2017 Significant Settlements

Jacqueline J. Chan

Introduction

Whereas much of this book discusses cases resolved by a court or a jury, this chapter highlights some significant settlements between the food and drug industry and the U.S. Food and Drug Administration (FDA) in conjunction with the U.S. Department of Justice (DOJ) in 2017. FDA and DOJ have far reaching enforcement powers including civil penalties and criminal prosecution.

As in recent years, many of the settlements discussed here arise from DOJ’s substantial use of the False Claims Act (FCA) that imposes liability on persons and companies who defraud governmental programs and contracts. Between fiscal years 2010 and 2017, DOJ recovered $32 billion through FCA settlements and judgments.1 Fiscal year 2017 resulted in more than $3.7 billion in FCA settlement and judgments,2 which was a dip from the $4.7 billion in FCA recoveries in fiscal year 2016 (which was the third highest annual recovery in FCA history).3 However, FCA recoveries generally have been consistently high in recent years, with no annual recoveries below $3 billion since 2010.4 In 2017, the largest recoveries again came from the health care industry ($2.4 billion) with over $900 million from the drug and medical device industry.5 This was the eighth consecutive year that health care industry recoveries exceeded $2 billion, further reinforcing the government’s continued interest in the health care industry.

Fiscal year 2017 marked the fourth highest number of new FCA matters filed in a fiscal year, with nearly 800 new cases between the government and whistleblowers (known as relators in qui tam actions).6 As in past years, relator lawsuits accounted for the majority of FCA matters (674 cases versus the 125 cases filed by the government). Relators receive up to 30 percent of any recovery and such recoveries accounted for $3.4 billion out of the $3.7 billion total (the second highest yearly total for qui tam actions). Relators also showed a marked interest in continuing to pursue lawsuits even where the government did not intervene; such recoveries were the second highest ever in fiscal year 2017. Further of note, where relators are typically an employee or former employee of the company, one of the major FY 2017 FCA settlements came from a rival company relator (Sanofi-Aventis) in the EpiPen case against Mylan Inc. and Mylan Specialty L.P.7 From the $465 million settlement, Sanofi-Aventis received $38.7 million as its share of the federal recovery.

The 2017 settlements also illustrate DOJ’s commitment to holding individuals accountable for corporate wrongdoing in line with DOJ’s memorandum issued in September 2015. Commonly referred to as the “Yates memorandum,” the memorandum reinforced DOJ’s “commitment to us[ing] the False Claims Act and other civil remedies to deter and redress fraud by individuals as well as corporations.”8 In its year end press release, DOJ reiterated its focus on “ensur[ing] individual accountability for corporate wrongdoing by pursuing False Claims Act and other civil remedies to redress fraud by individuals as well as corporations.”9 Indeed, DOJ announced it recovered more than $60 million in settlements and judgments with individuals that did not involve a corporate entity.10 It also highlighted settlements where individual owners and executives of private corporations agreed to be held jointly and severally liable for settlement payments with their corporations, including a $155 million settlement with a national electronic health records software vendor, eClinicalWorks, and a $145 million settlement with a skilled nursing facility chain, Life Care Centers of America.11 This chapter discusses some of the key FCA settlements as well as other representative settlements and consent decrees between the food and drug industry and the government from 2017.

Drugs

  1. Mylan Inc. and Mylan Specialty L.P.12

Mylan Inc. and Mylan Specialty L.P. paid $465 million to resolve allegations that they violated the FCA when knowingly misclassifying EpiPen as a generic drug to avoid paying rebates owed primarily to Medicaid. The government alleged that Mylan erroneously reported EpiPen as a generic drug to Medicaid despite the absence of any therapeutically equivalent drugs, thus enabling Mylan to demand significant price increases while avoiding its rebate obligations to Medicaid. Under the Medicaid Drug Rebate Program, single-source (or brand name) drugs are subject to a higher rebate that is payable to Medicaid, which increases to the extent the drug price outpaces the inflation rate. On the other hand, generic drugs originating from multiple manufacturers are subject to lower rebates. According to the government, Mylan increased the price of EpiPen by approximately 400 percent between 2010 and 2016 but paid only a fixed 13 percent rebate to Medicaid.

Mylan also entered into a corporate integrity agreement with the U.S. Department of Health and Human Services, Office of Inspector General. The agreement requires an independent review organization to annually review Mylan’s Medicaid drug rebate program practices. The lawsuit against Mylan was initiated by Sanofi-Aventis US LLC under the whistleblower provisions of the FCA. As a result, Sanofi-Aventis received $38.7 million as its share of the federal recovery.

b. Baxter Healthcare13

Baxter Healthcare Corporation (Baxter) paid $18.158 million to resolve criminal and civil allegations arising from Baxter’s failure to follow current Good Manufacturing Practices (cGMPs) when manufacturing sterile drug products. The $18 million includes a FCA settlement of $2.158 million and $431,535 payout to an employee whistleblower who filed the lawsuit. Baxter allegedly introduced adulterated drugs into interstate commerce when it failed to follow cGMPs. It manufactured large-volume sterile intravenous solutions in a clean room that had air pushed into it through high-efficiency particulate absorption (HEPA) filters that were installed in the ceiling. A whistleblower employee reported the presence of mold on the HEPA filters to plant management but Baxter continued to manufacture IV solutions without removing or replacing the filters. Subsequent filter testing by FDA inspectors showed several mold species on the filters. There was no evidence of impact on the products or harm to patients.

FCA lawsuits based on a failure to comply with cGMPs are generally rare. Here, the government tied Baxter’s actions to the fact that Baxter sold these products to the government under contracts that required compliance with the Federal Food, Drug and Cosmetic Act (FDCA). As such, DOJ alleged that Baxter submitted false claims and thus violated the FCA. Under the terms of the deferred prosecution agreement, Baxter paid the monetary penalties and forfeiture and implemented enhanced compliance provisions, including periodic certifications to the government concerning its implementation of those provisions.

c. Mallinckrodt LLC14

Pharmaceutical manufacturer Mallinckrodt LLC (Mallinckrodt) agreed to pay $3 million to resolve allegations that it violated the Controlled Substances Act. DOJ has stated that “[t]his is the first settlement of its magnitude with a manufacturer of pharmaceuticals resolving nationwide claims that the company did not meet its obligations to detect and notify [the Drug Enforcement Administration (DEA)] of suspicious orders of controlled substances such as oxycodone.” The government alleged that Mallinckrodt had failed to design and implement an effective system to detect and report suspicious orders (i.e., orders unusual in frequency, size, or other patterns). As part of the settlement, Mallinckrodt is required to use downstream customer purchase information (“chargeback data”) and other similar data to monitor and report suspicious sales of oxycodone at the next level in the supply chain to DEA. This is in line with the DEA’s position that controlled substance manufacturers need to “know your customer’s customer” to ensure that these substances do not get in the wrong hands. The government also contended that Mallinckrodt violated certain record keeping requirements creating discrepancies between the actual number of tablets manufactured and the reported number of tablets manufactured. The settlement required specific procedures to ensure accuracy of batch records.

d. Novo Nordisk15

Novo Nordisk Inc. agreed to pay $58.65 million to settle allegations related to its Type II diabetes medication Victoza, including a $46.5 million settlement for FCA violations and disgorgement of $12.15 million for alleged violations of the FDCA. The government contended that FDA required a Risk Evaluation and Mitigation Strategy (REMS) in which Novo Nordisk was required to provide information regarding Victoza’s potential risk of Medullary Thyroid Carcinoma (MTC) to physicians. The government alleged that Novo Nordisk sales representatives gave physicians information to believe that this REMS-required message was erroneous, irrelevant, or unimportant and obscured the risk information. The government further contended that Novo Nordisk’s sales force encouraged the sale to and use of Victoza by adult patients who did not have Type II diabetes even though FDA has not approved Victoza as safe and effective for such patients. This settlement resolves seven lawsuits filed under the whistleblower provision of the FCA.

e. United Therapeutics16

United Therapeutics Corporation (United Therapeutics) agreed to pay $210 million to settle FCA claims that it used a foundation as a conduit to pay Medicare patient copays taking United Therapeutics’ pulmonary arterial hypertension drugs in violation of the FCA. Under the Anti-Kickback Statute, a pharmaceutical company is prohibited from offering or paying remuneration (directly or indirectly) to induce Medicare patients to purchase the company’s product. The government alleged that United Therapeutics made donations to a foundation that in turn used those donations to pay Medicare copays for United Therapeutics’ drugs to induce patients to purchase the drugs. United Therapeutics entered into a corporate integrity agreement with the Department of Health and Human Services, Office of Inspector General. Among other things, the agreement requires that United Therapeutics (1) implement measures designed to ensure that arrangements with third-party patient assistance programs are compliant with the law, (2) have review conducted by an independent review organization, (3) obtain compliance-related certifications from company executives and Board members, and (4) implement a risk assessment and mitigation process.

Medical Devices

  1. Shire Pharmaceuticals LLC—Largest False Claims Act Recovery by U.S. in Medical Device Kickback Case17

Shire Pharmaceuticals LLC and other subsidiaries of Shire plc (Shire) paid $350 million to settle federal and state FCA allegations that Shire and a company it acquired in 2011, Advanced BioHealing, used kickbacks and other unlawful methods to induce clinics and physicians to use or overuse its product, Dermagraft. Dermagraft is a bioengineered human skin substitute approved by FDA for the treatment of diabetic foot ulcers. The allegations claimed that Dermagraft salespersons unlawfully induced clinics and physicians to use Dermagraft with (1) dinners, drinks, entertainment, and travel, (2) medical equipment and supplies, (3) unwarranted payments for purported speaking engagements and case studies, and (4) cash, credits, and rebates. The United States alleged that Advanced BioHealing and Shire submitted or caused to be submitted hundreds of millions of dollars of false claims for Dermagraft to federally-funded health care programs.

U.S. Attorney’s Offices across several jurisdictions, including the Middle District of Florida, the District of Columbia, the Eastern District of Pennsylvania, and the Middle District of Tennessee contributed to the investigation and resolution of these matters. The settlement also resolved allegations that Shire and Advanced BioHealing unlawfully marketed Dermagraft for uses not approved by FDA, made false statements to inflate the price of Dermagraft, and caused improper coding and certification of Dermagraft claims and services. Beyond the civil settlement, U.S. attorneys for the Middle District of Florida are pursuing convictions against the individuals responsible for these illegal actions. Criminal convictions have included three high-level executives who supervised the implementation of the illegal kickback scheme and healthcare provider who received kickbacks.

Dietary Supplements

  1. Regeneca Worldwide18

Dietary supplement distributor, VivaCeuticals Inc., doing business as Regeneca Worldwide, and its CEO, agreed to a consent decree of permanent injunction to settle allegations that it was unlawfully distributing unapproved new drugs and adulterated and misbranded dietary supplements. The government’s complaint alleged that the defendants manufactured and distributed a product that contained the unsafe food additive 1,3 dimethylamylamine (DMAA) and failed to disclose the presence of DMAA on the product’s labeling. The complaint further alleged that the defendants violated the FDCA by marketing the product to be used in the cure, mitigation, treatment or prevention of diseases, causing the product to be an unapproved new drug and a misbranded drug. This enforcement action came after several FDA inspections of the manufacturing facility and a warning letter for marketing the dietary supplement containing DMAA. Regeneca had repeatedly assured FDA it would correct the violations yet continued to distribute the dietary supplement containing DMAA.

The consent decree requires Regeneca to cease all operations and, if it wishes to resume manufacturing dietary supplements or drugs in the future, FDA must first determine that its manufacturing practices have come into compliance with the law. Regeneca must, among other things, hire good manufacturing practice and labeling experts and implement procedures to comply with good manufacturing practice and labeling requirements.

b. Pick and Pay Inc./Cili Minerals LLC19

Manufacturer and distributor of drug and dietary supplements, Pick and Pay Inc./Cili Minerals (Cili Minerals) and its owner agreed to a consent decree of permanent injunction to settle allegations that it distributed misbranded and unapproved new drugs and misbranded and adulterated dietary supplements. The government’s complaint alleged that the defendants violated the FDCA by manufacturing, promoting, and distributing numerous dietary supplements marketed as drugs intended to treat or prevent diseases even though not approved by FDA. The complaint further contended that the claims were unsupported by well-controlled clinical studies or other credible scientific substantiation. According to the complaint, the defendants’ products were adulterated dietary supplements because they were not manufactured in compliance with good manufacturing practice regulations. The allegations underlying the government’s case were based on FDA’s findings during four facility inspections. For example, the inspections revealed that Cili Minerals failed to ensure the identity, purity, strength, and composition of their finished products. FDA had subsequently issued a warning letter to Cili Minerals.

The consent decree requires the company and its owner to cease all production and distribution of misbranded and unapproved new drugs and adulterated and misbranded dietary supplements and recall and destroy their drugs and dietary supplements. If the company and its owner wish to resume manufacturing dietary supplements and/or drugs in the future, they must hire labeling and good manufacturing practices experts and receive written permission from FDA to resume operations.

c. EonNutra LLC, CDSM LLC, and HABW LLC20

EonNutra LLC, two related companies (CDSM LLC and HABW LLC), and their owner (defendants) agreed to a consent decree of permanent injunction to settle allegations that it sold and distributed misbranded and unapproved new drugs and misbranded and adulterated dietary supplements. The government’s complaint alleged that the defendants violated the FDCA by marketing its labeled dietary supplements as drugs with claims that the products could help treat or prevent serious conditions or diseases. The complaint further alleged that defendants offered these claims without FDA approval and sold the supplements without implementing procedures to validate the dietary supplements’ composition. The claims were allegedly unsupported by well-controlled clinical studies or other credible scientific substantiation. The complaint also alleged that the defendants’ products were adulterated dietary supplements because they were not manufactured in compliance with cGMP regulations. The allegations were based on FDA’s findings during four facility inspections. For example, the inspections revealed that EonNutra LLC, CDSM LLC, and HABW LLC failed to ensure the identity, purity, strength, and composition of their finished products. Despite FDA’s warnings, defendants continued to post claims on their websites about their products curing, mitigating, treating, and preventing serious diseases. The consent decree requires the companies and its owner to cease all production and distribution of misbranded and unapproved new drugs and adulterated and misbranded dietary supplements and recall and destroy their drugs and dietary supplements. If the companies and its owner wish to resume manufacturing dietary supplements and/or drugs in the future, they must hire labeling and good manufacturing practices experts and receive written permission from FDA to resume operations.

Food

  1. Valley Milk Products21

DOJ and FDA filed a seizure action against Valley Milk Products LLC (Valley Milk, a manufacturer of Grade A and non-Grade A milk products) and its general manager, plant manager, and quality control compliance officer. The complaint alleged that FDA inspected a Valley Milk facility in 2016 and confirmed the presence of Salmonella meleagridis as in three previous inspections (2010, 2011, and 2013). FDA found the same strain in Valley Milk’s undistributed finished product samples. FDA also noted that the milk processing facility had insanitary conditions and that the company’s sanitation practices were inadequate to control or eliminate the Salmonella in its processing environment.

In March 2017, the U.S. District Court for the Western District of Virginia entered a consent decree of condemnation and permanent injunction against Valley Milk and the three individuals. Under the decree, certain seized milk powder products were condemned and the company was prohibited from resuming manufacturing milk powder products. To resume manufacturing, the company must complete certain remedial measures, including establishing and implementing a written sanitation control program.

b. The Smokehouse of NY, LLC22

In June 2017, the U.S. District Court for the Southern District of New York entered a consent decree of permanent injunction between the United States and The Smokehouse of NY, LLC (Smokehouse) and two of its employees (director of operations and president/owner). The consent decree resolves allegations of recurring food safety violations, that included a FDA Warning Letter related to findings of Listeria monocytogenes in the Smokehouse processing facility and in its cold-smoked salmon, as well as violations of the seafood Hazard Analysis Critical Control Point regulations and cGMP regulations for food. Subsequent inspections also found Listeria monocytogenes in the Smokehouse processing facility. Despite agreeing to correct the condition, Smokehouse did not consistently implement the changes. In 2017, FDA inspectors found widespread Listeria monocytogenes in the facility. No illnesses had been reported from Smokehouse products. The consent decrees will require defendants to retain an independent laboratory to collect and analyze samples for the presence of Listeria monocytogenes, retain an independent expert and development a program to control the bacteria, and eliminate insanitary conditions at the facility.

Conclusion

Overall, the 2017 settlements illustrate FDA’s and DOJ’s focus on food safety and dietary supplements as well as DOJ’s continued pursuit of FCA lawsuits, specifically against the health care industry. The recoveries also point to DOJ’s commitment to enforcing the FCA against individuals, through joint and several liability with their corporations and individual liability.

The recovery figures are generally consistent with recent years, which may indicate that the change in presidential administration has not affected FCA enforcement goals and activity. However, FCA lawsuits often take several years to be resolved after filing and are often driven by long-time DOJ FCA attorneys, so these figures may not be a true indication of how the change in administration will affect FCA recoveries. Regardless, the 2017 settlements demonstrate the strong interest of relators in pushing forward FCA lawsuits, even where the government does not intervene. Relators will likely continue to be the primary force behind FCA lawsuits. What remains to be seen is if more competitor companies, as opposed to current or former employees, will seek FCA lawsuits as in the case initiated by Sanofi-Aventis against Mylan.

Jacqueline J. Chan is an associate at Kleinfeld, Kaplan & Becker LLP. She advises and represents large, small, and start-up companies regulated by the Food and Drug Administration regarding regulatory compliance and potential liability issues.

  1. Fraud Statistics-Overview (DOJ Dec. 19, 2017).
  2. Press Release, DOJ, Justice Department Recovers Over $3.7 Billion from False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017).
  3. Press Release, DOJ, Justice Department Recovers Over $4.7 Billion from False Claims Act Cases in Fiscal Year 2016 (Dec. 14, 2016).
  4. Fraud Statistics-Overview (DOJ Dec. 19, 2017).
  5. Press Release, DOJ, Justice Department Recovers Over $3.7 Billion from False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017).
  6. Fraud Statistics-Overview (DOJ Dec. 19, 2017).
  7. Press Release, DOJ, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017).
  8. See id; Press Release, DOJ, Justice Department Recovers Over $4.7 Billion from False Claims Act Cases in Fiscal Year 2016 (Dec. 14, 2016).
  9. Press Release, DOJ, Justice Department Recovers Over $3.7 Billion from False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017).
  10. Id.
  11. Id.
  12. Press Release, DOJ, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017).
  13. Press Release, DOJ, Baxter Healthcare Corporation to Pay More Than $18 Million to Resolve Criminal and Civil Liability Relating to Sterile Products (Jan. 12, 2017).
  14. Press Release, Mallinckrodt Agrees to Pay Record $35 Million Settlement for Failure to Report Suspicious Orders of Pharmaceutical Drugs and for Recordkeeping Violations (July 11, 2017).
  15. Press Release, Novo Nordisk Agrees to Pay $58 Million for Failure to Comply with FDA-Mandated Risk Program (Sept. 5, 2017).
  16. Press Release, Drug Maker United Therapeutics Agrees to Pay $210 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 20, 2017).
  17. Press Release, DOJ, Shire PLC Subsidiaries to Pay $350 Million to Settle False Claims Act Allegations (Jan. 11, 2017).
  18. Press Release, DOJ, United States Files Consent Decree of Permanent Injunction Against California Dietary Supplement Manufacturer to Stop Distribution of Adulterated and Misbranded Dietary Supplements (Jan. 18, 2017); Press Release, FDA, Federal judge approves consent decree with California dietary supplement distributor, Regeneca Worldwide (Feb. 9, 2017).
  19. Press Release, DOJ, United States Files Consent Decree of Permanent Injunction Against a Louisiana Drug and Dietary Supplement Manufacturer to Stop Distribution of Misbranded and Unapproved New Drugs and Misbranded and Adulterated Dietary Supplements (Feb. 16, 2017); Press Release, FDA, Louisiana drug and dietary supplement maker ordered to cease operations due to federal violations (Feb. 21, 2017).
  20. Press Release, DOJ, District Court Enters Permanent Injunction Against Colorado Companies to Stop Distribution of Adulterated and Misbranded Dietary Supplements and Unapproved and Misbranded Drugs (March 15, 2017); Press Release, FDA, Colorado unapproved drug and dietary supplement makers ordered to cease operations for federal violations (March 14, 2017).
  21. Press Release, DOJ, District Court Enters Permanent Injunction Against Virginia Company and Employees to Prevent Distribution of Adulterated Milk Powder Products (March 15, 2017).
  22. Press Release, FDA, Federal judge orders New York smoked fish company to stop sales due to food safety violations (June 30, 2017).
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