The Food and Drug Administration has gained the upper hand in its nearly 10-year effort to obtain equitable monetary relief (restitution or disgorgement) as part of an injunction to enforce the Federal Food, Drug, and Cosmetic Act (FDCA). FDA can be expected to pursue these remedies aggressively. But important legal issues remain unresolved.

By William Vodra and Arthur Levine

Arthur Levine and William Vodra are both partners in Arnold & Porter LLP's Food, Drug, and Medical Devices Practice Group.

In February 2006, the Tenth Circuit Court of Appeals became the first appellate court to rule that the Federal Food, Drug, and Cosmetic Act (FDCA) authorizes a district court to impose disgorgement as part of the government’s relief in an FDA injunction. United States v. RxDepot Inc., No. 05-5003 (10^th Cir. 2/22/06; 4 PLIR 267, 3/3/06). The RxDepot decision comes on the heels of a Third Circuit decision, five months earlier, upholding the imposition of restitution in an FDA injunction action. United States v. Lane Labs-USA Inc., 427 F.3d 219 (3d Cir. 2005; 3 PLIR 1115, 10/28/05). Both courts of appeals viewed favorably a Sixth Circuit decision in 1999 supporting the use of restitution in an FDA injunction case against a misbranded device. United States v. Universal Management Servs. Inc., 191 F.3d 750 (6^th Cir. 1999).

The RxDepot Decision

In RxDepot, the government (on behalf of FDA) sought injunctive relief to prevent the defendants from filling prescriptions for U.S. citizens with drugs originally manufactured in the U.S. and shipped to Canada presumably to meet Canadian needs. The government alleged that RxDepot violated the FDCA by reimporting prescription drugs originally manufactured in the U.S. and by introducing such “new drugs” into U.S. commerce without FDA approval.

The parties entered a consent decree of permanent injunction, which left to the district court the issue of what, if any, equitable relief should be awarded. The district court then ruled that the express provision of other remedies in the FDCA created an inference that Congress intended to restrict a court’s power to order disgorgement under the FDCA. The government appealed. The Tenth Circuit Court of Appeals reversed, holding that the FDCA authorizes disgorgement in an FDA injunction because the FDCA invokes a federal court’s “general equitable jurisdiction and does not prohibit disgorgement by a clear legislative command or necessary and inescapable inference….” RxDepot at 3. Having reversed the lower court’s ruling (that disgorgement was not available under the FDCA as a matter of law), the appellate court remanded the case back to the district court for further proceedings. Specifically, the lower court was directed to “examine whether there were any ill-gotten gains” and “whether disgorgement was appropriate under the facts of this case.” RxDepot at 19, n.6.

In upholding the availability of disgorgement, the Circuit Court relied heavily on two Supreme Court decisions that explored, and supported, a broad application of the equitable powers of district courts--Porter v. Warner Holding Co., 328 U.S. 395 (1946) and Mitchell v. Robert De Mario Jewelry Inc., 361 U.S. 288 (1960). The Tenth Circuit held (RxDepot at 19):

This broad grant of equity jurisdiction [in the district courts to restrain violations of the FDCA] is not restricted by the text of the statute, its express provision of certain legal and administrative remedies, or its legislative history. Moreover, disgorgement furthers the purposes of the FDCA by deterring future violations of the Act which may put the public health and safety at risk. Therefore, according to the analysis established in Porter and Mitchell, we conclude disgorgement is permitted under the FDCA in appropriate cases.

The Circuit Court in RxDepot considered and rejected many of the arguments recently offered in opposition to disgorgement in an FDA proceeding.

First, the 10^th Circuit found that the Supreme Court’s decision in Meghrig v. KFC Western Inc., 516 U.S. 479 (1996), did not restrict the scope of a court’s inherent equitable powers as described in Porter and Mitchell. The court found that the statute at issue in Meghrig “fit into the exceptions recognized by Porter and Mitchell.” RxDepot at 7. After analyzing the statute at issue in Meghrig, the Resource Conservation and Recovery Act, the court concluded that “Meghrig merely demonstrates that a statute’s particular characteristics may preclude application of the [general] rule” of the older cases. Id. at 10. Relying on Porter, the court also distinguished Meghrig “because it involved a controversy between private parties … not an enforcement action by the government to protect the public.” Id. It found that “because the present action was brought by the government [under the FDCA] to protect the public health and safety, courts equitable jurisdiction … 'assume[s] an even broader and more flexible character.’ Porter, 328 U.S. at 398.” Id. at 12.

The court also declined to follow the ruling of the circuit court for the District of Columbia, in the Philip Morris case that disgorgement was not available “to restrain violations” under the Racketeer Influenced and Corrupt Organizations Act (RICO) because the D.C. Circuit Court “relied on language in RICO not present in the FDCA” and because Philip Morris “did not question the continued vitality of Porter and Mitchell.” Id. at 13-14.

Second, the court in RxDepot addressed the proposition that injunctions “to restrain violations” authorize only “forward-looking remedies,” not remedial ones like disgorgement. The court found that the Supreme Court had implicitly rejected this argument in Mitchell and Meghrig. Id.The court also observed that disgorgement should not be viewed as solely a backward looking remedy. “One purpose of disgorgement is to deter future violations … by making illegal conduct unprofitable.” Id. at 12, n.4.

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Third, the court considered whether the express provision of numerous remedies in the FDCA precludes an unspecified disgorgement remedy. The court found that “by granting courts general equity jurisdiction, Congress authorized all traditional equitable remedies. … Thus, we would not infer any remedies; rather, all equitable remedies are available unless Congress’s express provision of other remedies creates a necessary and inescapable inference that those remedies are exclusive.” Id. at 15. The court also compared the explicit remedies of the FDCA with those of the statute involved in Porter and found no differences that, in its view, should lead to a different result.

In particular, the court considered whether the express provision in the FDCA for restitution in certain circumstances involving medical devices constituted a congressional recognition that restitution was otherwise not available. The court found that in enacting such authority Congress was conferring administrative powers on FDA, not addressing inherent powers of the courts. Id. at 17.

Finally, the circuit court considered whether the legislative history of the FDCA reflected a congressional intent that product seizure be the harshest civil remedy available. The court questioned whether disgorgement would always be harsher than seizure, noting that procedurally the FDCA permits seizure on the basis of an ex parte showing of reasonable belief that the seized goods are violative. “Disgorgement, on the other hand, is only permitted after a party is found by a court to be in violation of the Act and only at the court’s discretion.” Id. at 18. The court also observed that the economic consequences of a seizure can be much greater than disgorgement. Finally, even if Congress had such an intent in drafting the FDCA, the court said that “it does not follow that Congress necessarily and inescapably intended to preclude disgorgement in all circumstances.” Id.

The circuit court also dealt with United States v. Parkinson, 240 F.2d 918 (9th Cir. 1956), which held that restitution was not available as a remedy under the FDCA. The court found that the reasoning in Parkinson was rejected by the Supreme Court in Mitchell (decided four years later in 1960), and thus Parkinson is no longer persuasive. Id. at 22-23.

The Tenth Circuit drew support for its conclusions on disgorgement from the two other U.S. courts of appeals that have upheld a district court’s equitable powers to impose restitution as part of an injunction brought to enforce the FDCA--United States v. Lane Labs-USA Inc., involving allegations of misbranding of dietary supplements and of using promotional claims that result in the supplements being unapproved (and therefore violative) new drugs, and United States v. Universal Management Services Inc. involving a misbranded device.

The Immediate Fallout From RxDepot

Defendants remain free to question the use of equitable remedies in conjunction with FDA injunction actions in the other federal circuits. Other courts may be more receptive to the arguments presented in RxDepot or to new arguments that may be presented. Indeed, the application of disgorgement by the district court in RxDepot may result in a further ruling by the Tenth Circuit. Until then, it can be foreseen that FDA will pursue and intensify its efforts to obtain equitable relief in injunction cases through negotiations over proposed consent decrees of permanent injunction.

Such efforts would reflect FDA’s approach during the past six years. Armed with the Sixth Circuit’s opinion in Universal Management, FDA obtained equitable money payments as part of three injunction cases brought for alleged violations of Current Good Manufacturing Practice (GMP).¹ Then, after the Third Circuit issued its opinion in Lane Labs, in October, 2005, the Justice Department and Eli Lilly and Co. announced on Dec. 21, 2005 their agreement to resolve an investigation into the marketing and promotion of Evista®. Lilly entered into a Consent Decree of Permanent Injunction which included Lilly’s agreement “to pay equitable disgorgement to United States Treasury [in] the total amount of Twenty-Four Million Dollars ($24,000,000) …”(3 PLIR 1323, 12/23/05). In light of the Tenth Circuit’s opinion in RxDepot, there is no question that FDA will continue and increase its efforts to obtain equitable payments, particularly now disgorgement, in conjunction with FDA injunction cases.

The Need for Standards and an FDA Enforcement Policy

Importantly, having found that disgorgement is an available remedy, the Tenth Circuit remanded the case to the district court to “examine whether there were any ill-gotten gains” and “whether disgorgement was appropriate under the facts of this case.” RxDepot at 19, n. 6. This remand will bring into focus the need for standards and criteria in the application of disgorgement in FDA injunction cases. Such standards and criteria have not yet been established by FDA or the courts. Without establishing standards and criteria, there is a significant risk that disgorgement may become a punitive remedy. This result would contravene the well-established rule that a court has no jurisdiction in equity to impose or enforce the penalty. A court may use disgorgement or restitution only to divest a defendant of unjust enrichment and ill gotten gains.

If FDA pursues disgorgement payments in future cases, and particularly as it moves from seeking disgorgement in GMP cases to seeking disgorgement in misbranding, new drug and other FDA enforcement contexts, it becomes imperative that either the agency or the courts establish standards and criteria to evaluate whether disgorgement is appropriate and how the agency will demonstrate, through the Justice Department, whether there were any ill gotten gains and how to measure those gains. The need for criteria and standards is particularly important because FDA has no special expertise in defining the basis for a disgorgement remedy or in determining its size. More frequent and/or more aggressive use of disgorgement absent appropriate standards and criteria will undermine FDA’s stated enforcement objective that disgorgement is designed to serve as a meaningful deterrent.²

The need for enforcement criteria for disgorgement--developed with public participation--has been recognized by other federal agencies. For example, the Federal Trade Commission undertook a public process to develop a policy statement on the use of disgorgement in cases involving alleged violations of the antitrust laws. It published a request for public comment on a series of specific questions. See Remedial Use of Disgorgement, 66 Fed. Reg. 67,254 (Dec. 28, 2001). After reviewing the comments and participating in public discussions, the FTC adopted a final policy statement establishing conditions that would have to be met in order for the FTC to seek disgorgement in competition law cases. See Policy Statement on Monetary Equitable Remedies in Competition Cases, 68 Fed. Reg. 45,820 (Aug. 4, 2003).

Similarly, the Office of the Inspector General of the Department of Health and Human Services (OIG) issued a comprehensive policy identifying risk areas of compliance with False Claims Act, the anti-kickback laws, and other federal fraud programs, after public comment on a draft, in its compliance program guidance published in the Federal Register in 2003.³ The OIG also has published various “safe harbors,” in 42 CFR, concerning exceptions from program integrity requirements for Medicare.

By comparison, while the majority of FDA injunctions cases are based on alleged GMP violations (and while the agency has engaged in a very public and participatory process [the 21^st Century Initiative] to assure proper use of the agency’s GMP enforcement authorities), so far FDA has pursued disgorgement remedies without public participation or the development of standards, criteria, or a statement of policy.

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If FDA is going to continue to pursue equitable money remedies that may involve payments in the tens-to-hundreds of millions of dollars, it should establish neutral regulatory standards and issue an enforcement policy to assure these remedies are not used punitively. These documents should be created after an opportunity for public participation and should be published so that the regulated industries and individuals will understand how FDA intends to seek and implement equitable remedies.

First and foremost, the agency should establish enforcement criteria as to those circumstances under which FDA will seek disgorgement, i.e., the circumstances when disgorgement would, in the agency’s view, be appropriate. Second, the agency should establish a means by which it will calculate the amount of unjust enrichment that it believes should be disgorged. A court’s equitable power extends only to enrichment causally related to the alleged wrongdoing. The basis of a disgorgement calculation is, therefore, a causal link between the illegal activity and the profits sought to be disgorged. Thus, FDA should effectively be able to “distinguish between legally and illegally obtained profits.”⁴

In an action for disgorgement, the government bears the burden of coming forward to demonstrate that the amount proposed to be disgorged reasonably approximates the amount of profits causally connected to the alleged violation.⁵ Whatever standards FDA creates, it cannot simply presume that all profits from sale of the violative product must be disgorged. The fallacy of such a presumption is readily apparent in injunctions involving allegations of violations of GMP given the fact that, under long-existing case law and FDA policy, it is recognized that drugs may meet their established specifications and not be deficient in any way and, nonetheless, violate GMP. Similarly, in the arena of alleged violations involving product promotion, even where the agency can establish that a drug or device has been inappropriately promoted, the therapeutic benefit derived from the product for those for whom it is indicated remains unaffected.

Finally, a court must be assured, in each case where FDA seeks disgorgement, that the court has the jurisdiction to order the proposed remedy and that the defendant has not been unfairly coerced into an arrangement with FDA. Of course, the burden of persuasion on the appropriateness of the remedy and the court’s jurisdiction, i.e., that the remedy will not be punitive, rests with the government. Equally, the defendant must have a meaningful opportunity to be heard. Even where a court is presented with a consent decree of injunction that includes a disgorgement provision, the court must satisfy itself that the settlement is fair and reasonable and that the disgorgement payment is not punitive. In short, inasmuch as the parties cannot confer jurisdiction, the court must be satisfied that it has jurisdiction by determining that the remedy that the parties have agreed to does not constitute a penalty. A court presented with a consent decree that includes a disgorgement provision must independently examine the bases for the disgorgement, its reasonableness, and the calculation of the amount.⁶

The recent appellate court decisions are likely to embolden FDA to seek equitable remedies in complaints for injunction and in negotiating consent decrees of permanent injunction. The use of such equitable remedies raises a number of procedural issues associated with determining whether imposition of such remedies is appropriate in any given case and in calculating any alleged unjust enrichment. Because these equitable remedies cannot be used as punishment, the absence of any FDA enforcement policy or case law on the use of disgorgement or restitution in the FDA context calls into question whether a court’s equitable authorities will be properly invoked.

¹ United States v. Abbott Labs, No. 99-C-7135, Consent Decree of Permanent Injunction (N.D. Ill. filed Nov. 2, 1999); United States v. Various Articles of Drug Identified in Attachment A and Wyeth-Ayerst Labs, No. 3:00-CV-359, Consent Decree of Condemnation and Permanent Injunction (E.D. Tenn. filed Oct. 4, 2000) and United States v. Schering-Plough Corp., No. C.02-2397, Consent Decree of Permanent Injunction (D.N.J., filed May 22, 2002).

² SeeEric M. Blumberg, Abbott Laboratory’s Consent Decree and Individual Responsibility Under the Federal Food, Drug, and Cosmetic Act, 55 Food and Drug L.J. 145 (2000).

³ 68 Fed. Reg. 23,731 (May 5, 2003).

⁴ SEC v. First City Financial Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989).

⁵ Id.

⁶ See Local Number 93, Int’l Ass’n of Firefighters v. City of Cleveland, 478 U.S. 501, 525 (1986).