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The Food and Drug Administration has a new weapon and it’s itching to use it. Throughout its history, the FDA has been limited in its ability to bring big-money cases against alleged lawbreakers. But now, thanks to a favorable court ruling and a high-profile $100 million settlement, the FDA has carved out a way to slap violators with multimillion dollar sanctions. And attorneys for drug and device companies are worried. “It has sent a wake-up call to the industry,” says Scott Bass, a partner in the D.C. office of Chicago’s Sidley & Austin, who represents numerous drug and pharmaceutical companies. “The health care industry has been hit with these kinds of settlements. There is a kind of sensitivity that this could happen” in drugs and medical devices. Traditionally, the FDA has had little power to seek fines. Instead, it has relied on injunctions or seizures to keep rogue companies in line. In those rare cases where it could seek civil money penalties, the fines have been low, usually in the $1 million range. Criminal prosecutions are rarer still. In years past, the agency has asked Congress for the ability to seek more or larger civil fines — and lost each time. Recently, however, as a result of a victory in United States v. Universal Management Services Inc., the agency found a way to add a financial component to its authority. In that case, the FDA faced off against a company that had sold gas grill ignitors, claiming use of the devices would ease such ailments as migraines and muscle problems. The agency concluded that the ignitors were unapproved medical devices and asked a judge to force the company to pay restitution to customers. The company argued that the Food, Drug, and Cosmetic Act did not give the agency the authority to seek restitution. The 6th U.S. Circuit Court of Appeals disagreed last September, saying that, unless specifically banned by Congress, the FDA could seek and courts could award various forms of fines and penalties. The decision came down at the height of a long-running disagreement between the agency and Abbott Laboratories over the company’s alleged violations of the FDA’s “good manufacturing practices.” Contending that Abbott’s production standards for diagnostic products were inadequate and improperly controlled during the past six years, the agency wanted to find a way to bring the company into compliance. The 6th Circuit’s decision paved the way for the FDA to seek a big penalty from Abbott. COSTLY CONSENT DECREE Just weeks after the 6th Circuit ruling, the FDA presented Abbott with a consent decree. The agency told the company that the opinion gave it the power to seek a monetary settlement, namely disgorgement of profits. The company quickly signed the consent decree, paying $100 million as disgorgement, the largest settlement in FDA history. The company also agreed to stop making many of its diagnostic products until the FDA signed off on its production methods. The company’s stock plummeted, shareholders filed lawsuits, and the planned acquisition of drug manufacturer Alza Corp. died soon after. To this day, the company is still being monitored by the agency and could face more fines and other legal action if the FDA finds it has not lived up to the consent decree. It was a spectacular example of the FDA’s newfound power. “I think it underscores our agency’s commitment to enforcement,” says Margaret Dotzel, the associate commissioner for policy. “We are not going to stand for continued violative behavior. I do think it’s a strong statement.” Abbott Laboratories and Abbott’s attorney, William Vodra, a partner with D.C.’s Arnold & Porter, decline comment. The FDA is perhaps best known for its role in approving new drugs and devices. But the agency’s authority goes far beyond that. It also monitors the day-in, day-out functions of companies under its jurisdiction, ensuring that they manufacture their products safely and correctly. The agency does so with production guidelines known as “good manufacturing practices.” Companies are required to follow these regulations, which lay out standards for keeping records, monitoring production runs, and testing the end product. Like any federal agency, the FDA can’t be everywhere, all the time. Factories are only inspected roughly once every two years. In essence, the FDA relies on companies to regulate themselves. Fear of enforcement helps ensure that companies stay well-behaved. Nothing helps build up that fear like a few prominent cases involving big-name companies. The Abbott case is textbook example. “They do it by the old crucifixion principle,” says Donald Stone, a partner at D.C.’s McKenna & Cuneo, of the FDA’s regulatory tactics. “You pick someone out, pillory him, and crucify him by the side of the road for everyone to see. The intent is to keep everyone else in line.” The ability to ask for disgorgement of profits also gives the FDA more leverage with some companies that seemed all but immune from punishment. One of the FDA’s most powerful tools against companies that violate manufacturing procedures is to take their products off the market for a period of time. But there are some manufacturers who make the only product on the market or make a device needed by consumers. These “medically necessary” products are deemed too important to be removed from shelves. In recent years, FDA employees said some companies were not taking compliance very seriously because they believed they were protected from shutdowns. “We seemed to be running into more and more of these cases,” said one FDA lawyer. “Medically necessary was becoming a byword. There has to be some force the agency can bring. So this was the perfect answer to that dilemma.” Attorneys who represent pharmaceutical companies and drug manufacturers strongly object to any charges of lax attitudes among the companies. “I think the companies take the FDA very seriously,” says Peter Safir, a partner at D.C.’s Kleinfeld, Kaplan & Becker. “But if the FDA perceives indifference there is no question high-profile enforcement actions are a way to solve that.” The Abbott case, as a consent decree, doesn’t carry any power of precedent in a court of law. But it does establish a practical precedent, a watermark of what the agency can ask for and receive. And in many cases that will prove the most valuable benefit to the FDA. “They can ask for whatever they want,” Safir says. And while the agency won’t always get what it asks for, it is now in a position to seek more than before. SHIFTING DYNAMIC What the Abbott settlement will likely change is the dynamic between large companies or repeat offenders and the FDA, say lawyers who represent companies before the agency. The FDA will now pursue — and in many cases get — larger amounts of money in consent agreements. Indeed, most companies find settling a far more attractive option than litigation. Time, money and publicity are all factors in the company’s decision. Plus, companies also know that after the case is finished, they still have to work with the agency. “The other thing about the FDA is the concern about retaliation,” says Ivan Wasserman, an attorney at D.C.’s Arent Fox Kintner Plotkin & Kahn. “Two years from now, you are going to need the FDA to approve your product. There has always been a fear of getting on the agency’s bad side.” As for the FDA’s right to seek disgorgement of profits, some still see it a legally debatable point. But as much as some companies might like to see the FDA stripped of its newly discovered power, the legality may not be challenged anytime soon. After all, no one seems eager to pick a fight with the FDA. “It would take a company that would have an awful lot to lose in a settlement,” says Ralph Simmons, a partner at D.C.’s Keller and Heckman. “You would have to be looking at pretty serious losses. The company would have to feel like its existence is at stake and felt like they had nothing else to lose.”

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