FEDERAL CIVIL AND CRIMINAL LAWS

1. FEDERAL CIVIL AND CRIMINAL LAWS HOW THEY IMPACT BIOMEDICAL COMPANIES AND THEIR EMPLOYEES

2. Prepared By: Michael A. Swit, Esq. Law Offices of Michael A. Swit 539 Samuel Ct., Suite 229 Encinitas, CA 92024 760-815-4762 fax: 760-454-2979 mswit@fdacounsel.com FOR:SDRAN RAC Review CourseOct. 23, 2003

3. INTRODUCTION This outline presents, in a “user friendly” format, how the civil and criminal laws of the federal (i.e., the United States) government impact a biomedical company and its employees.  It reviews the different types of violations that can occur, and the penaltiesand other collateral consequences of those violations. OR… WHY “CRIME” DOESN’T PAY!!

4. THE FEDERAL FOOD, DRUG, and COSMETIC ACT (“FDCA”)  The main law that applies to biomedical companies  How the FDCA works:  FDCA creates requirements you must meet  If you don’t meet the requirements, either by doing the wrong thing or failing to do the right thing, you commit a “prohibited act”  Any “person” that commits a “prohibited act”can be charged with a crime under the FDCA

5. THE FDCA IS A “STRICT LIABILITY” CRIMINAL LAW  No intent or knowledge (of the crime or the act that = the crime) is needed for a person to be accused of a crime for violating the FDCA; instead …  If a violation of the FDCA occurs, and a person was in a position to prevent the violation, then the person may be charged with a crime U.S. v. Park -- Supreme Court case (1975)

6. WHAT FDCA REQUIRES OF A REGULATED COMPANY and ITS EMPLOYEES: • Three basics: • Make and sell products that are “approved,” “cleared” or otherwise lawfully marketed • Do NOT make or sell products that are “adulterated” • Do NOT make or sell products that are “misbranded”

7. VIOLATING FDCA’sREQUIREMENTS MAY LEAD TO CRIMINAL CHARGES  GENERAL RULE #1: If you do anything involving the sale of an unapproved, misbranded or adulterated drug or device, you have committed a Prohibited Act” under §301 of the FDCA  GENERAL RULE #2:If you do a Prohibited Act, you can be charged with a crime under the FDCA

8. EXAMPLES OF “PROHIBITED ACTS” UNDER FDCA §301  Selling an adulterated or misbranded drug in “interstate commerce” -- i.e., across state lines  Receiving an adulterated or misbranded drug after it was shipped  Selling a drug requiring an NDA without having an effective approval

9. “PROHIBITED ACTS” UNDER FDCA §301 (cont’d)  Refusing to permit FDA toinspect your plant  Counterfeiting a drug

10. FDA’s THREE POWERS UNDER FDCA IF A PERSON DOES A “PROHIBITED ACT”  Criminal prosecutionof individuals or companies  Seizureof violative goods  Injunction orders against persons or companies doing the prohibited acts

11. SEIZUREFDCA § 304 • Civil Action in rem • On “libel” of information in U.S. District Court • Affected person can file a “claim” and show why goods are OK • After entry of decree, can be: • destroyed, sold (if OK) or reconditioned

12. INJUNCTIONFDCA §  302 • Civil Action Against Person or Corporation • Court has authority to restrain violation AND, in certain circumstances, may order a recall • Disgorgement & Abbott Labs & Schering • the costs are rising – now $500MM • An Injunction action may lead to -- or arise out of -- consent orders

13. Schering-Plough Consent Decree, May 2002 • $500MM fine, subject to court approval, represents disgorgement of profits from adulterated products • Result of 13 FDA inspections at 4 facilities in NJ and PR since 1998 • Fine includes $471,500 payment to cover costs of past FDA inspections

14. Schering-Plough Consent Decree, May 2002 … • 125 Rx/OTC drugs made at these plants, representing 90% of S-P's products • Permanent injunction requires procedures to assure cGMP compliance; suspended manufacturing of 73 products • Intensive internal audit required for 5 years, with increased FDA inspection as well

15. A FOURTH FDA “POWER” • “Force” a person to do a “Recall” • Recalls are “voluntary” requests by a drug company to send back drugs that violate the law • Devices -- FDA does have power to order a recall [§ 518(e)]; rarely done -- requires a finding that a device would cause “serious, adverse health consequences or death.” See 21 CFR Part 7 -- general info on recalls

16. RECALLS -- • BUT, FDA has ways to “make” you do a recall • threatens prosecution, injunction or seizure • threatens or actually spreads bad publicity about person who did the “prohibited act”FDCA §  705

17. FDA’s Non-Judicial Enforcement Tools: • Warning Letters • Civil Penalties (devices) • “Notices of Violation” • Inspections • Application Integrity Program • Generic Drug Enforcement Act of 1992 Powers (e.g., debarment) • Publicity

18. The “305” HearingFDCA §  305 • You don’t want to get a “305 Notice” • If you do, be happy -- you get to argue your case before FDA takes official criminal referral • Fairly informal process • Has been successful in avoiding charges

19. WARNING LETTERS • Procedure -- see Regulatory Procedures Manual (RPM), Chapter 8 • May issue directly from district office • Others require FDA HQ sign-off • Public documents (your competitors will read -- and circulate -- them)

20. Notices of Violation • Most frequently used on the drug side; now require clearance via FDA Office of Chief Counsel (may change back) • Not quite a warning letter, but should be taken seriously

21. APPLICATION INTEGRITY PROGRAM (AIP) • Spawned by the generic drug scandal56 Fed. Reg. 46191 -- Sept. 10, 1991 • See Compliance Policy Guide (CPG) 7150.09 (www.fda.gov/ora/ora_home_page.html) • Triggers -- “actions subverting FDA process”: Examples: • Fraud in applications or other falsifications • Bribery or gratuities • Problem -- “bars” you from approvals

22. APPLICATION INTEGRITY PROGRAM (AIP) -- con’d • Corrective Action Plan -- what you need to do if fall under AIP: • Cooperate with FDA and other federal investigators • Identify all wrongdoers and remove them from authority

23. APPLICATION INTEGRITY PROGRAM (AIP) -- con’d • Conduct an internal review with outside consultants to uncover all other wrongdoing • Written action plan: • Procedures and controls to preclude in future • Ethics programs • FDA Verification -- reinspection

24. CRIMINAL PROSECUTIONFDCA § 303 • Process --FDA District Office -- FDA Center OC -- FDA GC -- Justice Department (Ofc. Of CivilLitigation) -- U.S. Attorney -- Grand Jury (if felony sought) – • Indictment – felony • Information – misdemeanor or for plea agreements

25. THE PARK CASE: “Strict Liability in Action”  Question:Is it fair to charge a person with a crime if they did not know about a violation or did not intend to violate the law?  Mr. Park --president of Acme Markets  Acme had a warehouse in Baltimore, which FDA inspectors found to be filthy -- thus, Acme and Mr. Park were charged with adulterating food (also a prohibited act under §301 of FDCA)

26. THE PARK CASE (cont’d ...)  U.S. Supreme Court:  If a person is in a position to stop a violation of the FDCA from occurring, but the violation happens anyway, then that person (whether an individual such as Mr. Park or a company) can be charged with a crime under the FDCA

27. THE PARK CASE (cont’d ...)  Reason: a person who voluntarily takes a job in an industry regulated by the FDCA has a higher duty -- to protect the public health -- thus is subject to the “strict liability” standard of FDCA

28. THE PARK CASE(cont’d ...)  Exception to Strict Liability:if it was “objectively impossible”for the responsible person (such as Mr. Park) to prevent the violation, then not a crime under FDCA  “Objective Impossibility” may require, according to one court, that a person show that they exercised extraordinary care to prevent the violation, but it still happened

29. IMPACT OF THE PARK CASE ON A DRUG or DEVICE COMPANY:  Company executives have a duty:  to try to find violations of the law; and  to prevent violations from occurring in the first place  Company employees are basically “partners” with the executives because, if you violate the FDCA, your boss could be charged with a crime

30. OTHER FEDERAL CRIMES AND THE BIOMEDICAL INDUSTRY  False Statements --to make a statement(oral or written) tothe federalgovernment that isfalse - - e.g., falsedata submitted to FDA in an ANDA --you can’t lie toUncle Sam.

31. OTHER FEDERAL CRIMES AND THE BIOMEDICAL INDUSTRY …  Conspiracy -- happens when you plan with another person to do a crime and one of you takes one action (called an “overt act”) to carry out that plan NOTE: it is still a crime even if you stop the plan before the crime happens if you or your co-conspirator did the one “overt act”

32. OTHER FEDERAL CRIMES AND THE BIOMEDICAL INDUSTRY …  Bribery - - to givemoney or anythingelse of value inreturn for agovernment officialtaking come actionfor you

33. OTHER FEDERAL CRIMES AND THE BIOMEDICAL INDUSTRY …  Gratuity- - same as bribery, but you don’t ask the government official to do anything -- still wrong because officials should be fair to all and money may influence them to favor you  Perjury: lying while under oath, whether in court testimony or in a sworn affidavit

34. OTHER FEDERAL CRIMES AND THE BIOMEDICAL INDUSTRY …  Obstruction of justice:interfering with a government official’s lawful performanceof their duties - - e.g., not letting an FDA inspector into see a room they asks to see that they have a right to see

35. OTHER FEDERAL CRIMES AND THE BIOMEDICAL INDUSTRY …  Wire Fraud: to use a telephone,telegraph, or other form of electronic communication (e.g., e-mail) to do a crime Mail Fraud: to use the mails to do a crime Aiding and Abetting: occurs when you don’t do the crime itself, but you help someone else do it

36. CRIMINAL PENALTIES -- or “Does Crime Pay?” PRISON or JAIL: Felonies: up to five (5) years in prison for each violation Misdemeanors: up to one (1) year injail for each violation

37. CRIMINAL PENALTIES - - or “Does Crime Pay?” … FINES:amountdepends on theperson (whether anindividual orcompany), the classof crime (felony v.misdemeanor), andif the crime resultedin a death

38. CRIMINAL PENALTIES - - or “Does Crime Pay?” … FINES Individual: • misdemeanor: $100,000 per violation • misdemeanor resulting in death orfelony: $250,000 per violation Company: • misdemeanor: $100,000 per violation • misdemeanor resulting in death orfelony: $500,000 per violation

39. CRIMINAL PENALTIES - - or “Does Crime Pay?” … PROBLEMS FORINDIVIDUALS IFCONVICTED: Lose right to vote Lose right to run for public office Damage to reputation

40. CRIMINAL PENALTIES - - or “Does Crime Pay?” … PROBLEMS FORINDIVIDUALS IFCONVICTED (cont’d): Can be deported if not a U.S. citizen Financial ruin - - lose your job

41. CRIMINAL PENALTIES - - or “Does Crime Pay?” … PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS: ♦ Shareholders sue the company, its officers and directors ♦ Other companies may sue the company(e.g., Mylan Labs sued Par and others) ♦ Federal government may suspend or “debar” company from selling to government

42. CRIMINAL PENALTIES - - or “Does Crime Pay?” … • PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (cont’d): • FDA may refuse to approve applications under AIP • May lose state licenses • Customers abandon you • Decreased sales may force lay-offs of employees

43. CRIMINAL PENALTIES - - or “Does Crime Pay?” … • PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (cont’d): ♦ “Qui Tam” actions under the False Claims Act -- e.g., Lifescan case-- “whistle blower” cases -- leading to civil damages and may also spawn a criminal prosecution

44. CRIMINAL PENALTIES - - or “Does Crime Pay?” … • PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (con’d): • Financing disappears -- banks may refuse to lend money • May violate lending agreements, real estate mortgages or leases • A criminal investigation can cause greatdisruption to normal business activities

45. CRIMINAL PENALTIES - - or “Does Crime Pay?” … PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (con’d): High cost in money of an investigation: • lost sales • stock price falls • attorney’s fees and costs • costs of complying with requests by government for documents

46. FDA Activity Enforcement Statistics Fiscal Year 2002 Prosecution -- 0* Civil Money Penalty -- 1 Seizures -- 13 Consent Decrees of Permanent Injunctions (Filed) -- 15 Convictions – OCI – 317 Warning Letters – 755 FDA 483s Issued 7,180 Recalls -- 5,025 Inspections -- 18,572 Import Refusals -- 32,654 Asset Forfeitures (OCI) -- $18,300,000 Fines and Restitution (OCI) -- $24,027,549*: Does not include Office of Criminal Investigations data.

47. FDA Activity … Prosecutions

48. FDA Activity … OCI

49. FDA Activity … Injunctions

50. FDA Activity … Seizures