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FDA’s Extra Statutory Power to Demand Financial Restitution from Regulatees

In 1999, the United States Court of Appeals for the Sixth Circuit decided United States v. Universal Management Services, 191 F.3d 750, finding that restitution was a proper equitable remedy for a violation of the Food, Drug, and Cosmetic Act, despite the absence of statutory authority.  The decision has since been the topic of debate among academics and practicing professionals alike, as well as counsel for both those subject to the decision and those who look to it for support.  Virtually as many people have questioned the court’s expansion of equitable remedies that were previously unknown to FDA, as those who presume such remedies were inherent, yet never before used by the agency.  What remains of pointed concern, however, is that, as a result of Universal Management, Lane Labs, and their progeny, the FDA is likely to demand financial restitution from more regulatees in the future, catching many completely by surprise.  This may be especially true for those who are at risk of criminal prosecution for the same acts that were the basis of the restitution order.

In Universal Management, the District Court granted FDA an injunction against the defendant, who sold a machine that was marketed as a pain relieving tool.  The agency petitioned the court for remuneration of its costs and any such other relief the court thought proper, which included disgorgement of profits.   Although it found disgorgement inappropriate, the Court nevertheless awarded restitution.  The Court explained, “while numerous district courts have ordered the equitable remedy of disgorgement in a variety of FTC cases, neither the parties nor the court could find an FDA case where disgorgement of profits was ordered. While the lack of previous use of the equitable remedy of disgorgement of profits in FDA cases is not necessarily fatal to Plaintiff’s request for such a remedy, such nonutilization does cast some doubt on the appropriateness of disgorgement in this matter.” United States v. Universal Mgmt Services, Inc., 999 F.Supp. 974, 980 (N.D. Ohio 1997) aff’d sub nom. United States v. Universal Mgmt. Services, Inc., Corp., 191 F.3d 750 (6th Cir. 1999).  It continued by saying, “while the court will not order disgorgement of profits in this case, the court does find that restitution is both available and appropriate. Such remedy will ensure that the public interest is protected by providing each person who purchased Defendants’ adulterated product the opportunity to receive his money back.” Id.  The Court of Appeals found that, “absent a clear command by Congress that a statute providing for equitable relief excludes certain forms of such relief, this court will presume the full scope of equitable powers may be exercised by the courts.” United States v. Universal Mgmt. Services, Inc., Corp., at 761,  The Sixth Circuit relied principally on the U.S. Supreme Court’s decision in Porter v. Warner Holding Co., 328 U.S. 395 (1946), where the Court held that “unless otherwise provided by statute, all the inherent equitable powers of the District Court are available for the proper and complete exercise of that jurisdiction,” Porter at 398.

Since the Sixth Circuit’s decision in United States v. Universal Mgmt. Services, Inc., Corp., the FDA has benefited from other courts also finding that the agency possessed a remedy of restitution.  One of the notable decisions was out of the Third Circuit in United States v. Lane Labs-USA, Inc., 427 F.3d 219 (3d Cir. 2005).  The FDA sought an injunction against the Defendant for allegedly marketing unapproved and misbranded drugs, and since it worked before, the agency asked for “other relief” that the court deemed proper.  Also relying on Porter, the Third Circuit ruled that, “while arguably a close call, ‘based on such clear and sweeping language, it would appear that a district court sitting in equity may order restitution unless there is an explicit statutory limitation on the district court’s equitable jurisdiction and powers.’”

A primary statutory purpose of the FDCA was “to protect consumers from dangerous products,” but as a result of the above cases, however, parties standing accused by the FDA must not only confront the risk that a Court will find them liable but also that it will order them to pay restitution as a deterrent against alleged future misconduct.

There is a growing trend in these cases for courts to endorse the view that restitution serves as a deterrent against future FDCA violations.  Traditionally, the primary purpose of restitution was to restore aggrieved parties to the position that existed before the illegal or wrongful transaction occurred by compensating them for loss caused by the conduct.  The use of the term in the above cases, however, appears to be an expanded notion, one where the courts are presuming to punish the Defendant in a way that might deter future actions in opposition to FDA.  Generally, deterrence is thought of as a method of punishment meant to ensure that the offender will not risk the crime for fear of the consequence, either because she has suffered it or because of knowledge that someone else has.  Forms of deterrence include community service, monetary penalties, and incarceration.  The theory the FDA and the courts have adopted, however, is one designed to make the possibility of future acts disfavored by FDA unprofitable, thereby detering the person from doing it again. That theory is a harder proposition to justify, given that FDA has acknowledged that many of those it accuses of FDCA violations readily fix the way(s) in which they are said not to comply, ordinarily not comprehending themselves to be in violation in the first place; and further that, as I have witnessed as a former criminal prosecutor of serious repeat felony offenders, those inclined to break the law will generally not be deterred from reoffending merely because they are forced to give back the property that was never rightfully theirs.  The Third Circuit’s retort, stated in Lane Labs, is that restitution “furthers the purposes of the statute” by its deterrent effect, yet the ever-present threat will ordinarily lead to a kind of chilling effect, where a certain number of regulatees discontinue earnest pursuit of lawful business practices that are perceived as less desirable by the FDA.

The question now arises: do these decisions give the FDA a broadened sword with which to enforce its will beyond the limits of its statutory authority?  The answer must be yes; especially for those who find themselves in the crosshairs of FDA enforcement and who face a threat of civil and criminal charges.  For criminal violations, those accused can have their day in court by exercising their right to trial.  There, the FDA must prove the charges beyond a reasonable doubt, and only after a finding of guilt may restitution be imposed.  The agency now apparently has a new option if both civil and criminal charges are viable.  The FDA can merely seek an injunction and restitution with a drastically lower burden of proof, probable cause, and create an in terrorem effect that avoids need for the agency to prove in a penultimate criminal case guilt beyond a reasonable doubt.  Saving time and resources as well as potentially lowering the risk of not prevailing on close cases at the trial level offer a substantial alternative for FDA, one that effectively removes the protection of the higher criminal law standard before financial burdens are imposed.  This all has the ability to increase substantially the complexity and risk of dealing with the FDA, lessening the distinction between civil and criminal acts by increasing the risks of liability for the former to a level more comparable to that of the latter.


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