procedure, which does allow for public comment.

A copy of the FDA’s letter can be found here.

Article by:

Of:

Barnes & Thornburg LLP

I Scream, You Scream, We All Scream For…Ascertainability? Re: How Ben & Jerry’s Defeated an “All Natural” Class Certification Motion

Sheppard Mullin 2012

 

On January 7, 2014, the Northern District of California refused to certify a class of Ben & Jerry’s purchasers who allegedly had purchased ice cream that was falsely advertised as “all natural.” Astiana v. Ben & Jerry’s Homemade, Inc., No. C 10-4387 PJH, 2014 U.S. Dist. LEXIS 1640 (N.D. Cal. Jan. 7, 2014).  This opinion shows the continuing viability of arguments based on ascertainability and the Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) to defeat consumer class actions.  Thus, for many defendants, this opinion will get 2014 off to a delicious start.

In Astiana, the plaintiff alleged that certain Ben & Jerry’s ice creams were not “all natural” because they contained “alkalized cocoa processed with a synthetic ingredient.”  Astiana, p. 4.  After asserting claims under the Unfair Competition Law, False Advertising Law, as well as common law fraud and unjust enrichment, the plaintiff sought to certify a class of all California purchasers of “Ben & Jerry’s ice cream products that were labeled ‘All Natural’ but contained alkalized cocoa processed with a synthetic ingredient.”

The court denied class certification.  First, the court held that the class was not ascertainable so that it was “administratively feasible to determine whether a particular person is a class member.” Astiana, p. 5.  The court found that the plaintiff provided no evidence as to how the plaintiff could tell which consumers purchased ice cream with the synthetic ingredients because the synthetic ingredient was not present in every ice cream labeled as “all natural.”  Furthermore, because cocoa could be processed with a “natural” alkali, the ingredient list that only said “processed with alkali” was insufficient to identify the non-natural ice creams.  Even though only one supplier provided Ben & Jerry’s with the alkalized cocoa, the evidence demonstrated that the supplier did not know whether a synthetic ingredient was used in every instance.  Thus, even if every package was labeled “all natural,” it was impossible to tell which products actually contained the synthetic ingredients that would make the advertised claim false under California law.

Second, applying Comcast, the court held that the plaintiff was required to show “that there is a classwide method of awarding relief that is consistent with her theory of deceptive and fraudulent business practices.”  Astiana, p. 21.  The plaintiff offered no expert testimony on calculating damages, contending, instead, that it would be “simple math” to calculate Ben & Jerry’s profits and award “restitutionary disgorgement.”  The court held that this was insufficient: there was no evidence that the price of Ben & Jerry’s “all natural” ice cream was higher than its ice cream without that label, thus there was no evidentiary model tying damages to plaintiff’s theory of the case.  Since Ben & Jerry’s sold its products at wholesale (rather than to the public directly), these calculations would be extremely difficult, thereby debunking the plaintiff’s claim that the damages could be figured out with “simple math” and proving the need for expert testimony.  In light of the plaintiff’s failure to present evidence of “a damages model that is capable of measurement across the entire class for purposes of Rule 23(b)(3),” class certification was denied.

Astiana demonstrates that plaintiffs seeking to certify class actions involving small consumables will continue to run into ascertainability problems.  See e.g. Carrera v. Bayer, Corp., 727 F.3d 300 (3d Cir. 2013).  Astiana also represents the application of the strong reading of Comcast, essentially telling plaintiffs “No damages expert, no certification.”  If courts continued to adopt this reading of Comcast, plaintiffs will no longer be able to gloss over these significant (and oftentimes difficult) damages issues by simply asserting that the court can certify now and figure out the damages later.

Article by:

Paul Seeley

Of:

Sheppard, Mullin, Richter & Hampton LLP

Food and Drug Administration (FDA) Guidance for Industry and FDA Staff: Mobile Medical Applications

GT Law

 

On September 25, 2013, the Food and Drug Administration (the “FDA”) released final guidance on the regulatory requirements regarding the introduction of mobile medical applications into the marketplace (the “Final Guidance”).  The purpose of the Final Guidance and its Appendices is to assist manufacturers with determining if a product is a mobile medical app and if so the FDA’s expectations for that product.  This Alert summarizes some the key components of the Final Guidance.

I. Summary of the Guidance

This Final Guidance informs manufacturers, distributors and other entities on how the FDA intends to apply its regulatory authorities to select software applications intended for use on mobile platforms (mobile applications).1   Some mobile applications may meet the definition of a medical device under section 201 of the Federal Food, Drug, and Cosmetic Act (FD&C Act)), but because some may pose a lower risk to the public, FDA intends to exercise enforcement discretion.  A majority of mobile applications either do not meet the definition of the FD&C Act or are in a category where the FDA intends to exercise enforcement discretion.

The FDA intends to apply its regulatory oversight on those mobile applications that are medical devices and whose functionality could post a risk to a patient’s safety if the mobile application does not function appropriately.  The Final Guidance is intended to provide clarity and predictability for manufacturers of these mobile applications.

The Final Guidance provides lengthy definitions of the following terms:

  • Mobile Platform
  • Mobile Application
  • Mobile Medical Application
  • Regulated Medical Device
  • Mobile Medical App Manufacturer

The above-referenced definitions can be found in the full guidance.

II. Scope

The Final Guidance explains the FDA’s intent—to focus its oversight on a segment of mobile apps.

III. Regulatory Approach for Mobile Medical Apps

The FDA intends to apply its regulatory oversight to only those mobile apps that are (1) medical devices; and (2) whose functionality could pose a risk to a patient’s safety if the mobile app were to not function as intended. The FDA believes that if it fails to function as intended, this subset of mobile medical apps poses potential risks to the public health as currently regulated devices. The FDA strongly recommends that manufacturers who fall within the scope of this guidance follow the Quality System2  regulation (which includes good manufacturing practices) in the design and development of their mobile medical apps and initiate prompt corrections to their mobile medical apps, when appropriate, to prevent patient and user harm. Manufacturers of mobile medical apps must meet the requirements associated with the applicable device classification.

A. Mobile medical apps: Subset of mobile apps that are the focus of the FDA’s regulatory oversight

The FDA currently intends to apply its regulatory oversight to only the subset of mobile apps.3   Of major importance, mobile apps can transform a mobile platform into a regulated medical device by using attachments, display screens, sensors, or other such methods. In spite of the transformation, FDA considers such mobile apps to be mobile medical apps.

The following are mobile apps that the FDA considers to be mobile medical apps that are subject to regulatory oversight:

  • Mobile apps that are an extension of one or more medical devices by connecting4  to such device(s) for purposes of controlling5  the device(s) or displaying, storing, analyzing, or transmitting patient-specific medical device data.
  • Mobile apps that transform the mobile platform into a regulated medical device by using attachments, display screens, or sensors or by including functionalities similar to those of currently regulated medical devices. Mobile apps that use attachments, display screens, sensors or other such similar components to transform a mobile platform into a regulated medical device are required to comply with the device classification associated with the transformed platform.
  • Mobile apps that become a regulated medical device (software) by performing patient-specific analysis and providing patient-specific diagnosis, or treatment recommendations. These types of mobile medical apps are similar to or perform the same function as those types of software devices that have been previously cleared or approved.

B. Mobile Apps for which the FDA intends to exercise enforcement discretion (meaning that FDA does not intend to enforce requirements under the FD&C Act)

The Final Guidance illustrates the FDA’s exercise of enforcement discretion for mobile apps that: (i) Help patients (i.e., users) self-manage their disease or conditions without providing specific treatment or treatment suggestions; (ii) Provide patients with simple tools to organize and track their health information; (iii) Provide easy access to information related to patients’ health conditions or treatments; (iv) Help patients document, show, or communicate potential medical conditions to health care providers; (v) Automate simple tasks for health care providers; or (vi) Enable patients or providers to interact with Personal Health Record (“PHR”) or Electronic Health Record (“EHR”) systems.

It is important to note that some mobile apps listed above and below may be considered mobile medical apps, and others might not.

The following examples represent mobile apps for which the FDA intends to exercise enforcement discretion:

  • Mobile apps that provide or facilitate supplemental clinical care, by coaching or prompting, to help patients manage their health in their daily environment.
  • Mobile apps that provide patients with simple tools to organize and track their health information.
  • Mobile apps that provide easy access to information related to patients’ health conditions or treatments (beyond providing an electronic “copy” of a medical reference).
  • Mobile apps that are specifically marketed to help patients document, show, or communicate to providers potential medical conditions.
  • Mobile apps that perform simple calculations routinely used in clinical practice.
  • Mobile apps that enable individuals to interact with PHR systems or EHR systems.

IV. Regulatory Requirements

Manufacturers of mobile medical apps are subject to the requirements described in the applicable device classification regulation.6

Our team will continue to provide you with updated information on various aspects of this Final Guidance.

1 While many have suggested that this guidance provides similar views on software, the Agency has taken a more formalized position on certain software requirements and the classification of such products.  For example, the FDA has previously clarified that when stand-alone software is used to analyze medical device data, it has traditionally been regulated as an accessory to a medical device or as medical device software.  Medical Devices; Medical Device Data Systems Final Rule (76 FR 8637) (Feb. 15, 2011).

2 See 21 CFR part 820.

3 See Appendix C.

4 To meet this criterion, the mobile medical apps need not be physically connected to the regulated medical device (i.e. the connection can be wired or wireless).

5 Controlling the intended use, function, modes, or energy source of the connected medical device.

6 Class I devices: General Controls, including:

  • Establishment registration, and Medical Device listing (21 CFR Part 807);
  • Quality System (QS) regulation (21 CFR Part 820);
  • Labeling requirements (21 CFR Part 801);
  • Medical Device Reporting (21 CFR Part 803);
  • Premarket notification (21 CFR Part 807);
  • Reporting Corrections and Removals (21 CFR Part 806); and
  • Investigational Device Exemption (IDE) requirements for clinical studies of investigational devices (21 CFR Part 812).

Class II devices: General Controls (as described for Class I), Special Controls, and (for most Class II devices) Premarket Notification.

Class III devices: General Controls (as described for Class I), and Premarket Approval (21 CFR Part 814).

 

Article by:

Of:

Greenberg Traurig, LLP

What Does The Word “Natural” Mean, Anyway?

Mintz Logot’s 2 o’clock in the afternoon, you need a snack – maybe a granola bar, but which one? Does the package that boasts it is “100% Natural” win out over the one that is only “All Natural”?  Would you even consider one that is merely “Natural”? Well, don’t expect the U.S. Food and Drug Administration to help you decide anytime soon – they have left it up to the courts to grapple with.

Lawsuits against food companies alleging consumer fraud based on deceptive labeling have increased in the last few years.  Many of these lawsuits have been brought in the U.S. District Court in the Northern District of California, causing that court to be known as the “Food Court” (no, not the one at the mall).  One common bone of contention is the use of the word “natural” in food labeling.  “Natural” remains undefined by the U.S. Food and Drug Administration after a failed attempt to do so in 1991.  It reaffirmed its informal policy for use of the word “natural” on food labeling claims:

The agency will maintain its current policy . . . not to restrict the use of the term “natural” except for added color, synthetic substances, and flavors as provided in [21 CFR] §101.22.  Additionally, the agency will maintain its policy . . . regarding the use of “natural,” as meaning that nothing artificial or synthetic (including all color additives regardless of source) has been included in, or has been added to, a food that would not normally be expected to be in the food.  Further, at this time the agency will continue to distinguish between natural and artificial flavors as outlined in §101.22. See more here.

A typical claim in a lawsuit will contend that the use of the word “natural,” whether as “100% Natural,” “All Natural,” or something similar, is misleading if the product contains or was processed with a compound perceived by plaintiffs to be artificial or synthetic.  The problem in these lawsuits is that the term is undefined, and even FDA says that it is difficult to define a food product that is natural because it has likely been processed and is no longer a “product of the earth.”  This leaves fertile ground for plaintiff’s class action attorneys to bring claims against food companies for any use of the word.

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U.S. Medical Oncology Practice Sentenced for Use and Medicare Billing of Cancer Drugs Intended for Foreign Markets

GT Law

In a June 28, 2013 news release by the Office of the United States Attorney for the Southern District of California, in San Diego, it was reported that a La Jolla, California medical oncology practice pleaded guilty and was sentenced to pay a $500,000 fine, forfeit $1.2 million in gross proceeds received from the Medicare program, and make restitution to Medicare in the amount of $1.7 million for purchasing unapproved foreign cancer drugs and billing the Medicare program as if the drugs were legitimate. Although the drugs contained the same active ingredients as drugs sold in the U.S. under the brand names Abraxane®, Alimta®, Aloxi®, Boniva®, Eloxatin®, Gemzar®, Neulasta®, Rituxan®, Taxotere®, Venofer® and Zometa®), the drugs purchased by the corporation were meant for markets outside the United States, and were not drugs approved by the FDA for use in the United States. Medicare provides reimbursement only for drugs approved by the Food and Drug Administration (FDA) for use in the United States. To conceal the scheme, the oncology practice fraudulently used and billed the Medicare program using reimbursement codes for FDA approved cancer drugs.

In pleading guilty, the practice admitted that from 2007 to 2011 it had purchased $3.4 million of foreign cancer drugs, knowing they had not been approved by the U.S. Food and Drug Administration for use in the United States. The practice admitted that it was aware that the drugs were intended for markets other than the United States and were not the drugs approved by the FDA for use in the United States because: (a) the packaging and shipping documents indicated that drugs were shipped to the office from outside the United States; (b) many of the invoices identified the origin of the drugs and intended markets for the drugs as countries other than the United States; (c) the labels did not bear the “Rx Only” language required by the FDA; (d) the labels did not bear the National Drug Code (NDC) numbers found on the versions of the drugs intended for the U.S. market; (e) many of the labels had information in foreign languages; (f) the drugs were purchased at a substantial discount; (g) the packing slips indicated that the drugs came from the United Kingdom; and (h) in October, 2008 the practice had received a notice from the FDA that a shipment of drugs had been detained because the drugs were unapproved.

In a related False Claims Act lawsuit filed by the United States, the physician and his medical practice corporation paid in excess of $2.2 million to settle allegations that they submitted false claims to the Medicare program. The corporation was allowed to apply that sum toward the amount owed in the criminal restitution to Medicare. The physician pleaded guilty to a misdemeanor charge of introducing unapproved drugs into interstate commerce, admitting that on July 8, 2010, he purchased the prescription drug MabThera (intended for market in Turkey and shipped from a source in Canada) and administered it to patients. Rituxan®, a product with the same active ingredient, is approved by the Food and Drug Administration for use in the United States.

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A Short-Lived Victory for Generic Drug Manufacturers?

Sheppard Mullin 2012

On June 24, 2012, the U.S. Supreme Court handed down its decision in Mutual Pharmaceutical Co. Inc. v. Bartlett, 570 U.S. ____ (2013), finding that design-defect claims against generic drug companies are pre-empted where federal law prohibits an action required by state law. The Supreme Court had previously held in Pliva v. Mensing, 564 U.S. ____ (2011) that failure to warn claims against generic drug manufacturers are pre-empted by the Federal Food Drug and Cosmetic Act since generic drug makers must copy innovator drug labeling precisely in order to obtain approval of their products by the U.S. Food and Drug Administration (“FDA”). The Court in Mutual rejected the argument of lower courts that the generic manufacturer could comply with both federal and state law by choosing not to make and distribute the product at all.

The case in question involved the drug sulindac, a non-steroidal anti-inflammatory drug product marketed by the innovator as Clinoril®. The plaintiff in the case had been prescribed sulindac for treatment of shoulder pain. She subsequently developed a case of toxic epidermal necrolysis following taking an FDA approved generic product equivalent to Clinoril®, which resulted in significant and permanent disability (including blindness) and disfigurement. Subsequent to the event, the FDA required a more specific warning as to this possible side effect on sulindac products. A jury found the generic manufacturer liable under a theory that there was a design defect with the product, and the First Circuit affirmed, holding that the generic manufacturer could have complied with both federal and state law by not manufacturing and distributing the product. This was the method by which the lower courts overcame prior precedent that a state law may be impliedly pre-empted when it is not possible to comply with both federal and state law.

The Supreme Court in Mutual noted that the generic manufacturer could not comply with the state law, since federal law requires that the active ingredient, the amount of the active ingredient, the dosage form, and the labeling had to be identical to the innovator product. In this case, it was not possible to redesign the product, and the only way, under New Hampshire law, to remedy the design defect would have been to strengthen the product’s warnings. That too could not be done, as FDA rules require the labeling of the generic to be identical to that of the innovator. The Court ruled that in such a case the state law is without effect, and relevant New Hampshire warning-based design defect cause of action was pre-empted with respect to FDA-approved generic drugs sold in interstate commerce.

The scope of the Mutual decision may be limited to those states where design-defect claims allow for a risk-utility approach such as that the New Hampshire requires. The New Hampshire standard requires, among other things in determining whether there is a valid cause of action for a design defect, a determination as to whether there is a possible warning to avoid unreasonable risk of harm from the design defect and the efficacy of such warning. So not every design-defect claim may be pre-empted, depending on each state’s laws are interpreted. But given the Court’s reasoning, even state laws that do not take into effect the presence of and efficacy of a warning, may be pre-empted, as the generic must copy the formula of the innovator in all respects, except for the inactive ingredients in the product. (It should be noted that generics of some dosage forms – ophthalmic products and injectable products – must, in most cases, contain the same inactive ingredients as in the innovator product in the same amounts).

Furthermore, the FDA may amend its rules to permit ANDA holders to make changes in labeling. See “FDA Rule Could Open Generic Drug Makers to Suits,” The New York Times, Business, July 4, 2013, at B2. As stated in the posting on the OMB website (RIN 0910-A694):

Abstract: This proposed rule would amend the regulations regarding new drug applications (NDAs), abbreviated new drug applications (NDAs), abbreviated new drug applications (ANDAs), and biologics license applications (BLAs) to revise and clarify procedures for changes to the labeling of an approved drug to reflect certain types of newly acquired information in advance of FDA’s review of such change. The proposed rule would describe the process by which information regarding a “changes being effected” (CBE) labeling supplement submitted by an NDA or ANDA holder would be made publicly available during FDA’s review of the labeling change. The proposed rule also would clarify requirements for the NDA holder for the reference listed drug and all ANDA holders to submit conforming labeling revisions after FDA has taken an action on the NDA and/or ANDA holder’s CBE labeling supplement. These proposed revisions to FDA’s regulations would create parity between NDA holders and ANDA holders with respect to submission of CBE labeling supplements.

The expected date for a Notice of Proposed Rulemaking is September 2013. It could, of course, take FDA quite some time to propose a rule, and put it into effect, given the requirements of the Administrative Procedure Act. And Congressional action is also a possibility.

For the present, however, generic drug manufacturers appear to be shielded from liability under the doctrine of pre-emption from most, if not all, failure to warn and design defect claims under state law. Whether that victory is short-lived or not remains to be seen.

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Internal Revenue Service (IRS) Capitalized Legal Fees Incurred by Pharmaceutical Company

 

McDermottLogo_2c_rgbIn a recently released Field Attorney Advice, the Internal Revenue Service (IRS) Office of Chief Counsel concluded that a pharmaceutical company must capitalize legal fees incurred to obtain Food and Drug Administration approval for marketing and selling generic drugs and to prevent the marketing and sale of a competing generic drug.  The IRS Office of Chief Counsel also concluded that it could impose an adjustment on audit to capitalize legal fees that the taxpayer expensed in prior years, including years closed by statute of limitations.

In a recently published Internal Revenue Service (IRS) Field Attorney Advice (FAA 20131001F, March 8, 2013), the IRS Office of Chief Counsel concluded that a pharmaceutical company must capitalize legal fees incurred to obtain U.S. Food and Drug Administration (FDA) approval for marketing and selling new generic drugs and to prevent the marketing and sale of a competing generic drug.  The IRS also concluded that the Commissioner could change the taxpayer’s method of accounting for the legal fees and impose an adjustment on audit to capitalize legal fees that the taxpayer expensed in prior years, including years closed by the statute of limitations.

NDA and ANDA

In order to market or sell a new drug in the United States, a New Drug Application (NDA) must be submitted to and approved by the FDA.  An NDA consists of clinical and nonclinical data on the drug’s safety and effectiveness, as well as a full description of the methods, facilities and quality controls employed during manufacturing and packaging.  An NDA also must disclose all the patents that cover the drug.

To market or sell a generic version of an existing FDA-approved drug, the maker of the generic drug must submit an Abbreviated New Drug Application (ANDA) for FDA approval.  An ANDA generally is not required to include preclinical and clinical trial data to establish safety and effectiveness.  Instead, an ANDA applicant must show that its generic drug is bioequivalent to an existing drug.  In addition, an ANDA applicant is required to provide certification that the ANDA will not infringe on the patent rights of a third party.  Specifically, if an applicant seeks approval prior to the expiration of patents listed by the NDA holder, then a “paragraph IV certification” must be submitted by the applicant to certify that it believes its product or the use of its product does not infringe on the third party’s patents, or that such patents are not valid or enforceable.  The first generic drug applicant that files an ANDA containing a paragraph IV certification is granted, upon approval, 180 days of marketing exclusivity.

For an ANDA with a paragraph IV certification, the applicant must send notices to the NDA holder for the referenced drug and to all patentees of record for the listed patents within 20 days of FDA notification that the ANDA is accepted for filing.  If neither the NDA holder nor the patent holders bring an infringement lawsuit against the ANDA applicant within 45 days, the FDA may approve the ANDA.  If the NDA holder or the patent holders file a patent infringement lawsuit against the ANDA applicant within 45 days, a stay prevents the FDA from approving the ANDA for up to 30 months.  If, however, the patent infringement litigation is still ongoing after the 30 months, the FDA may approve the ANDA.

The Facts

The taxpayer is a pharmaceutical company engaged in developing, manufacturing, marketing, selling and distributing generic and brand name drugs.  In the process of filing ANDAs with a paragraph IV certification, the taxpayer incurred legal fees in lawsuits filed by patent and NDA holders for patent infringement.  In addition, the taxpayer as an NDA holder incurred legal fees in a lawsuit it filed against an ANDA applicant with a paragraph IV certification to protect its right to sell its branded drug until all patents expired.  The taxpayer sought to deduct its legal fees as ordinary and necessary business expenses.

The IRS Analysis

Legal Fees Incurred in the Process of Obtaining FDA Approval of ANDAs

The IRS concluded that the legal fees incurred by the taxpayer as an ANDA applicant to defend actions for patent infringement in the process of filing the ANDA with paragraph IV certification must be capitalized under Treas. Reg. § 1.263(a)-4.  The IRS characterized the fees as incurred to facilitate the taxpayer obtaining the FDA-approved ANDAs with paragraph IV certification, which granted the applicant the right to market and sell a generic drug before the expiration of the patents covering the branded drugs, and by filing early, potentially with a 180-day exclusivity period.  As such, the IRS concluded, the fees are required to be capitalized as amounts paid to create or facilitate the creation of an intangible under Treas. Reg. § 1.263(a)-4(d)(5).  In so concluding, the IRS rejected the taxpayer’s argument that its fees did not facilitate obtaining FDA-approved ANDAs because it could have commercialized its generic drugs after the 30-month stay expired regardless of the outcome of the lawsuits.  The IRS reasoned that the filing of the ANDAs with paragraph IV certification and the defense of the patent infringement lawsuit were a part of a series of steps undertaken in pursuit of a single plan to create an intangible.

The IRS further concluded that the cost recovery of the capitalized legal fees incurred to obtain the FDA-approved ANDAs must be suspended until the FDA approves the ANDAs, and the capitalized fees must be amortized on a straight-line basis over 15 years as section 197 intangibles.

Legal Fees Incurred to Protect Its Right Against Other ANDA Applicants with Paragraph IV Certification

With respect to the legal fees incurred by the taxpayer as an NDA holder in the litigation against another ANDA applicant, the IRS characterized the fees incurred to defend the validity of the patents owned by the taxpayer as amounts paid to defend or perfect title to intangible property that are required to be capitalized under Treas. Reg. § 1.263(a)-4(d)(9).  In contrast, the fees incurred by the taxpayer in the litigation relating to determining whether valid patents have been infringed are not required to be capitalized under Treas. Reg. § 1.263(a)-4(d)(9).

The IRS further concluded that the capitalized fees incurred to protect the patents and the FDA-approved NDA must be added to the basis of the patents to be depreciated under section 167.  The cost recovery begins in the months in which the legal fees were incurred and is allocated over the remaining useful lives of the patents.

In characterizing the legal fees incurred by the taxpayer in defending the validity of its patents as costs of defending or perfecting title to intangible property, the IRS distinguished the legal fees at issue from the litigation expenses incurred by the taxpayers in defending a claim that their patents were invalid in Urquhart v. Comm’r, 215 F.2d 17 (3rd Cir. 1954).  In Urquhart, the taxpayers were participants in a joint venture that was engaged in the business of inventing and licensing patents.  The taxpayers obtained two patents involving fire-fighting equipment and, after threatening litigation against Pyrene Manufacturing Company, brought an infringement suit against a customer of Pyrene, seeking an injunction and recovery of profits and damages.  The case was dismissed, and Pyrene subsequently commenced an action against the taxpayers seeking a judgment that the taxpayers’ patents were invalid and that its own apparatus and methods did not infringe the patents.  A counterclaim was filed for an injunction against infringement, and an accounting for profits and damages.  Pyrene did not raise any questions as to title to, or ownership of, the patents and was successful in the lawsuit.  The patents held by the taxpayers were found to be invalid.  In holding that the legal fees incurred by the taxpayer were deductible as ordinary and necessary business expenses, the U.S. Court of Appeals for the Third Circuit rejected the IRS’s contention that the litigation was for the defense or protection of title.

Distinguishing the FAA from Urquhart, the IRS focused on the fact that the taxpayers in Urquhart were professional inventors engaged in the business of exploiting and licensing patents, and that Urquhart involved the taxpayers’ claims for recovering lost profits.  By emphasizing that Pyrene did not raise any issue as to title to the patents in Urquhart, the IRS seemed to ignore the fact that, like the taxpayer in the FAA, Pyrene sought a judgment on the validity of the taxpayers’ patents and that the outcome of the litigation in Urquhart also focused on the validity of the patents.

Change of Accounting Method for Legal Fees Incurred by the Taxpayer 

The IRS also concluded that the taxpayer’s treatment of its legal fess associated with each ANDA or patent as either deductible or capitalizable is a method of accounting that the Commissioner can change on an ANDA-by-ANDA or patent-by-patent basis.  The consequence of this conclusion, if valid, is that the IRS can impose on audit an adjustment to capitalize legal fees that the taxpayer deducted in prior years, including years closed by the statute of limitations.  For example, the IRS can include in the taxpayer’s gross income for the earliest year under examination an adjustment equal to the amount of the legal fees the taxpayer previously deducted, less the amount of amortization that the taxpayer properly could have taken had the taxpayer capitalized the legal fees.

A taxpayer that voluntarily changes its method of accounting, however, receives more favorable terms and conditions than a taxpayer that has its method of accounting changed by the IRS on examination.  For example, a taxpayer that changes its method of accounting voluntarily can spread the adjustment resulting from the change over four taxable years, and the first year of the adjustment is the current taxable year as opposed to the earliest open taxable year.

The publication of this FAA likely will bring the attention of examining agents to this issue.  Therefore, if a taxpayer believes it is using an improper method of accounting for legal fees (or any other item), it should carefully consider whether to voluntarily change its method of accounting before the IRS proposes to change the taxpayer’s method of accounting on examination.

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FDA Issues Final Guidance on Refuse to Accept Policy for 510(k)s and Premarket Approval Applications (PMAs): Food, Drug & Device Law Alert

The National Law Review recently published an article by Hae Park-Suk and Lynn C. Tyler, M.S. of Barnes & Thornburg LLP regarding New FDA Final Guidance:

Barnes & Thornburg

 

The FDA recently issued two final medical device guidance documents titled, “Refuse to Accept Policy for 510(k)s” and “Acceptance and Filing Reviews for Premarket Approval Applications (PMAs).” Draft versions of these two guidance documents had been issued last summer in response to the FDA Safety and Innovation Act. The FDA was able to finalize the documents promptly because they did not receive many adverse public comments.

In addition to explanation of the new policy, the 510(k) guidance includes three checklists – one each for traditional, abbreviated, and special 510(k)s – for use by FDA staff in determining whether to accept a 510(k) for filing. The 510(k) guidance explains that two prior guidance documents, which this one replaces, and its current checklist “deal[t] largely with administrative elements but [did] not address specific content that is essential for 510(k) review.” FDA hopes that that the new guidance and checklists “will clarify the content needed in traditional, special, and abbreviated 510(k) submissions to allow FDA to conduct a substantive review, thereby enhancing the quality of received 510(k) submissions and improving overall review time.”

Further, the guidance states that the acceptance review should be conducted and completed within 15 calendar days of FDA’s receipt of a 510(k). If FDA refuses to accept the filing, it will notify the submitter and send the submitter a copy of the completed checklist to help the submitter identify the deficiency. The submitter may submit the additional information identified in the checklist and FDA will perform the acceptance screening again, also within 15 calendar days of receipt of the information. If FDA refuses to accept the filing a second time, the submitter is again notified and given the new checklist. If FDA accepts the filing, the submitter is notified and FDA will begin a substantive review of the 510(k). If FDA does not respond within the 15 days, the 510(k) is deemed accepted and FDA will also notify the submitter and begin a substantive review.

The checklists include five preliminary questions to be answered before the content of the 510(k) is compared to the acceptance criteria: Is the product a device or a combination product with a device component? Is the application with the appropriate Center (CDRH or CBER)? Is 510(k) the appropriate regulatory submission? Is there a pending PMA (pre-market approval application) for the same device and indications for use? And, if clinical studies have been submitted, is the submitter the subject of the Application Integrity Policy?

The PMA guidance also replaces a prior document, in this case one from 2003. The PMA guidance also includes checklists for the acceptance decision and follows the same 15 day scheme as the 510(k) guidance. It has the same five preliminary questions as the 510(k) guidance to be answered before the content is compared to the acceptance criteria, only modified for the PMA context. In other words, the third question is whether a PMA is the appropriate regulatory submission and the fourth is whether there is a pending 510(k) for the same device and indications for use.

The PMA guidance identifies several grounds for refusing to accept a tendered PMA application. FDA will not accept a PMA if it is incomplete because it does not on its face contain all information required under section 515(c)(1)(A)-(G) of the FD&C Act. Another reason a PMA will not be accepted is if it does not contain each of items required under 21 C.F.R. § 814.20 and any justification for the omission of any item is inadequate. FDA will not accept a PMA if the Applicant has a 510(k) pending for same device, and the FDA has not determined whether the device falls within the scope of 21 C.F.R. § 814.1(c). A PMA will not be accepted if it contains a false statement of material fact or is not accompanied by a statement of either certification or disclosure as required by 21 CFR Part 54.

A copy of the 510(k) guidance can be found here and a copy of the PMA guidance can be found here.

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