Third Circuit Vacates Sentence of John M. Crim in Commonwealth Trust Company Tax Shelter Criminal Tax Case

On December 12, 2011, the Third Circuit Court of Appeals entered an opinion and order in the consolidated case of United States of America, v. John M. Crim, et al.  case numbers 08-3028, 08-3931, 08-4077, and 08-4316.  The consolidated cases involved the appeals from the convictions obtained by the United States against  John M. Crim, John Brownlee, Constance Taylor, and Anthony Trimble.  John M. Crim was represented on appeal by Fuerst Ittlemans Senior Tax Associate Joseph A. DiRuzzo, III. Mr. Crim was not represented at trial by Mr. DiRuzzo.

The facts of the case are somewhat complex, and are, in relevant part, as follows:  Mr. Crim founded the Commonwealth Trust Company (“CTC”), and according to the Government used CTC to assist taxpayers in evading their federal income tax obligations.  CTC allegedly marketed both domestic and offshore trusts to be used to siphon off income and profits from domestic taxpayers and advised taxpayers not to file federal income tax returns.  CTC also allegedly advocated the use of liens to avoid IRS seizures and tax liens.

The Government indicted Crim, Brownlee, Taylor, and Trimble and charged violations of 18 USC section 371 (conspiracy to defraud the United States), commonly referred to as a Klien conspiracy and 26 USC section 7212 (the “omnibus clause” prohibiting the administration of the Internal Revenue Code) in the Eastern District of Pennsylvania.  Crim, Brownlee, Taylor, and Trimble were convicted at trial of all counts.  

On appeal, Mr. Crim raised various issues, such as the improper admission at trial of evidence concerning CTCs celebrity client Wesley Snipes (who was convicted of failing to file income tax returns as a result of heading CTCs advice); that the restitution order was improperly entered; and that the 96 month sentence on both counts was procedurally improper.

The Third Circuit ultimately held that the sentence imposed against Mr. Crim was improper and vacated his sentence and remanded to the District Court for resentencing.  The Third Circuit also remanded Mr. Crims case for clarification of the restitution order. A full copy of the opinion can be found here.

A petition for rehearing en banc was filed and was denied on December 12, 2011.  Joseph A. DiRuzzo, III will be filing a petition on behalf of Mr. Crim before the U.S. Supreme Court early next year.

Among other things, what the Third Circuits Decision in the Crim teaches is that having an attorney who is well versed in substantive tax and substantive criminal law is an absolute necessity in a criminal tax case.  Having an attorney who is versed in one area of the law but not the other may result in opportunities being lost for a criminal defendant.  The attorneys at Fuerst Ittleman have proficiency in substantive tax law and criminal law and have experience litigating civil tax cases, criminal cases, and criminal tax cases.  You can contact an attorney by emailing us at contact@fidjlaw.com.

Two Attorneys Arrested and Charged with Structuring Transactions to Avoid Bank Secrecy Act Reporting Requirements

On November 4, 2011, two New Jersey attorneys, Goldie Sommer and Edward Engelhart, were charged with conspiring to violate and violating the Bank Secrecy Acts (“BSA”) by “structuring” attorney trust account deposits in order to evade BSA reporting requirements. A copy of the criminal complaint can be read here.

Generally speaking, the BSA, 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to 31 C.F.R. § 1010.313, “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

According to the complaint, between August 13, 2010 and September 22, 2010, Sommer and Engelhart structured a series of deposits into their attorney trust account totaling $118,000. The government alleged that most of these deposits included even dollar amounts each under $10,000 and occurred on the same day or within a short period of time. However, when taken in the aggregate, the deposits should each have exceeded the $10,000 threshold, thus requiring the filing of a report. Additionally, the government alleged that during the same period of time similarly structured deposits were placed into the personal accounts of Sommer, Engelhart and “other individuals associated with [them].” Checks were then drawn from the personal accounts and placed in the defendants trust account. In total, authorities allege that $354,000 was structured into the trust account.

The complaint further alleged that during a June 16, 2011 meeting with the IRS both Sommer and Engelhart admitted that they had agreed to structure the deposits into the trust account. Additionally, the complaint alleges that Sommer and Engelhart admitted to receiving the currency from a client of their firm for the purchase of real estate and “inferred that the client wished that the funds would be deposited into a bank without the filing of any forms with the [IRS].” If convicted of structuring, Sommer and Engelhart can face up to five years in prison, a $250,000 fine and forfeiture of the structured funds.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com

Hill Dermaceuticals Sues FDA Following Approval of Generic Derma-Smoothe

On November 4, 2011, Hill Dermaceuticals, Inc. (Hill), a Florida-based drug manufacturer, sued the U.S. Food and Drug Administration (FDA). Hill brought suit in connection with the FDAs recent approval of three Abbreviated New Drug Applications (ANDAs) submitted by Identi Pharmaceuticals (Identi). Hill, the manufacturer of Derma-Smoothe, an FDA-approved skin treatment, alleges that FDAs recent approvals of the generic formulations of its drug violate the Federal Food, Drug and Cosmetic Act (FDCA).

Found here, Hills Complaint alleges that the FDAs approvals of Identis ANDAs were arbitrary and capricious. In short, Hill alleges that in approving the ANDAs, FDA treated Identi differently and in contravention of the FDCA by foregoing certain testing to show that the drugs are safe for consumers. Because Derma-Smoothe is a topical treatment derived from peanut oil (a major allergen), FDA required Hill to perform testing to show that the refined oils in the drug contained only trace amounts of amino acids. Still required to test every batch it produces, Hill claims that it has “invested more than $1 million to license and develop a proprietary amino-acid analysis.” Because the methods Hill uses to test its products are proprietary, Hill alleges based on information and belief that FDA has approved Identis applications without requiring such testing or verification that Identis drugs have similarly low levels of amino acid.

Further, because Hill is required to declare that Derma-Smoothe has undergone such testing on the label of each product, Hill claims that Identis products cannot be approved as a generic form of Derma-Smoothe because the drug cannot contain such a declaration in product labeling. Under FDA regulations, generic formulations of drugs undergo approval through an Abbreviated New Drug Application (ANDA). Unlike a New Drug Application (NDA), an ANDA requires the manufacturer to demonstrate that its drug is bioequivalent to a drug approved via an NDA. This showing generally requires the generic to demonstrate that it contains the same active ingredients, is used in the same manner and will bear largely the same labeling. Thus, assuming the Hill case survives a motion to dismiss filed by the FDA, the Hill case will confront the extent of the differences that are permissible in product labeling in order for the Agency to make a finding of bioequivalence under the FDCA.  

Fuerst Ittleman will continue to monitor the developments of the Hill case. For more information regarding the ANDA generic drug approval process or for any questions regarding how your company can maintain FDA regulatory compliance, please contact us at contact@fidjlaw.com.

UFC Claims New York State Law Banning Live MMA Events Violates the First Amendment

On November 15, 2011, Zuffa, LLC, which owns the Ultimate Fighting Championship (“UFC”) brought suit against New York Attorney General Eric Schneiderman and Manhattan District Attorney Cyrus Vance Jr. seeking a declaration that New Yorks ban on live mixed martial arts (“MMA”) events is unconstitutional. More specifically, the complaint, which was filed in the United States District Court for the Southern District of New York, alleges that enforcement of the ban violates UFCs and its “performers” free speech rights protected under the First Amendment. A copy of the UFCs complaint can be read here.

Generally speaking, attempts by the regulate speech fall into two broad categories: 1) “content-neutral” regulations, and 2) “content-based” regulations. The governments attempts to regulate the “time, place, and manner” of the expression or speech at issue, and not the message of the speech, are known as “content-neutral” speech regulations. In order for a “time, place, and manner” regulation to be found constitutional, it must: 1) be content neutral; 2) be narrowly tailored to achieve a significant government interest; and 3) the regulation must leave open alternative channels for communicating the information, i.e. other methods to communicate the same message still exist.

On the other hand, “content-based” regulations which attempt to regulate protected forms of expression are presumed to be unconstitutional. In order for a “content-based” regulation to be found constitutional it must pass strict scrutiny, i.e. the regulation must: 1) serve a compelling government interest which is 2) necessary to achieve this interest and for which there are no less restrictive means that would accomplish the governments goals just as well. It should be noted that all expression is protected unless it falls into one of five categories: 1) obscenity; 2) fraudulent misrepresentation; 3) defamation; 4) advocacy of imminent lawless behavior; or 5) “fighting words.” Speech in these five categories is considered “unprotected speech” and thus may be regulated by the government without violating the First Amendment.

In its complaint, UFC alleges that N.Y. Unconsol. Law § 8905-a (2) (hereinafter “Live MMA Ban”), is an improper “content-based” law and thus violates the UFCs and its performers freedom of expression. The UFC has alleged that, although the law has the appearance of a safety regulation, the legislative history of the Live MMA Ban reveals that the ban was implemented to restrict MMAs misperceived message of violence.

Update: Court Issues Preliminary Injunction Blocking FDA’s Graphic Smoking Warning Labels From Going Into Effect

On November 7, 2011, Judge Richard Leon of the United States District Court for the District of Columbia granted a preliminary injunction on behalf of five tobacco companies challenging the implementation of the FDAs new graphic cigarette warning labels. As a result of the injunction, the FDAs new cigarette labeling requirements, which were scheduled to take effect in September 2012, are now blocked from taking effect until fifteen months after resolution of the plaintiffs claims on the merits. A copy of the Courts opinion can be read here.

As we previously reported, on June 21, 2011, pursuant to the authority granted to it by the Family Smoking Prevention and Tobacco Control Act to regulate tobacco, the FDA released nine new graphic warning labels that were required to appear on every pack of cigarettes sold in the US and in every cigarette advertisement starting no later than September 2012. In response to the FDAs new rule, five tobacco companies (R.J. Reynolds Tobacco Company, Lorillard Tobacco Company, Commonwealth Brands, Inc., Liggett Group LLC, and Santa Fe Natural Tobacco Company, Inc.) filed a complaint in the United States District Court for the District of Columbia alleging that the FDAs new cigarette labeling rules violated the First Amendment and the Administrative Procedure Act.

The five companies also sought an injunction to prohibit the rules from going into effect until fifteen months after a final decision has been rendered on the merits of their case. More background information involving this case can be read in our prior report here. In order for a court to grant a preliminary injunction, it must determine the following: 1) whether there is a substantial likelihood of success on the merits for the moving party; 2) whether the movant will suffer irreparable harm if the injunction is not granted; 3) whether the injunction will substantially injure other interested parties; and 4) whether the public interest would be furthered by the injunction. See Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1066 (D.C. Cir. 1998). However, “the party seeking a preliminary injunction need not prevail on each factor.” R.J. Reynolds Tobacco Company, Inc. v. U.S. Food and Drug Administration, 11-1482, at 9 (November 7, 2011 D.D.C.). Rather, the court “appl[ies] the factors on a sliding scale.” Id. As a result, “if the arguments for one factor are particularly strong, an injunction may issue even if the arguments in the other areas are rather weak.” Id.

More specifically, the tobacco companies alleged that the requirement to place graphic images on its labels unconstitutionally compels speech. Generally speaking, compelled speech is presumptively unconstitutional and will only be upheld if it passes “strict scrutiny,” i.e.: 1) the government has a compelling interest it seeks to protect; and 2) the regulation is narrowly tailored to achieve that interest. However, as explained by the Court, narrow exceptions apply in the area of commercial speech. The government may require disclosure of only “purely factual and uncontroversial information” to protect consumers from “confusion or deception,” unless such a disclosure is “unjustified or unduly burdensome.” A lower level of scrutiny applies in cases where government- compelled speech meets this narrow exception.

In this case, the Court determined that the FDAs rule did meet the narrow exception for compelled commercial speech for several reasons. First, the Court found that the images could not be considered purely factual because must were either digitally enhanced or manipulated to depict the negative consequences of smoking. Second, the Court found that the FDAs argument that the images chosen by the rule were uncontroversial and purely factual was undermined by the fact that the FDAs selected graphic images were designed to evoke viewers emotions. Finally, the Court found that when the graphic images were combined with the textual warnings and the mandatory display of the 1-800-QUIT-NOW smoking cessation hotline, the goal was to induce the viewer to quit or never start smoking. Thus, the Court found that the FDAs labels were neither purely factual nor uncontroversial. Therefore, strict scrutiny and not a lower, more-deferential level of scrutiny applied.

In evaluating whether the FDAs labeling rule passed constitutional muster, the Court found that regardless of whether the governments interest in providing information to consumers is compelling, the FDAs rule is not narrowly tailored to achieve such a purpose. The Court noted that the size and display requirements of the rule — the top 50% of the front and back panels of all cigarette packages and the top 20% of printed advertising — is not narrowly designed to achieve an informative purpose. Rather, the Court found that such dimensions promote a government sponsored anti-smoking message. Additionally, the Court found that the graphic warnings when combined with the textual messages and the 1-800 number result in the FDA “conscript[ing] tobacco manufacturers into an anti-smoking brigade.” Thus, the Court found that the tobacco manufacturers have a substantial likelihood of success on the merits because the FDAs labeling requirements are likely to be found violative of the First Amendment.

The Court also found that the plaintiffs satisfied the other prongs necessary to be granted a preliminary injunction. The Court found that because of the plaintiffs likelihood of success on the merits and the fact that litigation would likely continue well beyond the September 2012 effective date, the plaintiffs would suffer irreparable harm if an injunction was not issued. Additionally, the Court found that injunctive relief would not harm any interested third parties because, based on the record, Congress did not demonstrate that such rules were urgent. In so finding, the Court noted that the Tobacco Act established a mutli-stage timeline in which the FDA was given two years to promulgate a Final Rule and a 15 month implementation period before the Final Rule took effect. Therefore, the Court found no prejudice to other third parties. Finally, the Court found that the “public interest will be served by ensuring that plaintiffs First Amendment rights are not infringed before the constitutionality of the regulation has been definitively determined.” As such, the Court granted the tobacco companies injunction.

Although the preliminary injunction is effective as of the Courts order, the government does have the ability to file an interlocutory appeal challenging the Courts decision. If the government does appeal and is successful, then the District Courts preliminary injunction will be vacated. A similar situation arose in Sherley v. Sebelius, a case involving a challenge to federal funding for stem cell research. In that case, the plaintiffs were granted a preliminary injunction to prevent the NIH funding guidelines from taking effect. However, as we previously reported, the D.C. Circuit vacated the preliminary injunction on appeal and remanded the case to the district court for resolution on its merits.

The practical effect of a successful government appeal would be that, although tobacco companies would still be able to challenge the FDAs rule on the merits, the companies would still have to comply with the FDAs new labeling requirements starting September 2012.

Fuerst Ittleman will continue to monitor the progress of this lawsuit and the FDAs regulation of tobacco products and advertising. For more information, please contact us at contact@fidjlaw.com.

Second Circuit Overturns Conviction for Violation of Iranian Transactions Regulations and Operation of an Unlicensed Money-Transmitting Business

On October 24, 2011, the United States Court of Appeals for the Second Circuit issued its decision in United States v. Banki overturning the conviction of Mahmoud Reza Banki for violating trade sanctions with Iran and operating an unlicensed money-transmitting business. In this case, authorities alleged that Banki violated the ITR and 18 U.S.C. § 1960, which prohibits the operation of unlicensed money-transmission businesses, for his role in 56 money transfers to Iran through the informal money transmission system known as “hawala” which is widely used throughout the Middle East and South Asia. In the hawala system funds are transferred from one country to another through a network of hawala brokers known as “hawaladars.”

As previously reported, the ITR, which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC.  31 C.F.R. § 560.204 prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States persons, of any goods, technology, or services to Iran unless “otherwise authorized” in 31 C.F.R. part 560. Pursuant to 17 U.S.C. § 1705, persons who willfully violate the ITR are subject to criminal penalties.

There are numerous forms of hawala but the two discussed by the Court were the “paradigmatic” system and the “match” system. The “paradigmatic” system works as follows: person 1 located in country A who wants to send money, for example $100, to person 2 in country B would contact a hawaladar located in country A and would pay the country A hawaladar the $100. Next the country A hawaladar would contact a country B hawaladar and ask the country B hawaladar to pay $100 in country Bs currency, minus any fees, to person 2. In the future, when country B hawaladar needs to send money to country A, he will then contact the country A hawaladar, with whom he now has a credit because of the previous transaction, and the country A hawaladar will complete the transaction. Normally, a number of transactions must be completed in order to balance the books between the two hawaladars and periodic settlement of the imbalances occurs via wire transfers or more formal money transmission methods. In this way, people can remit money to others without any actual money crossing the border between country A and country B.

The “match” system works on a similar premise. Under the match system, country As hawaladar seeks out a country B hawaladar looking to transmit money to a third party in country A. Once a “match” occurs, country Bs hawaladar would pay person 2 and then, upon knowledge of payment to person 2, country As hawaladar would pay the third party. Hawaladars derive their profits from the difference in the “buy” and “sell” exchange rates on completed transactions.

The use of the hawala system in the United States to remit funds to and from Iran is problematic for several reasons. First, transferring funds through a hawala qualifies as “money transmitting” under 18 U.S.C. § 1960. Therefore, hawaladars, which typically operate without licenses, are operating illegal money transmitting businesses and are thus in violation of 18 U.S.C. § 1960. As such, U.S. patrons of hawaladars may also be charged for using hawala in the U.S. Second, because money transmission is considered a “service” under the ITR, it is a violation of the Iranian sanctions to transfer money to Iran unless the transfer arises as part of an underlying transaction that is not prohibited.

In Bankis case, authorities alleged that Bankis family members in Iran engaged in 56 money transfers using a match hawaladar to transfer assets to Banki in the United States. Authorities further alleged that for each deposit made into Bankis U.S. bank account, a corresponding payment was sent to Iran for a third party. Additionally, although the funds being transferred into Iran were not Bankis, authorities alleged that Banki knew that for each deposit he received there was a corresponding payout in Iran. Thus, based on this knowledge, authorities alleged that Banki facilitated an American hawaladar in violating the IRT and in operating an unlicensed money-transmitting business.

Authorities charged Mr. Banki with: 1) conspiring to violate the ITR and operate an unlicensed money-transmitting business; 2) violating or aiding and abetting the violation of the IRT; 3) conducting or aiding and abetting the conduct of an unlicensed money-transmitting business; and 4) two counts of making materially false representations in response to an OFAC administrative subpoena. In May of 2010, Banki was found guilty of all counts and was sentenced to 30 months imprisonment and ordered to forfeit $3.4 million.

On appeal, Banki argued his conviction should be overturned for several reasons. First, Banki argued that executing money transfer to Iran on behalf of others only violates the ITR if undertaken for a fee. Second, he argued that even if hawala transfers are considered a service, non-commerical remittances, including family remittances like the ones in this case, are exempt from the service ban. Third, Banki argued his aiding and abetting of an unlicensed money transmitting business should be overturned because the trial court failed to instruct the jury that participation in a single, isolated transmission of money does not constitute a money transmission business.

In its decision, the Second Circuit provided a detailed analysis of Bankis arguments which will guide future IRT and 18 U.S.C. § 1960 cases. First, the Court found that because the IRT was designed to be a broad and overinclusive sanctions scheme designed to isolate Iran, “the transfer of funds on behalf of another constitutes a Ëœservice even if not performed for a fee.”

Although money transmittal for no fee is still considered a “service” under the ITR, the Court went on to find that 31 C.F.R. § 560.516, which provides that non-commercial remittances, such as family remittances, are exempt from the services ban, is ambiguous as to whether it applies to all instances of non-commercial remittances or only those which take place in depository institutions. In so holding, the Court found that the governments argument that U.S. depository institutions have exclusive authority to process family remittances is inconsistent with the language of the regulation. However, the Court also found that, based on the statutory and regulatory sanctions scheme in place, Bankis argument that anyone, including hawalas, could process a non-commercial remittance is inconsistent with the ITR scheme as a whole. Thus, based on the ambiguity of the breadth of the non-commercial remittance exemption, the Court overturned Bankis convictions for conspiracy and violations of the ITR.

The Court also vacated Bankis conspiracy and aiding and abetting of an unlicensed money transmitting business and remanded for a new trial. In so ruling, the Court agreed with Banki and stated that “to find a defendant liable for operating [or aiding and abetting] an unlicensed money transmitting business, a jury must find that he participated in more than a Ëœsingle, isolated transmission of money.” The Court found that because the evidence presented at trial only showed Bankis knowledge of “match” funds moving to Iran in one transaction, a jury instruction stating that participation in a single, isolated transmission of money does not constitute a money transmission business was appropriate. The trial courts failure to provide the jury with such an instruction was reversible error.

The Second Circuit further held that the lower court also erred in instructing the jury that hawala is both an informal money transfer system and a money transmitting business. The Court found that by so instructing the jury, the district court relieved the government of its burden of proving that Banki had knowledge that more than one transmission had occurred. As explained by the Court, “by later instructing the jury that Ëœa hawala is a money transmission business, the district court arguably was instructing the jury that if it found that Banki operated a hawala, then he necessarily operated a money transmitting business, thereby taking the latter issue away from the jury.” Thus, the Second Circuits opinion distinguishes between the use of a system of money transmission and the operation of a money transmission business.

Although the Court overturned Bankis convictions for conspiracy and aiding and abetting, it disagreed with Bankis argument that he was entitled to an “mere customer or beneficiary” instruction. In his appeal, Banki argued that he should not be held liable for conspiracy or adding and abetting because he was “mere customer or beneficiary” and thus exempt from criminal liability. However, the Court found that Banki was charged with aiding and abetting the facilitation of funds to Iran and not with receiving funds from Iran. Thus, because Banki was charged as the facilitator of the transfer he was an intermediary, not a customer, and thus the instruction would be inappropriate. As explained by the Court, “put simply, where the crime charged is transmitting money to Iran without a license, the Ëœcustomer is the wire originator and/or the intended recipient” not the intermediary.

The opinion is noteworthy not only because it is illustrative of the potential criminal charges Iranian sanction violators may face, but also because of the Courts detailed analysis of the Iranian Transactions Regulations (“ITR”) and the federal money transmitting laws. If you have questions pertaining to the OFAC sanctions on trade with Cuba and Iran, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

Seventh Circuit Finds State Consumer Protection Claim Preempted by Food, Drug and Cosmetic Act

On October 17, 2011, the Seventh Circuit Court of Appeals affirmed a district court ruling dismissing a state law consumer fraud claim, finding that it was preempted by the Federal Food, Drug and Cosmetic Act (FD&C). The suit alleged that General Mills, Inc. and Kellogg Co. failed to disclose pertinent information concerning their “Fiber Plus” chewy bars.

In the district court case, the Plaintiff claimed that while the labeling of the product declared fiber to be 35% of the daily recommended value, this information was misleading to consumers. Because the fiber found in the product was allegedly a “non-natural,” processed fiber, providing fewer benefits than consumption of natural fiber, the Plaintiff argued that the manufacturers of Fiber Plus should have declared the origins of this fiber in labeling.

Found here, the Seventh Circuit’s Opinion discusses how state law labeling requirements may not exceed those found in the FD&C. In particular, 21 U.S.C. § 343-1(a)(5) provides that no state may establish “any requirement respecting any claim of the type described in section 403(r)(1) made in the label or labeling of food that is not identical to the requirement of section 403(r). . . .” 21 U.S.C. § 403(r) gives the U.S. Food and Drug Administration (FDA) authority to regulate nutrition labeling and related claims for food products. Taken together, these provisions prevent states from imposing and enforcing requirements that are additional to or different from those set forth by the FDA. In this case, 21 C.F.R. § 101.54(d), the FDA regulation pertaining to nutrient content claims for food, provides the requirements that manufacturers must comply with when making “fiber claims.” Reasoning that the regulation does not require a declaration of the origins of fiber in food labeling, the Seventh Circuit ultimately found the plaintiff’s state law claim preempted.

For more information regarding the labeling of food products, contact us at contact@fidjlaw.com.

Longest Prison Sentence to Date for Violations of the FCPA

On October 25, 2011, the former president and the executive vice president of Terra Telecommunications Corp. (Terra) were sentenced in connection with their convictions at trial for money laundering and violating the Foreign Corrupt Practices Act (FCPA). Discussed here, the U.S. Department of Justice (DOJ) highlights the fifteen year sentence of Jose Esquenazi, Terra’s former president, noting how it is the longest prison sentence for a violation of the FCPA to date.

The Foreign Corrupt Practices Act makes it unlawful for certain classes of U.S. persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any willful or corrupt offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that such money or thing of value will be offered to a foreign official to influence the foreign official in his or her official capacity to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business.

According to the government, the executives committed several FCPA violations by funneling money into shell companies in order to use these monies to bribe Haitian government officials at the state-owned telecommunications company, Telecommunications D’Haiti S.A.M. (Teleco). In particular, Esquenazi and Terra vice president Carlos Rodriguez bribed Hatian officials in exchange for business advantages, including “the issuance of preferred telecommunications rates, reductions in the number of minutes for which payment was owed, and the continuance of Terra’s telecommunications connection with Haiti.” For more information about the case or the FCPA, see our previous report here. 

The government is trumpeting the harshest sentence ever against executives for violating the FCPA as a warning and deterrent against others who would violate the FCPA by bribing foreign government officials in return for business advantages. The government has made it a priority to prosecute FCPA violators and allocated substantial resources and created a task force at Department of Justice headquarters in Washington for such prosecutions. In fact, this case is one of the few FCPA prosecutions that proceeded to jury verdict, making the government’s victory and the harsh sentence all the more significant.

Fuerst Ittleman lawyers are experienced with handling white collar investigations and the defense of criminal prosecutions for white collar offenses. In addition, Fuerst Ittleman also can perform due diligence and compliance audits in order to assist businesses in their efforts to comply with the FCPA.

Par Pharma Brings Suit Against FDA Over Promotional Claims

On October 14, 2011, Par Pharmaceutical, Inc. (Par Pharma) brought suit against the U.S. Food and Drug Administration (FDA) challenging the Agencys rules that restrict claims made in marketing pharmaceutical products. Filed in the U.S. District Court in Washington D.C., the suit seeks a declaratory judgment and an injunction against the Agencys enforcement of the speech restrictions. Found here, the Complaint alleges that FDAs rules prevent Par Pharma from promoting its drug for both approved and unapproved uses.

Par Pharmas drug, Megace ES, was approved by the FDA in 2005 for the treatment of anorexia and cachexia, an AIDS-related wasting syndrome. Since its approval, the drug has been prescribed by doctors to treat other, related disorders, a practice known as “off-label” use. However, the FDA prohibits companies from promoting drugs for off-label uses, and it regularly enforces against companies which do so. For instance, the pharmaceutical manufacturer Allergan has been targeted for utilizing off-label marketing in the past. For more information regarding the Allergan suit, see our previous report here.

The FDAs jurisdiction to restrict off-label use is a contentious issue. While the FDA currently prohibits manufacturers from marketing FDA-regulated products for unapproved uses, the agency does not have the authority to prevent doctors from issuing prescriptions for off-label uses. Rather, the latter fits squarely within the practice of medicine, an area traditionally regulated by the states. Even where the FDA only attempts to restrict manufacturers without encroaching on the practice of medicine, FDAs efforts relating to off-label use are often viewed as hindering innovation inasmuch as manufacturers and doctors are prevented from discussing new, alternative uses for FDA-approved drugs and devices.

Although Par Pharma challenges the FDAs restrictions on off-label marketing, its suit also alleges that the Agency is unlawfully prohibiting the marketing of its drug for its approved uses. Specifically, Par Pharma claims that FDA is encroaching on its First Amendment rights by preventing the company from marketing its drug for its approved uses to physicians who are likely to prescribe the drug off-label. While this issue is slightly different than that regarding the promotion of off-label uses, it will be interesting to see who ultimately prevails.

For more information on FDA regulations and acceptable pharmaceutical marketing practices please contact us at contact@fidjlaw.com.

Company Pleads Guilty to Selling Misbranded Drug

On October 14, 2011, Medisca, Inc. pled guilty to introducing a misbranded drug into interstate commerce in violation of the federal Food, Drug and Cosmetic Act (FDCA). The Complaint, which was filed on October 14, alleged that Medisca purchased a drug called “Somatropin” from China and then proceeded to distribute the drug to various pharmacies throughout the United States.

The primary issue in the case was that Somatropin, a type of human growth hormone (HGH), was being marketed as having approval from the U.S. Food and Drug Administration (FDA). According to the Complaint, the drug was not FDA approved, rendering the drug’s labeling false and misleading and therefore misbranded under the FDCA. Although it was Medisca’s contention that it possessed a valid National Drug Code (NDC) pursuant to FDA’s rules requiring every manufacturer and/or distributer to register and list all drugs in commercial distribution, the FDA warned that a NDC does not denote a drug approval. Rather, in order for drugs to be properly distributed under the FDCA and accompanying FDA regulations, a New Drug Application (NDA) must be obtained for all new drugs prior to entering interstate commerce.

Additionally, only drugs that possess an NDA may be marketed as “FDA approved.” The Office of Prescription Drug Promotion (OPDP), formerly the Division of Drug Marketing, Advertising, and Communication (DDMAC), is a division within the FDA specifically tasked with overseeing promotional claims and labeling of drugs. OPDP ensures that marketing claims are within FDA regulations and limited to what the FDA has actually approved. Further, because drugs must possess a valid NDA before lawfully being advertised as “FDA approved,” the FDA flatly prohibits other types of products, like over-the-counter (OTC) drugs and medical devices with FDA clearance, from being marketed as approved by the FDA.

For more information regarding the FDA’s regulation of drugs and the requirements pertaining thereto contact us at contact@fidjlaw.com.