A Wake-Up Call to the Food Industry: FDA Announces Investigation into Use of Caffeine in Food

On the heels of Wrigley’s new promotion of its new caffeinated gum called Alert Energy, FDA has announced that it will be investigating the safety of caffeine in food products. The use of caffeine in food products has been a hot topic in the media over the past few weeks. As we previously discussed, there has been a growing push by health experts for regulatory changes related to the use of caffeine in foods and beverages. Meanwhile, companies like Monster Beverage have been making changes related to the marketing and labeling of their caffeinated products.

In its recent announcement, FDA stated that it has concerns regarding the presence of caffeine in a “range of new products, including ones that may be attractive and readily to children and adolescents.” FDA provides examples of new food products with added caffeine, including chewing gum, jelly beans, marshmallows, sunflower seeds, and waffles. It noted that the “proliferation of these products in the marketplace is very disturbing to us.” However, when it comes to taking action on this issue, FDA has not made a clear statement as to how it will proceed. Instead it has stated that it “need[s] to better understand caffeine consumption and use patterns and determine what is a safe level for totally consumption of caffeine” and that the agency “need[s] to address the types of products that are appropriate for the addition of caffeine.” FDA has indicated that it is meeting with food companies to discuss uses of caffeine in food products and the appropriateness of those uses.

FDA notes that it has deemed 400 milligrams per day of caffeine (or approximately four or five cups of coffee) as generally safe for consumption by healthy adults. Substances that are generally recognized as safe or “GRAS” (further explained here) are those that FDA deems generally recognized among qualified experts as having been adequately shown to be safe under the conditions of its intended use. FDA has not set a safe daily level of caffeine consumption for children. Under its current regulatory framework, FDA states that manufacturers can add caffeine to food products as long as the manufacturer determines that the addition meets relevant safety standards and the caffeine is listed on the product label’s ingredient list. Notably, FDA stated in its recent announcement that “[w]hile various uses may meet federal food safety standards, the only time FDA explicitly approved adding caffeine was for colas in the 1950s. Existing rules never anticipated the current proliferation of caffeinated products.”

While it is not clear at this time exactly what FDA intends to do about the growing number of caffeinated products on the market, FDA has stated that it may consider enforcement action against individual products as it deems necessary and appropriate. As the food and beverage industry rapidly grows and expands the novel types and categories of products it offers to consumers, FDA regulation has clearly come up short in keeping pace. Because this caffeine issue has garnered national attention, the food and beverage industry will have to be prepared to quickly adapt to (or potentially fight) any new regulation or policy FDA attempts to implement.

Fuerst, Ittleman, David & Joseph, PL will be closely monitoring FDA’s investigation and actions related to the use of caffeine in food products. For more information, please contact us via e-mail at contact@fidjlaw.com or via telephone at (305) 350-5690.

FDA Issues Two Warning Letters for Social Media Use: FDA Does Not Approve of “Liking” Consumer Claims and Targets Website Search Results

In 2009, the U.S. Food and Drug Administration (FDA) announced that it intended to release a guidance document explaining how it will regulate industry’s use of social media to advertise products or communicate with consumers. As of today, the FDA still has not done so, and as a result, a regulatory gray area has been created, wherein industry is forced to weigh the risk of reaching out to its consumers through popular forms of social media, such as Facebook or Twitter, with no clear guidelines regarding how to do so. Despite the FDA’s failure to provide industry with any guidance on the proper use of social media in compliance with federal laws and policies, the FDA has not backed down from taking enforcement action for what it views as improper use of social media channels.

FDA Takes Enforcement Action Against Advertiser for “Liking” Consumer’s Facebook Comment

On December 11, 2012, the FDA issued a Warning Letter to AMARC Enterprises (“AMARC”) for claims made on its Facebook account that purportedly promoted its dietary supplement, PolyMVA, as a drug intended for use in the cure, mitigation, treatment, or prevention of disease. (To read the FDA’s Warning Letter to AMARC Enterprises, please click here.) Specifically, the FDA noted that the PolyMVA Facebook page “liked” a comment posted by a consumer, which stated that “PolyMVA has done wonders for me. I take it intravenously 2x a week and it has helped me tremendously. It enabled me to keep cancer at back without the use of chemo and radiation”¦Thank you AMARC.” This claim was included as one of several examples of the company promoting PolyMVA “for conditions that cause the product to be a drug.”

In issuing this Warning Letter to AMARC, the FDA took an unprecedented position on the use of social media to promote or advertise FDA-regulated products. Specifically, this Warning Letter implies that the FDA views the company’s act of “liking” comments or posts on Facebook as akin to adopting or endorsing the underlying claim itself. Although the FDA did not elaborate on or specifically explain how “liking” a user’s comment constitutes drug promotion, it seems that the FDA perceives “liking” a third-party’s comment as creating an implied disease claim. The FDA’s Warning Letter sends a strong message to industry that it should be cautious in its use of Facebook’s “like” function because “liking” a comment or post could inadvertently result in closer FDA scrutiny of those consumer claims. It remains to be seen whether the FDA’s unofficial policy regarding “liking” Facebook comments will be extended to other popular social media venues, such as Twitter, where users can “re-tweet” or “favorite” a message, or Google+, where users can “+1” a post.

FDA Holds Advertiser Responsible for How Consumers Interpret Computer-Generated Search Results

In a second Warning Letter to M.D.R. Fitness Corp. (“M.D.R. Fitness”) dated January 29, 2013, the FDA took the company to task regarding its website. (To read the FDA’s Warning Letter to M.D.R. Fitness, Corp., please click here.) Specifically, the FDA noted that typing well-known diseases like “cancer” or “diabetes” into a search field on the product’s website returned a list of the company’s dietary supplement products. According to the FDA’s Warning Letter, the results of this search create the implication that M.D.R. Fitness is promoting its dietary supplement products “for conditions which cause the products to be drugs” that are “intended for use in the diagnosis, cure, mitigation, treatment or prevention of such diseases.”

Even though the FDA only mentioned the company’s search engine as a passing comment in a list of other deficiencies, this statement has the potential to have significant effects on the regulation of industry. The FDA’s Warning Letter suggests that manufacturers can be held responsible for any associations consumers may make between a disease and a dietary supplement, including any information generated through a search engine. It is unclear whether the company’s search function strategically manipulated the results to include its dietary supplement products or whether the search function is built upon a dynamic tool like Google. This Warning Letter raises serious questions about the extent to which the FDA will hold manufacturers responsible for search results on their own websites and consumers’ interpretations of those search results. Based on the limited information in the M.D.R. Fitness Warning Letter, it seems likely that the FDA is now targeting manufacturers for creating implied drug claims based on no more than search results.

FDA Continues to Delay Release of Guidance on Social Media Use

In 2009, the FDA expressly stated that it planned to develop and issue guidance on the use of social media; however, the FDA has yet to issue any additional information or policies specifically related to the use of popular social media websites, such as Facebook, Twitter, or Google+. Other federal agencies, on the other hand, have recently provided some clarification on how to communicate information to the public through these social media outlets in compliance with federal laws and policies. For example, in March 2013, both the Federal Trade Commission (FTC) and Securities and Exchange Commission (SEC) released guidances that clarified how they intend to regulate the use of social media. (Please click here to access the FTC’s new guidance entitled “.com Disclosures: How to Make Effective Disclosures in Digital Advertising” and click here for more information about the SEC’s policy on the use of social media networks.) The FDA specifically stated that it has “placed developing social media guidance at the top of its work plan for 2013.” (For more information, please read the FDA News announcement here.) However, drug marketers may need to wait as late as a July 9, 2014 deadline for more detailed FDA guidance on allowable medical product promotions via the Internet and social media.

The FDA’s Warning Letters to AMARC and M.D.R. Fitness suggest that the FDA is in the process of shaping its enforcement policies regarding social media use. However, in the absence of any further guidance or information from the FDA regarding the use of social media to promote or advertise FDA-regulated products, industry will continue to face the challenge of operating these social media channels relatively blindly. Although it remains uncertain whether the FDA will continue to patrol search results on product websites or take enforcement action against companies for their use of social media prior to issuing a formal guidance document, these Warning Letters serve as notice to industry to exercise caution.

Fuerst, Ittleman, David & Joseph, PL will continue to monitor the developments in the FDA’s regulation of social media use. For more information, please contact us via e-mail at contact@fidjlaw.com or via telephone at (305) 350-5690.

Federal Court Orders FDA to Approve OTC Sales of “Morning-After Pill,” Finds Current Age and Point-of-Sale Restrictions to be Arbitrary and Capricious

On April 5, 2013, Judge Edward R. Korman of the United States District Court for the Eastern District of New York found that the Secretary of Health and Human Service’s (“HHS”) decision to limit over-the-counter (“OTC”) purchases of the emergency contraceptive levonorgestrel (marketed under the name PLAN B and commonly referred to as the “morning-after pill”) to women 17 and older, and thereby requiring girls 16 and under to have a prescription for the pill, to be arbitrary and capricious. In so holding, Judge Korman ordered the FDA to make the pill available OTC to women and girls of all ages free of the numerous point-of-sale restrictions that currently exist. A copy of the Court’s Opinion in Tummino v. Hamburg can be read here.

I. Procedural Posture

The Court’s decision is the culmination of a twelve year battle between family planning organizations and the FDA regarding the OTC sales of levonorgestrel.

A. The approval of PLAN B for prescription use, the subsequent Citizen Petition and the manufacturer’s supplemental new drug applications

In 1999, the FDA first approved leveonorgestrel for prescription use. Two years later, in 2001, the plaintiffs in this case filed a Citizen Petition with the FDA seeking the agency to switch leveonorgestrel from prescription to OTC status for all ages. A copy of the 2001 Citizen Petition can be read here. The FDA denied the Citizen Petition in 2006. The FDA’s denial can be read here.

Concurrent with the consideration of Citizen Petition, the FDA considered several supplemental new drug applications (“SNDA”) submitted by the drug’s manufacturer. The first SNDA sought OTC access to the drug for all ages. This SNDA was denied by the FDA. Subsequent to this denial, the manufacturer filed a second SNDA seeking OTC access for women 16 and older. However, “despite nearly uniform agreement among FDA scientific review staff that women of all ages could use Plan B without a prescription safely and effectively” the FDA rejected this application. See Tummino v. Torti, 603 F. Supp. 2d 519, 523 (E.D.N.Y. 2009).

The manufacturer then submitted a third SNDA, which proposed making Plan B available without a prescription to women 17 and older. “While FDA scientists and senior officials found that 17 year olds could use Plan B safely without a prescription, the FDA Commissioner determined that, because of ”˜enforcement’ concerns, Plan B would be  available  without  a  prescription  only  to women 18 and older.” Thus, the FDA approved the product’s OTC sale for women 18 or older while requiring the product be available to women 17 and younger by prescription only. In addition, despite the OTC approval for women over 18, the FDA placed several point-of-sale restrictions on the sale of the product including: 1) the drug could only be sold in pharmacies; and 2) the drug could only be sold to consumers who presented government-issued identification establishing proof of age. The petitioners sought judicial review of the FDA’s decision.

B. Tummino v. Torti (Tummino I): Plaintiffs’ first challenge to the FDA’s ruling on emergency contraception.

Subsequent to the FDA’ denial of the Citizen Petition, the plaintiffs sought judicial review in Tummino v. Torti, 603 F. Supp. 2d 519 (E.D.N.Y. 2009). In its complaint, the plaintiffs alleged that the FDA’s denial of its Citizen Petition, in light of the scientific evidence presented in the concurrent SNDAs, was arbitrary and capricious because it was not the result of reasoned and good faith agency decision-making.

In 2009, the Court agreed and vacated the FDA denial of plaintiffs’ Citizen Petition. In vacating the FDA’s denial, the Court found that the denial was the product of improper political influence and was arbitrary and capricious because the rationale for the agency’s decision departed from its own policies.

“To support a claim of improper political influence on a federal administrative agency, there must be some showing that the political pressure was intended to and did cause the agency’s action to be influenced by factors not relevant under the controlling statute.” Id. at 544 (quoting Town of Orangetown v. Ruckelshaus, 740 F.2d 185, 188 (2d Cir. 1984)). In holding that the decision was the by-product of political influence, the Court found that despite Advisory Committee and FDA scientists strongly recommending the drug for OTC without age restriction, the FDA Commissioner decided against unrestricted OTC access because of pressure from the White House. Thus, the Commissioner’s decision was influenced by outside political pressure and not factors relevant under the controlling statute. (It should be noted that a drug is considered suitable for OTC use when it is found to be safe and effective for self-administration and when its label clearly provides directions for safe use and warning regarding unsafe uses, side effects, and adverse reactions. See generally, 21 C.F.R. § 330.10(a)(4).)

In finding that the agency’s decision was arbitrary and capricious, the Court noted several departures by the FDA from its established policies and procedures. “The most glaring procedural departure was the decision to act against the Advisory Committee’s recommendation to approve the Plan B OTC switch without age restriction.” Tummino I, 603 F. Supp. 2d at 547. The Court went on to note that in every application in the last decade, the FDA has followed committee recommendations.

The Court noted that the FDA’s denial of the Citizen Petition departed from the agency’s general policies and procedures in at least four other respects. First, the FDA departed from policy when it placed additional members on its Advisory Committee for the purpose of achieving ideological balance. The Court noted that the “goal of ideological diversity does not aid the FDA in its obligation to examine the safety and effectiveness of a drug’s use in self-medication.” Secord, the Court found that the unusual amount of White House involvement in the decision was not the norm in the FDA’s OTC reclassification decision-making process. The third departure involved the timing of the agency’s decision to deny the Citizen Petition. The Court found that the decision regarding OTC status was made before the scientific review staff had completed its review of the manufacturer’s SNDA and without consultation with FDA scientists. The fourth departure was the agency’s refusal to extrapolate actual use study data from older age groups to the 16 and younger age group. The Court noted that the FDA routinely extrapolated such data when reviewing the safety and effectiveness of other forms of contraception.

However, the Court did not grant the plaintiff’s request to require the drug to be available OTC without restrictions for all age groups. Instead, the Court remanded to the FDA to reconsider its decision free from political influence and to “conduct a fair assessment of the scientific evidence.” The Court also ordered that the FDA make the drug available to 17 year olds OTC under the same point of sale restrictions that were currently in place for those 18 and over because scientific data was sufficient to support the safe use of the drug as an OTC for women 17 and older.

C. The reconsidered Citizen Petition, the 2011 SNDA, the FDA’s approval of OTC use and the subsequent reversal by the Secretary of HHS

Following the Court’s 2009 remand in Tummino I, the FDA once again undertook consideration of the plaintiff’s Citizen Petition for reclassification of leveonorgestrel from prescription to OTC status for all ages without point-of-sale restrictions. While the agency was reconsidering the plaintiff’s Citizen Petition, the drug’s manufacturer submitted a fourth SNDA seeking to allow OTC access to a single dose version of levonorgestrel for all ages.

On December 7, 2011, the FDA announced that “[b]ased on the information submitted to the agency, CDER [the Center for Drug Evaluation and Research] determined that the product was safe and effective in adolescent females, that adolescent females understood the product was not for routine use, and that the product would not protect them against sexually transmitted diseases. Additionally, the data supported a finding that adolescent females could use Plan B One-Step properly without the intervention of a healthcare provider.” Thus, the FDA announced that “there is adequate and reasonable, well-supported, and science-based evidence that Plan B One-Step is safe and effective and should be approved for nonprescription use for all females of child-bearing potential.” A copy of FDA Commissioner Hamburg’s statement can be read here.

However, that same day, HHS Secretary Sebelius overruled FDA Commissioner Hamburg and ordered the FDA to deny the SNDA. In her December 7, 2011 Memorandum to FDA Commissioner Hamburg, Secretary Sebelius concluded “that the data submitted for this product do not establish that prescription dispensing requirements should be eliminated for all ages.” More specifically, the Secretary noted “[t]he label comprehension and actual use studies submitted to FDA do not include data on all ages for which the drug would be approved and available over-the-counter. Yet, it is commonly understood that there are significant cognitive and behavioral differences between older adolescent girls and the youngest girls of reproductive age, which I believe relevant to making this determination as to non-prescription availability of this product for all ages.” A copy of the Secretary’s Memorandum can be read here.

While the Secretary’s denial of the SNDA did not directly apply to the plaintiff’s Citizen Petition, because the Secretary’s rationale for denying the SNDA was based on a lack of comprehension and actual use studies which were also lacking from the Citizen Petition, the practical effect of the Secretary’s decision was to force the FDA to once again reject the Citizen Petition. As a result, on December 12, 2011, the FDA again denied the Citizen Petition requesting OTC access to levonorgestrel for all ages without point-of-sale restrictions. A copy of the FDA’s 2011 denial can be read here. The petitioners sought judicial review of the FDA’s 2011 decision.

D. Tummino v. Hamburg (Tummino II)

Subsequent to the FDA’ denial of its Citizen Petition, the plaintiffs again sought judicial review. As in its original complaint, the plaintiffs again alleged that the FDA’s denial of its Citizen Petition, in light of the scientific evidence presented in the concurrent SNDAs, was arbitrary and capricious because it was not the result of reasoned and good faith agency decision-making. The plaintiffs further sought an order from the Court requiring the FDA to grant its Citizen Petition and make levonorgestrel-based emergency contraception available for all ages without point-of-sale restrictions. The Court agreed.

The Court reasoned as follows: “Though the agency’s decision is unfettered at the outset, if it announces and follows””by rule or by settled course of adjudication””a general policy by which its exercise of discretion will be governed, an irrational departure from that policy (as opposed to an avowed alteration of it) could constitute action that must be overturned as ”˜arbitrary, capricious, [or] an abuse of discretion’ within the meaning of the Administrative Procedure Act.” (citing INS v. Yang, 519 U.S. 26 (1996)). Such was the case here.

In its biting opinion, the Court found that the Secretary’s decision in reversing the FDA Commissioner and denying the Citizen Petition was arbitrary and capricious for several reasons. The Court noted the unprecedented intervention of the Secretary in “overrul[ing] the FDA in an area which Congress entrusted primarily to the FDA, 21 U.S.C. § 393(d)(2), and which fell within the scope of the authority that the Secretary expressly delegated to the Commissioner.” See also FDA Staff Manual Guides, Vol.II – Delegations of Authority.

With respect to the Secretary’s determination that the studies submitted were insufficient because they did not include data on women of all ages, the Court found that the Secretary ignored the FDA’s previous waiver of such a requirement.  Moreover, the Court found that even if this could form an adequate basis for prohibiting OTC access for girls of all ages, the Secretary could not justify prohibiting non-prescription access for the age groups [14 and older] for which studies were presented.

The Court was even more critical with respect to the Secretary’s insistence on point-of-sale restrictions for OTC access. First, the Court noted that the Secretary could “not define any harm that could come from the use of levonorgestrel-based emergency contraceptives” by girls younger than 17. Second, the Court noted that even if such risks exist for an OTC product, “the policy of the FDA is to rely on labeling” and providing warnings and directions for use in at risk populations as opposed to implementing point-of-sale restrictions to address safety concerns. The Court went on to find that the “FDA’s authority over nonprescription drugs does not extend to restricting the point-of-sale distribution of drugs that have been found to be safe ”˜when used in the manner intended.’” (quoting American Pharmaceutical Ass’n v. Weinberger, 377 F. Supp. 824, 828 (D.D.C. 1974)). Thus the Court found that “[t]he Secretary’s edict to the FDA simply reflects the fact of her lack of familiarity with, or her willingness to ignore, the policy of the FDA in dealing with these concerns.”

Moreover, the Count found that the rationale and evidence upon which the Secretary relied in forming her decision was so weak that the agency could not adequately explain it in the administrative record itself. Thus, the Court found that FDA had to supplement the administrative record by considering the extra-record material and evidence, namely the studies and evidence submitted by the manufacturer in its 2011 SNDA. This evidence further supported the Court’s conclusion that the Secretary’s reversal of the FDA’s determination that levonorgestrel-based emergency contraceptives should be available OTC without point-of-sale restrictions was arbitrary and politically motivated.

In finding that the Secretary’s actions were arbitrary and capricious, the Court took the bold action of ordering the FDA to approve levonorgestrel as an OTC emergency contraceptive without any age or point-of-sale restrictions. In so ordering, the Court rejected the FDA’s request for remand to the agency so that the agency could initiate rulemaking. In a process the Court described as an “administrative agency filibuster,” the Court found that the “FDA has engaged in intolerable delays in processing the petition.” The Court noted that “one of the devices the FDA has employed to stall proceedings was to seek public comment on whether or not it needed to engage in rulemaking in order to adopt an age-restricted marketing regime. After eating up eleven months, 47,000 public comments, and hundreds of thousands, if not millions, of dollars, it decided that it did not need rulemaking after all.” The Count went on to state that “plaintiffs should not be forced to endure, nor should the agency’s misconduct be rewarded by, an exercise that permits the FDA to engage in further delay and obstruction.”

It is not yet known how, or whether, the FDA will appeal Judge Korman’s landmark decision.

The Court’s decision in this case highlights the importance that the judicial branch can and does play in allowing parties to engage in meaningful, and not mere perfunctory, judicial review of agency decisions. The attorneys of Fuerst, Ittleman, David,& Joseph, PL have extensive experience in the fields of food, drug, and cosmetic law and administrative litigation. For more information, please contact Fuerst Ittleman David & Joseph, PL at contact@fidjlaw.com.

CMS To Post Additional Nursing Home Deficiency Data Online

On March 22, 2013, the Centers for Medicare and Medicaid Services (“CMS”) announced that it would increase the amount of information available online by posting a nursing home’s three (3) preceding standard health surveys and three (3) years of prior complaint surveys. A link to the CMS memorandum may be found here. Previously, searchable data only included statements of deficiencies (Form CMS-2567) for the most recent standard health surveys and the past fifteen (15) months of complaint surveys. In addition to the expanded time frames, CMS also plans to include indicators as to the scope and severity of each cited deficiency.

Interestingly, CMS decided not to gather and publish corresponding plans of correction (PoCs) submitted by nursing homes. Generally, when a nursing home receives a deficiency citation via CMS Form-2567, it is required to draft and submit a plan of correction identifying how and when the cited deficiency will be resolved. This information may, however, be requested directly from the nursing home or the state survey agency (in Florida, the Agency for Health Care Administration).

With this recent move toward the publication of expanded deficiency information and ease of access to that information, the importance of drafting plans of correction has become more important than ever. On the one hand, nursing homes must draft a plan of correction in such a way as to adequately address any and all concerns expressed by CMS. However, on the other, nursing homes must carefully draft plans of correction so as to prevent third parties from taking statements of deficiency out of context and using them against the nursing home in subsequent proceedings.

For more information about how your nursing home should respond to a statement of deficiency or prepare a plan of correction, please contact Fuerst Ittleman David & Joseph, PL by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.

FDA Energy Drink Regulation in the News: Health Experts Push for Regulatory Changes and Monster Moves to Market as a Beverage Instead of as a Dietary Supplement

On March 19, 2013, a group of doctors, researchers, and public health experts sent a joint letter to the Commissioner of the U.S. Food and Drug Administration (“FDA”) urging the FDA to make changes to the regulation of energy drinks. In its letter, the group concluded that there is a “robust correlation between the caffeine levels in energy drinks and adverse health and safety consequences,” especially where children, adolescents and young adults are concerned. Furthermore, the group claims that “there is neither sufficient evidence of safety nor a consensus of scientific opinion to conclude that the high levels of added caffeine in energy drinks are safe under the conditions of their intended use.” As a result of these findings, the group is pushing the FDA to require manufacturers to label energy drinks with the product’s caffeine content and demonstrate that the levels of caffeine in those products are generally recognized as safe (“GRAS”) and comport with existing GRAS standards for beverages.

The FDA has previously dismissed public concerns about the safety of caffeine levels in energy drinks. In an unpublished response to Senator Dick Durbin’s 2012 investigation of dietary supplements, which included energy drinks, the FDA explained that the amount of caffeine in energy drinks is not significantly different from the levels of caffeine in commonly consumed beverages like coffee or carbonated soda. (For more information, please see Natural Insider’s article here.) Furthermore, the FDA noted that most caffeine consumed by Americans comes from what is naturally present in coffee and tea and that a review of the available studies does not indicate any new, previously unknown risks associated with caffeine consumption.

Monster to Market Energy Drinks as Beverage Instead of Dietary Supplement

In a move unrelated to the letter described above, Monster Beverage, the largest seller of energy drinks, recently announced its plan to discontinue marketing its energy drink products as dietary supplements. Instead, Monster will market its products as conventional beverages. In addition to implementing required changes to its product labeling to reflect nutrition facts instead of supplement facts, Monster disclosed that its energy drink products will now specify caffeine content. (For more information about the change in the marketing of Monster energy drinks, please click here.) Monster’s announcement of its plan to shift the marketing of its energy drinks comes just a few months after another energy drink brand, Rockstar, made a similar move.

According to Joseph Cannata, an executive vice president at Rockstar, Rockstar made its decision to market energy drinks as beverages because consumers found food labels easier to read than dietary supplement labels. A spokesperson for Monster, Michael Sitrick, explained that Monster’s decision was influenced by several factors. Specifically, Mr. Sitrick stated that a major reason for the change was to stop the “misguided criticism” that Monster was selling its energy drinks as dietary supplements because dietary supplements are more lightly regulated than beverages. Additionally, Mr. Sitrick explained that “Monster Energy drinks could equally satisfy the regulatory requirements” for either dietary supplements or beverages. (For more information, please read the New York Times article here.)

These announcements from Rockstar and Monster Beverage come after a year of close public scrutiny over energy drinks. In July 2012, the parents of a 14-year-old girl filed a lawsuit against Monster after their daughter died following the consumption of two Monster Energy products. (For more information about this incident, please read CBS’s coverage here.) In November 2012, the FDA received several voluntary adverse health reports listing the dietary supplement 5-hour Energy as contributing to an illness or death. Subsequently, the FDA began a routine investigation to determine whether a possible link exists between the hospitalizations and 5-hour Energy. (For more information about this investigation, please read CBS’s coverage here.) In spite of these recent investigations, the FDA has not officially changed its position regarding the safety of consuming energy drinks.

FDA Regulation of Energy Drinks

The FDA does not have a specific category or specific regulations for energy drinks. Typically, energy drinks have been marketed as either dietary supplements or conventional beverages, depending on the product’s ingredient, intended use, and labeling. For manufacturers, determining the appropriate regulatory framework for a product has important implications on a product’s development, as it can help guide product formulation and establish the limitations on product labeling and marketing, any requirements for pre- or post-market reporting or mandatory adverse event disclosures to the FDA. As we previously explained here, categorizing products as either conventional foods or dietary supplements can be difficult.

The FDA defines conventional foods as “articles used for food or drink for man or other animals, chewing gum, and articles used for components of any such article.” All ingredients in conventional foods must be pre-approved by the FDA as a food additive or meet the requirements of the GRAS provisions. Dietary supplements, on the other hand, are defined as products “intended for ingestion that contain a dietary ingredient intended to add further nutritional value to (supplement) the diet.” Dietary supplements may be in forms such as tablets, capsules, softgels, gelcaps, liquids, or powder, and may be one, or a combination, of the following substances: vitamins, minerals, herbs or botanicals, amino acids, concentrates, metabolites, constituents, or extracts. Based on these definitions, it may be more difficult to classify certain liquid products where the product is intended to supplement the diet with vitamins or nutrients but resembles a conventional beverage in serving size and taste.

In an attempt to assist manufacturers in properly classifying their products as either liquid dietary supplements or conventional beverages, the FDA issued a draft guidance document in 2009. (The FDA’s Guidance document can be accessed here.) This 2009 draft guidance states that the FDA considers a product’s name, packaging, serving size, recommended conditions of use, and other representations about the product, to be determinants of whether the product is a conventional food or dietary supplement. This guidance has not been finalized; however, the U.S. Government Accountability Office released a report in March 2012 indicating that the FDA is in the process of developing and reviewing a final guidance document that clarifies when a liquid product should be marketed as a dietary supplement or conventional beverage. (The U.S. Government Accountability Office’s report can be accessed here.)

If a product is a conventional food or dietary supplement but improperly marketed as the other type of product, the product could be deemed by the FDA to be misbranded or adulterated in violation of 21 U.S.C. § 331(a) and 21 U.S.C. 342(a)(2)(C). Failure to comply with the appropriate labeling regulations could subject manufacturers to enforcement action. The FDA has issued Warning Letters against manufacturers for mislabeling conventional beverages as dietary supplements. (For more information about the FDA’s past enforcement action regarding the labeling of dietary supplements, please read our previous post here.)

Uncertainty Regarding the Future Regulation of Energy Drinks

Despite the FDA’s current position that the elevated caffeine levels in energy drinks do not pose a significant health risk, the public continues to pressure Congress and the FDA to address its concerns about the safety of consuming energy drinks. Now, with the release of this joint letter to the FDA, doctors, researchers, and public health experts seem to support the push for tighter regulation and increased oversight of these products. At this time, it remains to be seen what steps Congress and the FDA will take to address any gaps in the present regulatory scheme.

Fuerst Ittleman David & Joseph, PL will continue to monitor any developments in the regulation of compounding pharmacies. For more information, please feel free to contact our offices by email at contact@fidjlaw.com or by phone at (305) 350-5690.

POM Appeals FTC Final Order Regarding Deceptive Claims

As we previously reported, on May 17, 2012, an FTC Administrative Law Judge (“ALJ”) held in an Initial Decision that POM Wonderful LLC’s (“POM“) claims that its products can treat, prevent, or reduce the risk of heart disease, prostate cancer, and erectile dysfunction (“ED”) were deceptive and inadequately substantiated because the claims were not supported by sufficient “competent and reliable scientific evidence.” FTC case law defines “competent and reliable scientific evidence” as “tests, analysis, research, or studies that have been conducted and evaluated in an objective manner by qualified persons and are generally accepted in the profession to yield accurate and reliable results.” Seee.g. In re Novartis Corp., 127 F.T.C. 580, 725 (1999). Although the Initial Decision rejected the FTCs theory that competent and reliable scientific evidence for the disputed claims could only be satisfied with two double-blind, randomized placebo-controlled clinical trials (RCTs), the ALJ found that competent and reliable scientific evidence could be established without RCTs in order to adequately substantiate disease claims. Subsequently, both POM and the FTC appealed the Initial Decision to the FTC Commissioners.

On January 10, 2013, the FTC Commissioners issued a Final Order approving the Initial Decision 5-0 that POM made deceptive claims about treating, preventing or reducing the risk of heart disease, prostate cancer and ED. The Commissioners also issued a cease and desist order restraining POM’s future advertising.

On March 8, 2013, POM appealed the Commission’s Final Order to the United States Court of Appeals for the District of Columbia Circuit. POM’s petition for review can be found here. Significantly, POM’s petition did not request a stay from the D.C. Circuit. Thus, the cease and desist order restraining POM’s advertising has become effective and will remain so at least until the DC Circuit issues a ruling on this case.

Fuerst Ittleman David & Joseph, PL will continue to monitor the development of the POM case. For more information about food and dietary supplement claims or to have Fuerst Ittleman David & Joseph, PL complete a label and website review for your products, please contact us at (305) 350-5690 or contact@fidjlaw.com.

The Latest Zpic Target: Medicare Cost Reports

(For additional information concerning ZPICs, please refer to our January 11, 2013 blog entry, “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West”).

A. Cost Reports, Generally

When Medicare was created in 1966, Medicare paid participating providers (e.g. hospitals and skilled nursing facilities) based on a portion of their costs. Medicare’s portion of costs was determined by multiplying total costs by the ratio of Medicare charges to all charges. Providers were paid an estimated amount on an interim basis; however, providers filed a “cost report” at the end of each year in order to compute a final settlement. Generally, the cost report aggregated a providers’ detailed financial data. If Medicare overpaid the provider from the interim payments, a payable was generated from the provider. If Medicare underpaid the provider from the interim payments, a receivable was generated to the provider. Medicare discontinued this payment system in 1983 (for hospitals) and 1998 (for nursing homes).

Medicare now utilizes a prospective-based reimbursement system which has no relation to a providers’ actual cost report. While providers are still required to file cost reports as a condition of participation in the Medicare program, the cost report no longer impacts the settlement process. Rather, the Centers for Medicare and Medicaid Services (“CMS”) utilizes the data to compute national reimbursement rates. In other words, a providers’ Medicare cost report is used by CMS for informational purposes only.

B. ZPIC Requests for Provider Business and Financial Data

As briefly referenced in our January 11, 2013 blog entry, “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West,” ZPIC auditors are demanding that skilled nursing facilities produce, in addition to patient/resident medical records, confidential and proprietary business and financial records. Generally, these demands include requests for the following: (a) detailed general ledgers; (b) audited financial statements; (c) organization charts; (d) journal entry descriptions; (e) chart of accounts; (f) board meeting minutes; (g) facility check register; (h) list of facility credit card holders and bills; (i) facility grouping schedule; (j) working trial balance; (k) balance sheets; (l) profit and loss statements; (m) floor plans; (n) facility and corporate policy and procedures manuals.

These requests not only appear to exceed the scope of a ZPIC’s authority, but also appear duplicative. When the ZPIC is questioned as to its authority to request such information, the ZPIC frequently responds citing generally to the Social Security Act. When pressed for specific citations to legal authority, the ZPIC may cite to 42 CFR §§420.301-304. Interestingly, 42 CFR 420.301-304 falls under Subpart D, “Access to Books, Documents, and Records of Subcontractors” (Emphasis added). A skilled nursing facility, however, does not fall under the definition of a “subcontractor” as defined in 42 CFR §420, Subpart D. Despite advising the ZPIC of this flaw, the ZPIC is generally unwilling to engage in any further discussion relative to the scope of its authority.

Further, the requested financial information is duplicative given CMS already obtained the financial data in the normal course of business via the provider’s Medicare cost reports. Of course, if CMS, c/o its Fiscal Intermediary/Medicare Administrative Contractor (“FI/MAC”), had an issue with the information contain in the provider’s cost report, the issue would have been addressed at that time. Yet, a request for a provider’s financial data from several years prior appears to be a means of harassing a provider into noncompliance following an endless barrage of detailed and dated financial document requests.

C. Are Medicare Cost Reports “Fair Game” for ZPICs? 

When a nursing home fails (or is otherwise unable) to produce such business and financial data, the ZPIC may instruct the FI/MAC to a issue “Notice of Change of Amount of Program Reimbursement” for each corresponding fiscal year end period. The result may be as severe as a reopening of each corresponding fiscal year end period and denying some or all of the provider’s Medicare costs referenced therein.

Interestingly, the regulations clearly state that the FI/MAC is the only entity with the authority to reopen provider cost reports and make determinations relative to same. See 42 C.F.R. §405.1801, et. seq. Further, while Section 4.7.1 of the Medicare Program Integrity Manual permits a ZPIC to compile and review cost reports, the ZPIC Zone 7 Statement of Workexpressly excludes cost report action from the scope of a ZPIC’s authority (e.g. reopening and denials).

However, the FI/MAC typically accepts the ZPICs directives without question or analysis. More importantly, the FI/MAC generally has no knowledge concerning the underlying basis for the ZPIC’s cost report action. In other words, the ZPIC and FI/MAC make it clear that the ZPIC is the sole entity making all decisions and determination relative to the providers cost reports. Thus, the FI/MAC is simply issuing correspondence based on ZPIC directives.

D. A Lack of Provider Business and Financial Data Cannot be the Basis of a ZPIC’s Adverse Cost Report Determination

ZPICs have asserted, in no uncertain terms, that the failure (or inability) to produceall of the demanded financial documentation will lead to the reopening and denial of all Medicare costs contained in the corresponding fiscal year end cost reports.

However, a provider’s failure (or inability) to produce all of the demanded financial and business records has no relation to the actual ZPIC cost report determinations. In addition to aggregating a provider’s financial data (for informational purposes only), a Medicare cost report also includes RUG scores (a/k/a the rate CMS will pay the provider for a given resident). These RUG scores are multiplied by a skilled nursing facility’s census to identify Medicare days paid. Despite requesting business and financial data, ZPICs are reopening cost reports relative to Medicare days paid and making their determinations accordingly. The ZPICs’ conduct is the equivalent of stating that no skilled nursing facility resident during the same periods qualified for Medicare and any payments received by the skilled nursing facility for those Medicare residents must be returned. Yet, whether a resident qualified for Medicare and whether that information was accurately included in the provider’s cost report has no relation to, for instance, a provider’s failure or inability to produce unrelated credit card statements and/or building floor plans. Instead, a determination relative to the accuracy of a provider’s resident Medicare costs would require an analysis of the actual facility residents during the corresponding periods. Even still (and as previously noted), a provider’s Medicare cost reports are merely informational.

E. Does a Provider Have Appeal Rights?

While providers are given the opportunity to appeal cost report reopenings/denials (whether before the Provider Reimbursement Review Board or the MAC, depending upon the amount at issue), appeals may be futile given regulations which permit CMS, c/o the U.S. Department of the Treasury, to begin recouping and/or offsetting Federal and certain eligible state funds due the provider. In essence, the provider is at risk of being choked out of business with millions of dollars earmarked by the ZPIC for recoupment/offset before the provider can assert its appeal rights, even in an action arguably void at its inception. Whether a provider should exercise its appellate rights or seek some other type of relief from a cost report reopening/denial is ultimately a fact-intensive analysis which should be made in light of all of the circumstances affecting the provider’s business.

Fuerst Ittleman David & Joseph, PL will continue to monitor the ZPIC landscape. For more information concerning the foregoing, please contact our firm’s litigation department by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.

Customs Sharing Hard Times with Importers and Travelers

Sequestration budget cuts only add to CBP’s focus on increasing revenues.

While much has been made in the press about the effect of the sequestration on U.S. Customs and Border Protection (CBP), with experts and even CBP officials anticipating longer lines at immigration check-points and longer times to clear cargo, the sequestration is only another thorn in the budgetary side of CBP. And CBP seems to want to share that pain with importers and travelers alike.

Some Historical Perspective

While CBP’s official mission statement discusses such noble (and critical) roles as guarding our nation’s borders and protecting us against terrorists and instruments of terror, it also mentions “ fostering our Nation’s economic security through lawful international trade and travel.” What do these words mean? Money.

Many people do not realize that the second act of the 1st Congress of the United States, passed on July 4, 1789, authorized the collection of duties and tariffs on imports. Twenty-seven days later, the fifth act of that first Congress established the progenitor of CBP to collect those duties. Congress created Customs (CBP) even before the Bill of Rights.

The reason for this Congressional urgency was money. In 1789, the nation desperately needed to pay the costs of the Revolutionary War. In fact, since 1789, with the exception of temporary taxes and bonds to fund little government projects like the War of 1812 and the Civil War, the sole source of revenue for the U.S. Government was customs duties. This was true for the first 124 years of our nation’s existence, up until the passage of the Sixteenth Amendment in 1913, which established the income tax systems we know today.

With collecting money so firmly rooted in its DNA, it stands to reason that when economic times get hard for CBP, it returns to its roots and its mission of “economic security.” And now with the sequestration, times are hard for CBP.

Sequestration Squeezes the Agency

Under current sequestration provisions, CBP will have to cut $754 Million, or roughly 6.5% of its budget. The Agency reports that an immediate consequence will be deep cuts in overtime pay for its CBP officers and staff. These cuts, combined with 12-14 day furloughs, means that fewer inspectors will be available at immigration checkpoints, and fewer officers will be available to clear incoming cargo. In addition, we can expect to see longer processing times for bonded-activity applications (like bonded warehouses and container freight stations) and for adjudications of protests and fines, penalty and forfeiture cases.

But these proposed and hypothesized cuts only tell half of the story.

As budgetary times have become harder for the Agency and perhaps in anticipation of the sequestration, we have seen a significant trend in those CBP fines, penalty and forfeiture cases as well as in its adjudication of rulings affecting duties and tariffs. The bottom line is that CBP is looking for more money from its enforcement measures.

Take offers-in-compromise, for example. In penalty cases, if an importer is unable to pay a proposed or levied penalty, the importer can make an offer-in-compromise to the Agency. The importer offers to pay a percentage of the penalty, and usually provides documentation (tax, sales, and banking records) describing the financial straits that render the importer unable to pay the full amount. In years gone by, depending on the circumstances, CBP has been willing to accept pennies on the dollar, often approving offers for 5% – 25% of the original penalty amount.

Recently, however, we have seen offers as high as 50% and 67% of a penalty amount refused by CBP, even though the importer in each case provided documentation that it has steadily lost money in each of the prior three years and didn’t have enough money in the bank to cover the full amount of the penalties. When pressed for additional information on these rejected offers, CBP sources confirmed that the Agency is seeking higher revenues these days. This same mindset explains the trends we have seen in recent months of reduced mitigation of liquidated damages and claims for higher initial penalties than would have been previously expected.

At the same time, we are seeing increased enforcement and revenue collection efforts across a variety of avenues. More and more CBP officers are screening both incoming and outgoing travelers for currency and monetary instrument reporting compliance. Also, the Agency has been challenged by Congress to better enforce antidumping and countervailing duty collection.

The bottom line for importers and travelers for CBP’s budget woes is this: it will take longer to get you and your products into the United States, and if you break any laws, the penalties will be higher and the levels of possible forgiveness will be lower. And if the current negotiations on the sequestration are any indication, we should expect this new status quo for the foreseeable future.

11th Circuit Case Signals Split on Law vs. Regulation vs. … Contract?

Decision holds interesting repercussions for trade violations and penalty amounts

On February 22, 2013, the U.S. Court of Appeals for the Eleventh Circuit vacated the smuggling and conspiracy convictions of two importers of allegedly tainted cheese products in the case of United States of America v. Yuri Izurieta and Anneri Izurieta (Case No. 11-13585). The decision created a circuit split over the scope of U.S. Customs and Border Protection (CBP) import bond regulations, yet also raised the possibility of a new line of attacks against CBP import penalties and liquidated damages.

With the highly respected U.S. Court of International Trade Judge Jane A. Restrani sitting with the 11th Circuit by special designation, a three-member panel found that a certain class of U.S. import regulations are civil rather than criminal in nature. Therefore, the criminal convictions of the husband and wife failed for lack of subject matter jurisdiction.

The case focused on the actions of the Izurietas and their Miami-based company, Naver Trading, Corp. Over several years, the company imported several large shipments of cheese and other dairy products into the United States. The shipments were “conditionally released” upon importation, that is, CBP and the U.S. Food and Drug Administration (FDA) allowed the shipments to move to Naver’s warehouse, but ordered the merchandise to be held at the warehouse pending further review and testing by the FDA. When the FDA tests came back indicating that the products were contaminated with Salmonella, E. coli and Staphylococcus aureus, the FDA ordered the products to be either destroyed or re-exported under the supervision of CBP.  The Izurietas failed to do so, however, and admitted that almost 5,000 kilograms of imported cheese that contained both E. coli and Staphylococcus aureus had been sold into the United States.

The FDA Office of Criminal Investigation, aided by special agents from U.S. Immigration and Customs Enforcement (ICE) investigated and referred the case for criminal prosecution to the U.S. Department of Justice. The Izurietas were tried, convicted, and sentenced in June 2011.

The defendants appealed to the 11th Circuit arguing violations of their Sixth Amendment rights to confront witnesses, improper statements made by the prosecutor over the course of trial, and faulty calculations underlying their sentences. The Appeals Court, however, saw a different issue in the case, which it raised sua sponte.

Six of the seven counts in the original indictment against the Izurietas alleged violation of 18 U.S.C. § 545, which is the statute barring smuggling into the United States. The operative language of the statute reads:

Whoever fraudulently or knowingly imports or brings into the United States, any merchandise contrary to law, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise after importation, knowing the same to have been imported or brought into the United States contrary to law. . .
Shall be fined under this title or imprisoned not more than 20 years, or both. (18 U.S.C. § 545 (emphasis added).)

In this case, the “law” alleged to have been violated was a CBP regulation governing the conditional release of food, drug, device, cosmetic and tobacco products. Section 141.113 of Title 19, Code of Federal Regulations, allows for the conditional release of such products; however, subsection (c)(3) requires:

If FDA refuses admission of a food, drug, device, cosmetic, or tobacco product into the United States, or if any notice of sampling or other request is not complied with, FDA will communicate that fact to the CBP port director who will demand the redelivery of the product to CBP custody. … [A] failure to comply with a demand for redelivery made under this paragraph (c) will result in the assessment of liquidated damages equal to three times the value of the merchandise involved[.] (19 C.F.R. § 141.113 (c)(3).)

The court held that the regulation at issue “sets forth the terms of the contract between the importer and Customs by delineating the obligations of the importer upon conditional release and the damages for a breach of those contractual obligations.” When the Izurietas breached their contract with the Customs, the court held that criminal charges could not arise because “that law is civil only, and in particular reflects contractual requirements.” The court went on to state, “While some regulations may fall under the criminal prohibitions of 18 U.S.C. § 545, the text of 19 C.F.R. § 141.113(c) along with the comments issued during its promulgation certainly indicate to the average person that liability is strictly civil and monetary, capped at most at three times the value of the merchandise secured by bond, and is not aimed at punishment.”

Having found that only civil, contractual violations occurred, the 11th Circuit vacated the criminal convictions of the Izurietas under the smuggling charges, and vacated the accompanying conspiracy charge noting, “The indictment was sufficiently unclear as to whether any crime was charged such that the average person could easily read [the conspiracy count] as actually charging only a conspiracy to commit non-criminal acts.”

“We disagree with the conclusion of our sister circuit …”

The Izurieta case is noteworthy in many respects, not least of which is that the court’s opinion sets up a split among the Circuits regarding the interpretation of the “contrary to law” provision of 18 U.S.C. § 545.

The 11th Circuit panel referred to a Ninth Circuit case in which that court adopted a relatively narrow interpretation of the smuggling statute. The court in United States v. Alghazouli, 517 F.3d 1179 (9th Cir. 2008), decided that regulations are included within the definition of a “law” for purposes of 18 U.S.C. § 545 only if there is a statute (a “law”) that specifies that violation of that regulation is a crime. Alghazouli, 517 F.3d at 1187.

The court in Izurieta also took notice of a Fourth Circuit case, United States v. Mitchell, 39 F.3d 465 (4th Cir. 1994). In Mitchell, the court adopted a more expansive reading of 18 U.S.C. § 545, stating, “[i]t has been established in a variety of contexts that properly promulgated, substantive agency  regulations have the ‘force and effect of law.'” Mitchell, 39 F.3d at 468 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 295-96 (1979)).  The 4th Circuit then went on to apply a three-prong test (under Chrysler) to determine whether the regulation at issue in Mitchell had the “the force and effect of law.”

Finally, the Eleventh Circuit gave a nod to the First Circuit, which addressed this issue in United States v. Place, 693 F.3d 219 (1st Cir. 2012). The Izurieta court noted, however, “Because the appellant in [Place] made only an “all-or- nothing” argument that no regulations could be included within the scope of  “law” under 18 U.S.C. § 545, the First Circuit decided not to address ‘this delicate point.'” Place, 693 F.3d at 228 n. 12.

Examining the sum of these precedents and calling to mind the deliberations of Goldilocks in the three bears’ house that day, the 11th Circuit decided in Izurieta to reject both the narrow reading of the 9th Circuit and the “sweeping result” which would occur from the “breadth of the Fourth Circuit’s three-prong approach, derived from a non-criminal context.” Instead the court decided – correctly, in our opinion – to examine the true nature of the regulation and opt for lenity, or kindness, “especially where a regulation giving rise to what would appear to be civil remedies is said to be converted into a criminal law.”

Important Ramifications for International Trade Enforcement Measures

In addition to the circuit split, the Izurieta case potentially opens the door for a new line of attacks on Customs’ and other regulatory agencies’ fines, penalties, and liquidated damages. In calling the CBP regulation “civil only” and contractual in nature, the question arises as to the applicability of the tenets of contract law to such governmental regulations.

The CBP regulation at issue in this case (19 C.F.R. § 141.113) is similar in language and intent to many other CBP and other government agency regulations. CBP regulations for import bonds under 19 C.F.R. § 113.62, et seq., has provisions such as “(a) Agreement to Pay Duties, Taxes, and Charges,” (f) Agreement for Examination of Merchandise,” and “(m) Consequence of default.” All of these provisions are very civil and very contractual in nature. In fact, most of the regulatory provisions for which CBP assesses “liquidated damages” – for violations of bond provisions, failure to files timely export information (15 C.F.R. § 30.24), violation of airport security regulations (19 C.F.R. § 122.181, et seq.) and violation of CBP-bonded warehouse and other customs-bonded facilities (Treasury Decision 99-29 and multiple regulations) – are decidedly civil and contractual in nature.

Thanks to Izurieta, it can now be argued by importers and others in the trade community in the Eleventh Circuit that violation of any of these types of civil, contractual regulations cannot result in criminal prosecution. Yet more interestingly, if these regulations are civil and contractual in nature would contract law provisions apply to the liquidated damages, fines and penalties that result from these provisions?

For example, if an importer enters incoming merchandise by filing entry documents with CBP, but is late in paying the duties that are due on that merchandise, the importer can be cited with a violation of the import bond provision (19 C.F.R. §§ 113.62(l)(4), and 113.62(a)(1)) and can be assessed liquidated damages in an amount of double the unpaid duties. In light of Izurieta, we would have to now ask, are these civil damages reasonable?

In a 2009 decision in the case of Country Inns & Suites By Carlson, Inc. v. Interstate Properties, LLC, 329 Fed. Appx. 220, No. 08-16850 (11th Cir., May 12, 2009), the Eleventh Circuit examined the validity of liquidated damages in a contract dispute arising under Florida law. The court held that the test under Florida law as to when a liquidated damages provision will be upheld should be applied to the case. Under Florida law, liquidated damages are enforceable when:

First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages. (Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991).

In our hypothetical case of the late-paying importer above, CBP may assess liquidated damages of double the unpaid duties even if the duty payment is only one day late. Looking at the second prong of the test from Lefemine, the actual damages to CBP of a late duty payment are, at best, the opportunity costs of that late payment. In most contractual settings, such late payment fees are a small percentage (1% or 1½% per month) of the unpaid amount. In a duty bill of $100,000, however, the liquidated damages could equal to $200,000. Such CBP-levied damages clearly violate the Lefemine test and would be thrown out in a Florida court, and now apparently, in the 11th Circuit as well.

The implications for the potential application of Izurieta are enormous. The Eleventh Circuit includes the major international ports of Miami, Fort Lauderdale, Tampa, Jacksonville, Atlanta, and Savannah to name a few. The ports of the 11th Circuit saw over $150 Billion in imports during 2011, almost 10% of the total in the United States. The liquidated damages, fines and penalties to CBP arising from these ports are similarly great. The question after the holding in United States of America v. Yuri Izurieta and Anneri Izurieta is now whether these monetary damages can now be sustained.

CBP Inspects Almost a Billion Ways to Say “I Love You”

As the last of forgetful but doting husbands, boyfriends, and lovers runs out to buy their special someone flowers on this Valentine’s Day, the inspectors at U.S. Customs and Border Protection (CBP) are breathing a sigh of relief.

Although final numbers for this season are not yet in, during the period of January 1 through February 14, CBP will see the importation of almost 1 billion stems of cut flowers from around the world, mostly from Central and South America.  During the 2012 Valentine’s season, CBP processed over 842 million stems, and levels of imports were expected  to rise between 7% and 9% this year due to the increasingly healthy U.S. economy.  Most of these cut flowers are coming through CBP inspection sites at Miami International Airport, which saw 716.7 million stems (or ~85% of the total imported cut flowers nationally) imported between January 1 and February 14, 2012.  The flowers come mostly from Colombia (about 67% of the total), followed by Ecuador, with approximately 23% of the total.

With the flowers coming from these locations, many might assume that CBP is looking for illegal narcotics.  And while some drugs are found in shipments, what CBP is really looking for is bugs.

Every year, mixed in among the roses, mixed bouquets, and dianthus (the biggest imports) are invasive, harmful pests such as Tetranychus sp. (mites), Aphididae (Aphids), Agromyzidae (Miner Flies) and Noctuidae (moths).  In 2012, CBP intercepted approximately 2,500 shipments infested with these pests.  Most often, the shipments are fumigated and the flowers continue on their way.  However, some other plants and flowers are intercepted and destroyed at the border.  Chrysanthemums, gladiolas, and orange jasmine from Mexico (which carries the Asian citrus psyllid, a dangerous pest that destroys citrus crops), as well as most flowering plants in soil are prohibited from entering the United States altogether.

Were it not CBP’s pest interdiction efforts, the U.S. Department of Agriculture estimates that billions of dollars in damage to U.S. crops, including vegetables, grains, and flowers, could be done by these pests.  In addition to bugs, CBP is also on the look-out for diseases.  Current CBP interdiction efforts are underway to prevent funguses called “Chrysanthemum White Rust” and “Gladiolus Rust” from entering the U.S.  These diseases, if they gained a toe hold in the United States, could severely damage the domestic flower industry.

So as you pass by the flower shop or roadside-stand filled with blooms, remember that CBP inspectors have played their role to ensure that nothing will “bug” your loved one this Valentine’s Day.