Significant Settlements of 2018

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 2018. 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 2018, DOJ recovered nearly $35 billion through FCA settlements and judgments.[1] Fiscal year 2018 resulted in more than $2.8 billion in FCA settlement and judgments,[2] which was a dip from the $3.7 billion in FCA recoveries in fiscal year 2017 and $4.7 billion in FCA recoveries in fiscal year 2016 (which was the third highest annual recovery in FCA history).[3] In 2018, the largest recoveries again came from the health care industry ($2.5 billion), in particular from the drug and medical device industry.[4] This was the ninth consecutive year that civil health care fraud settlements and judgments exceeded $2 billion, further reinforcing the government’s continued interest in the health care industry.

Fiscal year 2018 saw a significant number of new FCA matters filed, with over 750 new cases between the government and whistleblowers (known as relators in qui tam actions).[5] As in past years, relator lawsuits accounted for the majority of FCA matters (645 cases versus the 122 cases filed by the government). Relators receive up to 30 percent of any recovery and such recoveries accounted for $2.1 billion out of the $2.8 billion total. Although relators showed interest in continuing to pursue lawsuits even where the government did not intervene, such recoveries were down by over $480 million.

The 2018 settlements also illustrate DOJ’s commitment to holding individuals accountable for corporate wrongdoing in line with the DOJ’s memorandum issued in September 2015, commonly referred to as the “Yates memorandum.” DOJ recently reiterated its continued “commitment to us[ing] the False Claims Act and other civil remedies to deter and redress fraud by individuals as well as corporations.”[6]

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 2018.

Drugs

AmerisourceBergen Corporation[7]

Wholesale drug company AmerisourceBergen Corporation and its subsidiaries AmerisourceBergen Specialty Group, AmerisourceBergen Drug Corporation, Oncology Supply Company, and Medical Initiatives Inc. (collectively “AmerisourceBergen Corporation”) paid $625 million to resolve civil allegations arising from their operation of a facility that improperly repackaged oncology-supportive injectable drugs into pre-filled syringes and improperly distributed those syringes to physicians treating vulnerable cancer patients. The drugs involved were Procrit, Aloxi, Kytril and its generic form granisetron, Anzemet, and Neupogen. According to the government, AmerisourceBergen Corporation sought to profit from the excess drug product (“overfill”) contained within the original FDA-approved sterile vials for these cancer supportive injectable drugs by establishing a pre-filled syringe program for a subsidiary claiming to be a pharmacy. The “pharmacy” was actually a repackaging operation where AmerisourceBergen Corporation purchased original vials, broke their sterility, pooled the contents, and repackaged the drugs into pre-filled syringes. The allegations also included billing multiple healthcare providers for the same vial of drug and physician kickbacks.

AmerisourceBergen Specialty Group had previously pled guilty to illegally distributing misbranded drugs and paid $260 million to resolve criminal liability for its distribution of those drugs from a facility not registered with FDA.

Actelion Pharmaceuticals US, Inc.[8]

Pharmaceutical company Actelion Pharmaceuticals US, Inc. (“Actelion”) paid $360 million to resolve claims that it illegally used a foundation as a conduit to pay the copays of thousands of Medicare patients taking Actelion’s pulmonary arterial hypertension drugs in violation of the FCA. According to the government, from 2014 to 2015, Actelion made donations to the foundation, which then used those donations to pay copays of patients prescribed the drugs. Actelion allegedly routinely obtained data from the foundation on how much the foundation spent for patients on each drug and used that information to decide how much to donate to the foundation. The government further alleged that Actelion referred Medicare patients to the foundation, which allowed the patients’ copays to be paid and resulted in claims to Medicare for the remaining cost.

Dr. Reddy’s Laboratories, Inc.[9]

In January 2018, the U.S. District Court for the District of New Jersey imposed a $5 million civil penalty and entered a consent decree of permanent injunction against Dr. Reddy’s Laboratories Inc. The civil penalty and consent decree resolve allegations that Dr. Reddy’s knowingly violated the Consumer Product Safety Act (“CPSA”) with respect to household oral prescription drugs in blister packs that did not meet Poison Prevention Packaging Act (“PPPA”) requirements for child resistant packaging. According to the complaint, Dr. Reddy’s distributed such prescription drugs until 2012 even though it had been previously warned by its own employees that the blister packs had not been tested for PPPA compliance and likely would fail such tests. Dr. Reddy’s also allegedly failed to notify the Consumer Product Safety Commission (“CPSC”) immediately that the products were not complaint with the PPPA. Under the consent decree, Dr. Reddy’s cannot distribute household oral prescription drugs in violation of the PPPA and CPSA and must implement a compliance program, including internal controls and procedures to ensure reporting to CPSC.

Medical Devices

Alere[10]

Medical device manufacturer Alere Inc. and its subsidiary Alere San Diego, paid $33.2 million to resolve allegations that Alere caused hospitals to submit false claims to Medicare, Medicaid, and other federal healthcare programs by knowingly selling materially unreliable point-of-care diagnostic testing devices. According to the government, between January 2006 and March 2012, Alere knowingly sold the devices used frequently in emergency departments to aid in the diagnosis of acute coronary syndromes, heart failure, drug overdose, and other serious conditions. Alere continued to sell such devices even after receiving customer complaints that certain devices produced erroneous results with potential to create false positives and false negatives that adversely affected clinical decisionmaking. In 2012, FDA inspections prompted a nationwide product recall. This lawsuit was filed under the whistleblower provision of the FCA and the whistleblower who filed the civil lawsuit will receive approximately $5.6 million.

ev3[11]

Medical device manufacturer ev3 Inc. pled guilty to charges related to distribution of an adulterated neurovascular medical device, Onyx Liquid Embolic System, and paid $17.9 million ($11.9 million fine and $6 million forfeiture). FDA had approved Onyx only for use inside the brain as a liquid embolization device; despite this approval, sales representatives encouraged surgeons to use Onyx for unproven and potentially dangerous surgical uses outside the brain. The sales representatives continued to do so even after FDA officials identified specific safety concerns with use of Onyx outside the brain, which would require a study to gain approval for such uses. Incentived by sales quotas and bonuses, sales representatives instructed surgeons to use Onyx outside of the brain at quantities far larger than what would be used in the brain. Subsequent to the criminal conduct, Medtronic acquired ev3’s parent company and agreed to implement new compensation structures to ensure the sales force responsible for marketing Onyx was not incentivized to sell the device for unapproved uses.

Covidien L.P.[12]

Medical device manufacturer Covidien L.P. paid $13 million to resolve civil allegations of causing false claims to be submitted to Medicare and Medicaid by paying kickbacks to hospitals and institutions to induce use of its Solitaire mechanical thrombectomy device. According to the government, Covidien launched a registry to pay hospitals and institutions to collect data about user experiences with the device. Each time a hospital or institution participated in the registry by using a new Solitaire device and reporting certain clinical data, Covidien would pay them a fee. This lawsuit was filed by a whistleblower who was a former Covidien employee. As part of the resolution, the employee will receive $2 million.

Olympus Medical Systems Corporation[13]

Medical device manufacturer Olympus Medical Systems Corporation (“Olympus”) and a former top regulatory official pled guilty to distributing misbranded medical devices in interstate commerce in violation of the FDCA. Olympus was fined $80 million and ordered to pay $5 million in criminal forfeiture and, by agreement with the Justice Department, is required to enact extensive compliance reforms. The former executive will be sentenced in 2019 and faces a maximum potential penalty of a year in prison and a $100,000 fine.

Olympus admitted to failing to file FDA required adverse event reports related to three separate events involving infections in Europe connected to Olympus’s duodenoscope. The events included approximately 22 patients in the Netherlands, three patients in France, and five patients in France in 2012. Olympus continued to sell the duodenoscopes in the United States despite those failures. The former executive admitted personal responsibility for failure to file the necessary information with FDA. Between August 2012 and October 2014, Olympus shipped misbranded duodenoscopes in the United States, generating approximately $40 million in revenue and approximately $33 million in total gross profit.

In addition to the above fines, Olympus has agreed to extensive compliance steps including retaining an independent MDR expert and providing FDA with periodic reports.

AngioDynamics, Inc.[14]

Medical device manufacturer AngioDynamics, Inc. paid a total of $12.5 million to resolve FCA allegations. It has paid $11.5 million to resolve allegations that the company caused false claims to be submitted to healthcare programs for procedures involving an unapproved drug-delivery device that was marketed with false and misleading promotional claims. AngioDynamics marketed LC Bead for use as a drug-delivery device in combination with chemotherapy drugs. FDA twice declined to approve LC Bead for this use. Despite this, AngioDynamics claimed that LC Bead was “better,” “superior,” “safer,” and “less toxic” than alternative treatments without clinical evidence.

AngioDynamics is separately paying $1 million to resolve allegations that it had caused false claims to be submitted to healthcare programs in connection with use of PVAK (i.e., the 400 micron kit). FDA cleared PVAK only for use in treating superficial veins and AngioDynamics subsequently requested FDA expand the clearance to include treatment of perforator veins. FDA found that the treatment of perforator veins constituted a new indication for which safety and efficacy were unknown. AngioDynamics voluntarily recalled the product but AngioDynamics personnel continued to market the device for the uncleared indication.

Food

The below summarizes a representative group of settlements entered into between the United States and conventional foods and dietary supplement companies. Notably, these consent decrees involved not only the companies themselves, but also the owners or operators of the companies.

Saranac Brand Foods, Inc.[15]

In December 2018, the U.S. District Court for the Western District of Michigan entered a consent decree for permanent injunction between the United States and Saranac Brand Foods and two of the company’s owners. The consent decree resolves allegations of FDCA violations of introducing or delivering for introduction into interstate commerce adulterated ready-to-eat foods. Working in conjunction with FDA, the DOJ filed a complaint alleging that environmental samples collected from defendants’ facility during numerous inspections showed the facility contained Listeria monocytogenes, rendering the defendants’ food products adulterated. In August 2016, FDA issued a warning letter to defendants informing them of the contamination and objectionable conditions at the facility. In November 2017, FDA issued a list of inspectional observations identifying insanitary conditions observed during a follow-up inspection. Defendants agreed to settle the complaint by consent decree of permanent injunction. Under the consent decree settlement, defendants have represented that they have discontinued all operations related to receiving, preparing, processing, holding, or distributing food. If they intend to resume such activity, they must notify FDA in writing in advance along with complying with specific remedial measures.

Euroline Foods, LLC and Royal Seafood Baza, Inc.[16]

In July 2018, the U.S. District Court for the Eastern District of New York entered a consent decree of permanent injunction between the United States and Euroline Foods, LLC, Royal Seafood Baza, Inc., and three company owners and operators and one company manager. The consent decree resolves allegations that the defendants’ jointly owned food preparation facility violated the FDCA for processing and distributing ready-to-eat fish and fishery products, vegetable salads, and cheese products in chronic insanitary conditions. FDA inspections found Listeria at the facility and also determined that the defendants lacked adequate measures to reduce the risk of such health hazards. The complaint alleged that the defendants failed to comply with cGMPs and Hazard Analysis and Critical Control Point (HACCP) regulations as revealed by these FDA inspections in 2015, 2016, and 2017. In 2015, FDA also had issued a warning letter to Royal Seafood Baza related to identified HACCP and cGMP violations. Under the consent decree, defendants may only receive, hold, and distribute food that remains enclosed in a container while at their facility and may also operate retail food establishments. If they intend to resume food processing of non-prepackaged food, then they must notify FDA and demonstrate compliance with specific remedial measures as well as passing a FDA inspection.

Todd & Patty Meech Dairy Farm[17]

In July 2018, the U.S. District Court for the District of Minnesota entered a consent decree of permanent injunction between the United States and Todd & Patty Meech Dairy Farm and its two co-owners. The consent decree resolves allegations that the defendants introduced adulterated meat into interstate commerce. According to FDA, Meech Dairy Farm had a long history of violations. During several FDA inspections, FDA found defendants did not maintain adequate treatment records for their cattle, including data on administered dosage, administration route, withdrawal time for meat, and the usable date for meat. More recently, the USDA detected above-tolerance drug residue in the liver of a cow sold for slaughter and FDA found violations in a follow-up inspection similar to those found in earlier inspections. Under the consent decree, defendants are required to implement steps to ensure consumer safety, including establishing and implementing a quarantine or segregation system that ensures ready distinction between medicated and unmedicated animals and prevents defendants from selling or delivering for food slaughter any animals with illegal new animal drug residues in their edible tissues. The consent decree does not prohibit the farm from selling milk because there was no evidence that the farm’s milk was adulterated.

Vulto Creamery LLC[18]

In April 2018, the U.S. District Court for the Northern District of New York entered a consent decree of permanent injunction between the United States and Vulto Creamery LLC and its owner. The consent decree resolves allegations that defendants violated the FDCA by manufacturing and distributing ready-to-eat cheeses contaminated with Listeria monocytogenes. The complaint alleges that FDA and the Centers for Disease Control and Prevention identified Vulto Creamery cheese as the source of a multistate listeriosis outbreak that sickened at least eight people, including two of whom died. Company records had revealed positive tests for a type of Listeria but defendants never attempted to identify the species of Listeria or its source and failed to conduct microbial testing of finished cheese products. Under the consent decree, defendants may not manufacture or distribute food unless they comply with specific remedial measures including hiring a qualified independent expert to develop an effective sanitation control program to control for the risk of Listeria.

Global Marketing Enterprises, Inc., Lifeline Nutrients, Corp., Pronto Foods Company[19]

In July 2018, the U.S. District Court for the Northern District of Illinois entered a consent decree of permanent injunction between the United States and three related companies – Global Marketing Enterprises, Inc., Lifeline Nutrients Corp., and Pronto Foods Company – and their owner and their operations manager. The consent decree resolves allegations that the defendants manufactured, packaged, labeled, and distributed dietary supplements in violation of the FDCA. The complaint alleged that FDA inspections in 2015 and 2017 revealed that the dietary supplements were adulterated because they were not manufactured in compliance with cGMP regulations and that the products were misbranded for label deficiencies. The complaint further contended that defendants marketed products as drugs by making claims that the products could help treat or prevent serious diseases, including Alzheimer’s disease, diabetes, HIV/AIDS, and Parkinson’s disease, but did not have the required FDA approval. Such claims were also unsupported by well-controlled clinical studies or other credible scientific substantiation. Under the consent decree, if defendants wish to resume manufacturing and distributing dietary supplements, they must implement remedial measures, notify FDA of the measures taken, and obtain written approval from FDA.

 Riddhi USA Inc.[20]

In March 2018, the U.S. District Court for the Eastern District of New York entered a consent decree of permanent injunction against Riddhi USA Inc. and its owner. The consent decree resolves allegations that defendants distributed adulterated and misbranded dietary supplements. The complaint alleged that defendants manufactured, prepared, labeled, packed, held, and distributed dietary supplements that were not in compliance with cGMPs. Violations included failing to establish product specifications for the identity, purity, strength, and composition of the finished dietary supplements; inadequate master manufacturing and batch production records; lack of quality control procedures; and lack of procedures to investigate product complaints. In 2016, FDA had similarly issued a warning letter to defendants after a facility inspection. The consent decree requires defendants to destroy all dietary supplements in their possession, custody, or control within 15 days and implement consumer safety measures before resuming the manufacturing or distributing of dietary supplements. The consent decree further requires defendants to hire an independent expert to certify all cGMP deviations have been corrected.

Cosmetics

Keystone Laboratories, Inc.[21]

In October 2018, the U.S. District Court for the Western District of Tennessee entered a consent decree for permanent injunction between the United States and Keystone Laboratories, Inc. and two of the company’s key personnel (the owner and the operator). The consent decree resolves allegations that the defendants distributed misbranded drugs that were manufactured under insanitary conditions. Working in conjunction with FDA, the Department of Justice filed a complaint alleging that the defendants violated the FDCA by distributing hair care and skin care products that were not manufactured, processed, packaged, or held subject to cGMPs for drugs. FDA inspections further revealed problems at facilities and within products, including the company’s release of hair products despite test results suggesting contamination by Staphylococcus aureus. Under the consent decree, the defendants cannot manufacture or distribute their over-the-counter drug products from any facility owned or operated by the defendants unless they comply with specific remedial measures.

Conclusion

Overall, the 2018 settlements illustrate FDA and DOJ’s focus on food safety as well as DOJ’s continued pursuit of FCA lawsuits, specifically against the health care industry and drug and medical device manufacturers. The recoveries also point to FDA’s and DOJ’s commitment to enforcing the FCA and the FDCA against individuals, through joint and several liability with their corporations and individual liability.

The 2018 settlements continue to 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.

The recovery figures are generally consistent with recent years although with a small dip, 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 in the years to come.

 

* 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. 2018).

[2]    Press Release, DOJ, Justice Department Recovers Over $2.8 Billion from False Claims Act Cases in Fiscal Year 2018 (Dec. 21, 2018).

[3]    Press Release, DOJ, Justice Department Recovers Over $3.7 Billion from False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017); Press Release, DOJ, Justice Department Recovers Over $4.7 Billion from False Claims Act Cases in Fiscal Year 2016 (Dec. 14, 2016).

[4]    Press Release, DOJ, Justice Department Recovers Over $3.7 Billion from False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017).

[5]    Fraud Statistics-Overview (DOJ Dec. 21, 2018).

[6]    Press Release, DOJ, Justice Department Recovers Over $2.8 Billion from False Claims Act Cases in Fiscal Year 2018 (Dec. 21, 2018).

[7]    Press Release, DOJ, AmerisourceBergen Corporation Agrees to Pay $625 Million to Resolve Allegations That it Illegally Repackaged Cancer-Supportive Injectable Drugs to Profit from Overfill (Oct. 1, 2018).

[8]    Press Release, DOJ, Drug Maker Actelion Agrees to Pay $360 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 6, 2018).

[9]    Press Release, DOJ, District Court Awards $5 Million in Civil Penalties and Enters Permanent Injunction to Prevent Dr. Reddy’s Laboratories Inc. from Distributing Prescription Drugs Not in Child-Resistant Packaging (Jan. 19, 2018).

[10]  Press Release, DOJ, Alere to Pay U.S. $33.2 Million to Settle False Claims Act Allegations Relating to Unreliable Diagnostic Testing Devices (Mar. 23, 2018).

[11]  Press Release, DOJ, Medical Device Maker ev3 to Plead Guilty and Pay $17.9 Million for Distributing Adulterated Device; Covidien Paid $13 Million to Resolve Civil Liability for Second Device (Dec. 4, 2018).

[12]  Press Release, DOJ, Medical Device Maker ev3 to Plead Guilty and Pay $17.9 Million for Distributing Adulterated Device; Covidien Paid $13 Million to Resolve Civil Liability for Second Device (Dec. 4, 2018).

[13]  Press Release, DOJ, Olympus Medical Systems Corporation, Former Senior Executive Plead Guilty to Distributing Endoscopes After Failing to File FDA-Required Adverse Event Reports of Serious Infections (Dec. 10, 2018).

[14]  Press Release, DOJ, Medical Device Maker AngioDynamics Agrees to Pay $12.5 Million to Resolve False Claims Act Allegations (July 18, 2018).

[15]  Press Release, DOJ, District Court Issues Order to Prevent Michigan Company and its Owners from Distributing Adulterated Ready-To-Eat Foods (Dec. 3, 2018); News Release, FDA, Michigan-based food manufacturer agrees to stop operations after repeated food safety violations (Dec. 17, 2018).

[16]  Press Release, DOJ, District Court Orders New York Food Distributors to Comply with Food Safety Requirements (July 18, 2018); News Release, FDA, New York-based food processors agree to stop food preparation operations due to food safety violations (July 17, 2018).

[17]  Press Release, DOJ, District Court Orders Minnesota Dairy Farm and Owners to Stop Distributing Adulterated Meat in Interstate Commerce (July 9, 2018); News Release, FDA, Federal judge enters consent decree against Minnesota dairy farm for drug residue violations (July 10, 2018).

[18]  Press Release, DOJ, District Court Enters Permanent Injunction Against New York Food Manufacturer Linked to Listeriosis Outbreak (Apr. 2, 2018); News Release, FDA, New York raw milk cheese company ordered to stop sales for food safety violations (Apr. 2, 2018).

[19]  Press Release, DOJ, District Court Enters Permanent Injunction Against Chicago Companies to Stop Distribution of Adulterated and Misbranded Dietary Supplements and Unapproved and Misbranded Drugs (July 27, 2018).

[20]  Press Release, DOJ, District Court Orders Long Island Company to Stop Distributing Adulterated and Misbranded Dietary Supplements (March 29, 2018); News Release, FDA, Federal judge approves consent decree with New York dietary supplement manufacturer Riddhi USA (Mar. 29, 2018).

[21]  Press Release, DOJ, District Court Orders Tennessee Personal Care Products Manufacturer to Comply with Drug Safety Requirements (Oct. 23, 2018).