FDA Issues Draft Guidance for Medical Device Pre-Submission Program

On July 13, 2012, the U.S. Food and Drug Administration (“FDA“) issued a Draft Guidance document entitled “Medical Devices: The Pre-Submission Program and Meetings with FDA Staff” (“the Guidance”). The Guidance outlines the Agencys recommendations and procedures for medical device manufacturers and researchers who want early feedback and advice before submitting product- or research-specific applications. When final, the Guidance will supersede the 1999 guidance entitled “Pre-IDE Program: Issues and Answers – Blue Book Memo D99-1.” 

The Guidance expands on the pre-Investigational Device Exemption (“pre-IDE”) program and will now be referred to as the Pre-Submission (“Pre-Sub”) program. The pre-IDE program allows applicants to obtain feedback on a product during the investigational stage and prior to the formal application process. The Pre-Sub program broadens the pre-IDE program to include Premarket Approval (PMA), Humanitarian Device Exemption (HDE), Premarket Notification (510(k)), and de novo submissions.

The FDA states that the Pre-Sub program will provide more timely regulatory actions and innovative new devices for patients through improved submissions. The Guidance advises applicants how to improve their pre-market submissions by:

  • describing when device developers might benefit from early FDA feedback;
  • describing pre-submissions package content necessary for optimal FDA feedback: and
  • explaining how to best engage FDA in informal meetings to discuss the most efficient path with a new technology or  planned regulatory submission 

The FDA cautions that the Pre-Sub program is not an alternative to traditional approval and clearance processes. Instead, the Pre-Sub program is intended to help industry identify regulatory requirements early in the device development process to facilitate earlier, more transparent, and more predictable interactions with the FDA. The Guidance stresses that the Pre-Sub program is designed to answer specific questions an applicant may have during product development.

The Pre-Sub program is part of the FDAs effort to strengthen its image regarding the safety of medical device products after facing criticism regarding the 510(k) program. Last year, the Institute of Medicine (“IOM”) released a report which assessed the overarching structure of the 510(k) process and its ability to sufficiently monitor and oversee the safety and efficacy of medical devices on the market. Overall, the IOM identified substantial problems with the FDAs 510(k) process and suggested the FDA integrate a premarket and post-market regulatory framework that provides for reasonable assurance of safety and effectiveness throughout the device life cycle. Please see our previous report for more information regarding the IOM report.

The medical device industry has also criticized the FDAs medical device review process. For years industry has complained about slow FDA review. The Pre-Sub program is expected to improve review times due to improved submission quality from applicants. The FDA states that the Pre-Sub program will provide industry with enhanced predictability and transparency during the medical device review process.   

However, the FDA notes that its ability to hold timely meetings is contingent upon its resources, which are often strained. The FDA estimates that it will receive approximately 2,544 pre-submission meeting requests annually. Each meeting request is estimated to involve 137 hours of work per applicant. Thus, the extent of the effect of the Pre-Sub program on review times remains to be seen.

Anyone can submit comments on the Guidance at any time. However, in order to ensure that the FDA considers comments on this Guidance when developing the final guidance, electronic or written comments should be submitted by October 11, 2012. Electronic comments should be submitted here. Written comments should be submitted to the Division of Dockets Management, (HFA-305), Food and Drug Administration, 5630 Fishers Lane, Room 1061, Rockville, MD 20852.

The FDAs review of medical devices is complex. Fuerst Ittleman has extensive experience successfully navigating medical devices through FDA review. For more information on FDAs review of medical devices, please contact us at contact@fidjlaw.com.

POM Wonderful and FTC Appeal Initial Decision

As we previously reported, in September 27, 2010, the Federal Trade Commission (“FTC“) filed a complaint against POM Wonderful LLC (“POM“) for allegedly making unsubstantiated claims, which were also false or misleading in violation of Sections 5(a) and 12 of the Federal Trade Commission Act (“FTC Act“). In its Complaint, the FTC alleged that POMs claims that its products prevent, reduce the risk of, or treat heart disease, high blood pressure, prostate cancer, and erectile dysfunction (“ED”) were not supported by competent and reliable evidence. Additionally, the Complaint contained a proposed cease and desist order that would require, among other things, U.S. Food and Drug Administration (“FDA“) approval of certain disease claims for POMs products.

On May 17, 2012, an FTC Administrative Law Judge (“ALJ”) held in an Initial Decision that POMs claims that its products could treat, prevent, or reduce the risk of heart disease, prostate cancer, and ED were deceptive because these claims were not supported by sufficient competent and reliable evidence. However, the Decision rejected the FTCs theory that POM was required to have double-blind, randomized placebo-controlled clinical trials (RCTs) to make the claims that the FTC attacked. The Decision clarified that the standard for substantiation is competent and reliable scientific evidence. The ALJ also held that the FTCs proposed requirement that POM be prohibited from making any disease claim in the future unless the claim had been pre-approved by FDA “would constitute unnecessary overreaching.”

Both POM and the FTC appealed the Initial Decision to the FTC Commissioners. POM appealed all portions of the Decision relating to the finding of liability. The FTC appealed the ALJs conclusion arguing that (1) all advertisements challenged in the Complaint violated the FTC Act, (2) the substantiation of disease efficacy claims should require well-designed, well-conducted RCTs, and (3) the ALJ erred in not adopting the proposed remedy to require FDA approval for all future claims that any POM product is effective in the diagnosis, cure, mitigation, treatment or prevention of diseases. The appeal briefs for POM and the FTC can be read here and here respectively.

If the ALJs Initial Decision is upheld, it will establish that the FTC exceeded its authority by requiring RCTs and FDA preapproval to substantiate food and dietary supplement claims. Marketers of food and dietary supplements will therefore be able to continue to promote health benefits that are supported by competent and reliable scientific evidence, without conducting RCTs and obtaining FDA preapproval.

Nevertheless, in the past two years, the FTC has reached numerous settlements in which it has persuaded marketers of food and dietary supplements to conform to a new standard for substantiation requiring RCTs, particularly with respect to weight-loss and disease-fighting claims. Recently published consent orders include those against Nestle USA, Iovate Health Sciences, Inc., and The Dannon Company, Inc., in which the FTC prohibits future claims by the companies unless the claims are supported by two well-controlled RCTs. Please see our previous report for more information regarding these agreements.

In a recent trend, Courts have disagreed with the FTCs attempts to redefine and enforce a heightened level of substantiation for health related claims. As we previously reported, the Garden of Life (“GOL”) decision is one example. In FTC v. Garden of Life, the FTC sought to modify a previous consent decree by changing the definition of “competent and reliable scientific evidence” to require “two adequate and well-controlled human clinical studies for all absolute or comparative claims” and FDA approval for disease claims. In rejecting the FTCs position, the Court stated that competent and reliable evidence does not mean “uncontroverted proof.”

The next step in the process is for the five FTC Commissioners to hear oral argument and make a final decision regarding whether to adopt, in whole or in part, or not at all, the ALJs Initial Decision.  Oral argument before the Commission is scheduled for August 23, 2012. Fuerst Ittleman will continue to monitor the development of the POM case. For more information about food and dietary supplement claims or to have Fuerst Ittleman complete a label and website review of your products, please contact us at (305) 350-5690 or contact@fidjlaw.com.

Senate Report Reveals Numerous Sustained AML Deficiencies at HSBC

On July 16, 2012, the =Senate Permanent Subcommittee on Investigations released a 335 page report detailing numerous and sustained AML regulatory compliance deficiencies over the past decade at London headquartered banking giant HSBC. HSBC is Europes largest bank with over $2.5 trillion in assets, 89 million customers, and 2011 profits of nearly $22 billion. The report was released ahead of a July 17, 2012 hearing at which HSBC executives are scheduled to testify. The effects of the Senates report have been immediate. On July 17, 2012, HSBCs head of compliance, David Bagley, announced during his Senate testimony that he will be resigning from his position with the bank. A copy of the Senate Subcommittees report can be read here.

In its report, the Senate Subcommittee focused on five areas of AML regulatory compliance deficiencies at HSBC which impact correspondent banking in the U.S. These areas include: 1) establishing U.S. correspondent bank accounts for foreign high risk affiliates without conducting proper due diligence; 2) circumventing Office of Foreign Asset Control (“OFAC”) regulations to facilitate transactions that would otherwise be prohibited; 3) providing correspondent services to foreign banks with links to terrorism; 4) clearing bulk U.S. dollar travelers cheques despite signs of suspicious activity; and 5) offering high risk bearer share corporate accounts. The report found that many of these violations occurred because of HSBCs understaffed and undertrained AML compliance department.

Since 2002, U.S. law has required that all U.S. banks conduct due diligence reviews before opening any U.S. correspondent account for any foreign financial institution, including a U.S. banks foreign affiliates. However, the report found that despite this law, HSBC instructed its U.S. affiliates to assume that all HSBC affiliates met HSBCs AML standards and to open correspondent accounts without additional due diligence. The report found that this lack of due diligence was particularly problematic in regards to correspondent accounts established for HSBCs Mexican affiliate. The report found that HSBC ignored multiple warnings from both U.S. and Mexican regulatory officials regarding the lack of AML controls at HSBCs Mexican affiliate. Regulatory authorities were concerned that Mexican drug cartels were laundering money by circumventing U.S. bank AML controls by moving U.S. money into Mexico, bulk depositing such money into HSBC Mexican banks, and then re-injecting the money into the U.S. financial system through correspondent accounts. As a result of HSBCs lack of controls, between 2007 and 2008, HSBCs Mexican affiliates moved $7 billion in cash to the U.S. despite being warned that bulk cash shipments of that volume from Mexico could only occur if they included illegal drug proceeds.

The report also found that HSBCs foreign affiliates took deliberate actions to circumvent OFAC prohibitions on transactions with sanctioned nations such as Iran, Cuba, and the Sudan. According to the report, HSBCs European affiliate systematically altered transaction information to strip out any references to the sanctioned nations and characterized such transactions as transfers between banks in approved jurisdictions. As a result of such actions, between 2001 and 2007, HSBC participated in 28,000 undisclosed transactions with OFAC prohibited entities involving a total of $19.7 billion.

The report also found that the bank ignored links to terrorist financing among its customer banks including Al Rajhi Bank of Saudi Arabia, which had known ties to terrorist groups through the banks owners. The report found that HSBCs actions offered a gateway to U.S. dollars and U.S. financial institutions for terrorists and terrorist financing.

The Senate Subcommittee also detailed HSBCs clearing of suspicious bulk travelers cheques for foreign banks with inadequate AML controls in place finding that HSBC continued to maintain a correspondent relationship with the foreign affiliates despite knowledge of the foreign banks lack of AML controls. The report criticized HSBC for its use of bearer share accounts. Under the rules of a bearer share account, bearer share corporations do not have to register shares in the names of the shareholders. Instead, the ownership of bearer shares is assigned to whoever holds physical possession of the shares. Thus, these shares can be passed person to person in secrecy. The report also noted that HSBC continued this practice despite multiple auditors and regulatory examiners advising the bank to discontinue the use of such accounts.

The report went on to criticize the failures of the Office of the Comptroller of the Currency  (“OCC”) in its regulation of HSBCs activities. First, the report found that because the OCC treats AML deficiencies as a customer compliance issue and not a bank safety and soundness issue, AML deficiencies rarely lower the safety and soundness evaluation ratings of U.S. banks. Second, the report discussed OCCs practice of not citing to a statutory or regulatory violation in its issuance of Supervisory Letters when a bank fails to comply with its AML program. As explained by the report, “by consistently treating a failure to meet one or even several of these statutory requirements as a ËœMatter Requiring Attention instead of a legal violation, the OCC diminishes the importance of meeting each requirement, sends a more muted message about the need for corrective action, and makes enforcement actions more difficult to pursue if an AML deficiency persists.”

The Senate Subcommittee report highlights the need of all financial institutions to properly staff, train, and supervise their AML compliance departments in order to meet their rigorous legal and compliance requirements. If you have questions pertaining to anti-money laundering compliance, the BSA, 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.

Drugmaker Sues FDA over Orphan Drug Exclusivity

On July 5, 2012, K-V Pharmaceutical Company (“KV“) filed a complaint against the U.S. Food and Drug Administration (“FDA“) in the U.S. District Court for the District of Columbia regarding the right to exclusively market the orphan drug Makena (a hydroxyprogesterone caproate injection). KV is seeking to enforce its statutory right to market exclusivity.

On February 3, 2011, the FDA approved KVs drug Makena “to reduce the risk of preterm birth in women with a singleton pregnancy who have a history of singleton spontaneous preterm birth.” The FDA also granted KV orphan drug exclusivity that expires on February 3, 2018. Pursuant to section 527 of the Federal Food, Drug, and Cosmetic Act (“FDCA”), orphan drug exclusivity prevents the FDA from approving another companys version of the “same drug” for the same disease or condition for seven years, unless the subsequent drug is different from the approved orphan drug, or because the sponsor of the first approved product either cannot assure the availability of sufficient quantities of the drug or consents to the approval of other applications. For more information regarding Makenas FDA approval, please see our previous report.

However, compounded generic versions of Makena, commonly known as 17P, are available at a substantially lower price through compounding pharmacies. Generally, compounded drugs are not reviewed or approved by the FDA because they are made through a process by which a pharmacist or doctor combines, mixes, or alters ingredients to create a customized medication for the needs of an individual patient. 17P costs about $10 to $20 per dose at compounding pharmacies, compared to commercially-available Makena which costs about $690 per dose. Thus, many patients are seeking 17P, the unapproved compounded drug, instead of FDA-approved Makena.

In the past, the FDA has generally exercised enforcement discretion against compounding pharmacies operating in conformity with Compliance Policy Guide 460.200. However, despite the statutory market exclusivity for Mekena, on March 30, 2011, the FDA announced it did not intend to take enforcement action against pharmacies that compound 17P unless the compounded products are unsafe. As a way to explain its change in position with regard to compounding pharmacies, the FDA stated that it will not take enforcement action in an effort “to support access to this important drug, at this time and under this unique situation.” Please see our previous report for more information regarding the FDAs enforcement posture for Makena.

In its complaint, KV alleges that the FDA effectively nullified Makenas statutory seven-year period of market exclusivity in violation of section 527 of the FDCA by giving de facto approval to compounded versions of 17P that are intended for use to treat the same indication for which Makena is designated as an orphan drug and is approved. KV is seeking temporary, preliminary, and permanent declaratory and injunctive relief to restore the right to exclusively market the drug Makena.

The purpose of granting orphan drug exclusivity is to incentivize pharmaceutical manufacturers to invest money and resources developing treatments for small patient populations. Without the FDAs enforcement of the seven-year market exclusivity period against compounding pharmacies, manufacturers of orphan drugs have little incentive to develop drug treatments for rare diseases due to high research and development costs. Of course, at $690 per dose, the Makena approval raises the question of whether seven-year market exclusivity will benefit anyone in the first place. The FDAs position vis-a-vis Makena, as well as the upcoming litigation between KV and the FDA will certainly highlight the divide between these two interests.

A Motions Hearing is scheduled for August 7, 2012. Fuerst Ittleman will continue to monitor the developments of the Makena drug case. For more information regarding orphan drugs, compounded products, or for any questions regarding how your company can maintain FDA regulatory compliance, please contact us at contact@fidjlaw.com.

FDA to Take Enforcement Action against Companies Marketing Unapproved Oxycodone Drugs

On July 5, 2012, the U.S. Food and Drug Administration (FDA) announced its intent to take enforcement action against companies that manufacture and distribute certain unapproved drugs that contain oxycodone. The notice is part of the FDAs Unapproved Drugs Initiative to remove unapproved new drugs from the market. The full text of the announcement can be found here.

The FDA action affects companies manufacturing and distributing unapproved single-ingredient, immediate-release oxycodone drug products in oral dosage forms, including tablets, capsules and oral solutions. The FDA states that these products have not been evaluated for safety, effectiveness, manufacturing quality, or appropriate labeling, including dosing information and warnings. Therefore, these products cannot be marketed legally in the United States.

The FDA is concerned because the oxycodone drug products pose a risk to public health due to the omission of important warning information on the labeling. The FDA is aware of two serious adverse events: (1) a 21-month-old patient prescribed oxycodone at a strength of 1 mg/mL but instead given one at 20 mg/mL who suffered respiratory failure but was successfully resuscitated; and (2) an 18-year-old patient whose prescription was to take one 5 mg teaspoon every four hours but was given a 20 mg/mL solution. The second patient went into a coma with organ failure and was placed in intensive care.

Companies that manufacture the oxycodone drug products are expected to cease production within 45 days of the notice and halt shipping the products within 90 days. The oxycodone drug products that are subject to these timeframes include products that:

  • were introduced onto the market before September 19, 2011, 
  • were listed in the FDAs Drug Registration and Listing System before July 6, 2012, and 
  • were being commercially used or sold before July 6, 2012.

Generally, the FDA will issue Warning Letters to companies before taking enforcement action. However, the FDA stated that in this circumstance it will not issue Warning Letters before taking enforcement actions against companies that continue to market, manufacture, or ship the oxycodone drug products. Companies that continue to market, manufacture, or ship are subject to enforcement action including seizure, injunction, or other judicial or administrative proceeding.

For more information about FDA enforcement action or regulatory compliance, please contact us at contact@fidjlaw.com.

FDA Proposes Unique Device Identification System for Medical Devices

As required by the Food and Drug Administration Amendments Act of 2007 (FDAAA), the U.S. Food and Drug Administration (FDA) issued a proposed rule on July 3, 2012 to establish a unique device identification (“UDI”) system for medical devices marketed in the U.S. The UDI system would require a unique code to appear on the label and package of a device in order to adequately identify the device through its distribution and use. The UDI system is expected to help the FDA identify product problems more quickly, better target recalls, and improve patient safety. The FDAs proposed rule can be read here.

Under the proposed rule, the UDI is composed of (1) a device identifier, which is a unique numeric or alphanumeric code specific to a device model; and (2) a production identifier, which includes current production information for a device. The proposed rule also requires device manufacturers to submit device information into the publicly available Global Unique Device Identification Database (“GUDID”). GUDID will include a standard set of basic identifying elements for each UDI. The UDI does not indicate, and GUDID will not contain, any information about who uses a device, including personal privacy information.

The proposed rule implements the UDI system through a multi-year risk-based, phased-in approach, focusing on highest-risk medical devices first and exempting low-risk devices from some or all requirements. Exempt devices include:

  • Over-the-counter devices sold at retail which have UPC codes;
  • Devices delivered directly to hospitals and other health care facilities;
  • Class I devices exempted by regulation from the Quality Systems Requirements in 21 C.F.R. 820;
  • Products used solely for research, teaching, or chemical analysis and not intended for any clinical use;
  • Custom devices;
  • Investigational devices;
  • Veterinary medical devices;
  • Devices intended for export;
  • Devices held by the Strategic National Stockpile; and
  • Devices for which FDA has established a performance standard.

Once fully implemented, the FDA states that the UDI system will provide multiple benefits, including:

  • Allow more accurate reporting, reviewing and analyzing of adverse event reports so that problem devices can be identified and corrected more quickly.
  • Reduce medical errors by enabling health care professionals and others to more rapidly and precisely identify a device and obtain important information concerning the characteristics of the device.
  • Provide a consistent way to enter information about devices in electronic health records and clinical information systems.
  • Provide a standardized identifier that will allow manufacturers, distributors and healthcare facilities to more effectively manage medical device recalls.
  • Provide a foundation for a global, secure distribution chain, helping to address counterfeiting and diversion and prepare for medical emergencies.

The proposed rule could significantly impact medical device labelers, including manufacturers, reprocessors, and repackagers. Specifically, these labelers will bear the brunt of the cost of implementing the new UDI system. The FDA estimates that the majority of the cost of the proposed rule would be incurred by domestic labelers. Domestic labelers are estimated to spend $588.6 million over the next 10 years to implement the UDI system. The largest component of the estimated cost includes the costs to integrate the UDI system into existing information systems. Other significant components of the cost include costs to redesign device labels to incorporate the required UDI information.

The FDA is currently seeking public comment on the proposed rule for the UDI system (Docket No. FDA-2011-N-0090). Fuerst Ittleman will continue to monitor the developments and changes to the FDAs medical device regulation. For more information, please contact us at contact@fidjlaw.com.

Florida Biotech Funding Tripled in 2011

According to recent reports presented by BioFlorida, biotechnology funding in Florida tripled in 2011 and the growth of new biotech and medical device companies in Florida outpaced the national average. As biotechnology emerges as one of the fastest growing and most complex industries from a regulatory and corporate perspective, the State of Florida is making strides to become a focal point of this industry.

The BioFlorida reports highlighted some significant statistics demonstrating the rapid development of the biotechnology industry in Florida. Some of these statistics include:

  • Venture investment funding for biotech and medical device companies increased 207% between 2010 and 2011, jumping from $29.25 million in 2010 $86.72 million in 2011.
  • The number of Florida biotech companies in Florida has increased 42% over the past five years, while the national growth rate of biotech companies has been less than 5% over the same period.
  • State and local government agencies in Florida have spent approximately $1.5 billion over the past ten years to lure nonprofit institutes to the area.

Florida has become a hotbed of activity and growth for the biotechnology and medical device industries. With innovative research and development occurring at the University of Miami and the University of Florida, as well as private companies, the “biotech clusters” throughout Florida are quickly growing and evolving.

Fuerst Ittleman, PL is a participating member of BioFlorida and heavily involved in the medical device and biotechnology industry in the State of Florida and nationally. For more information on services offered by Fuerst Ittleman, please contact us at contact@fidjlaw.com or (305) 350-5690.

Senate Passes Food and Drug Administration Safety and Innovation Act

On June 26, 2012, the U.S. Senate passed the Food and Drug Administration (FDA) Safety and Innovation Act by a 92-4 vote, which the U.S. House of Representatives passed on June 20, 2012 by a voice vote. The FDA Safety and Innovation Act will provide more than $6 billion in industry user fees to the FDA over the next five years to fund the Agencys review of new drugs and medical devices. The full text of the FDA Safety and Innovation Act can found here.

Although the FDA receives money from Congress each year, a large portion of the Agencys budget comes from user fees it receives from manufacturers of drugs and medical devices. Under the new legislation, the FDA is expected to collect $693 million from drug manufacturers through next year, and $595 million from medical device manufacturers through 2017. Consequently, the Congressional Budget Office projects that the legislation will reduce federal spending by $311 million over the next 10 years.

The additional funds will enable the FDA to more quickly review new drugs and medical devices. Therefore, the legislation is expected to help the FDA bring critical drugs and medical devices to market faster, protect patients from drug shortages and manufacturing problems, and enhance the availability of low-cost generic drugs.

Fuerst Ittleman will continue to monitor the legislation as it is enacted and implemented. For more information about the FDA Safety and Innovation Act or FDA regulatory compliance, please contact us at contact@fidjlaw.com.

Fourth Circuit Affirms Federal Tax Conviction

In United States v. Jinwright, available here, the Richmond, Virginia based 4th Circuit Court of Appeals affirmed two tax convictions. The facts of the case are as follows:

Mr. and Mrs. Jinwright were former co-pastors of the Greater Salem Church in North Carolina. When Mr. Jinwright first became pastor he earned about $10,000 per year. Mr. Jinwright’s salary had increased to  about $148,000 in 2001, and about $300,000 in 2007. Between 2001 and 2007, Mr. Jinwright’s employer provided him with substantial taxable benefits that he failed to report and/or underreported on his personal income tax returns. When taking into account Mr. Jinwright’s reported and unreported compensation between 2001 and 2007, he earned almost $3.9 million. During that same time period Mrs. Jinwright received similar compensation from the church amounting to nearly $1 million.

Mr. and Mrs. Jinwright also earned income separate and apart from the church, such as compensation for speaking engagements, which,  of course, they failed to report on their tax returns. The church, like many others, applied for tax exempt status under Section 501(c)(3) of the Internal Revenue Code, available here.

In 2002, the church understated Mr. Jinwright’s total compensation. The IRS denied the tax exempt status because Mr. Jinwright’s compensation was too high.  A second application by the church was filed in 2003, listing Mr. Jinwright’s compensation as $600,000. However, in contrast to the 501(c)(3) application, Mr. Jinwright reported on his personal income tax return compensation of $280,000.

Not surprisingly, the IRS began an audit and concluded that Mr. and Mrs. Jinwright had failed to properly report taxable income of approximately $2 million between 2002-2007, and federal criminal indictments soon followed.  

Mr. and Mrs. Jinwright were charged withparticipating in a Kleinconspiracy, 18 U.S.C. § 371, available here, of three counts of tax evasion for the years 2005-2007, 26 U.S.C. § 7201, available here, and aiding and abetting tax evasion under the federal aiding and abetting statute, 18 U.S.C. § 2, available here.

Mr. Jinwright was convicted, but not Mrs. Jinwright, of three counts of tax evasion for the years 2002-2004, as well as six counts of filing a false tax return, 26 U.S.C. § 7206(1), available here.

At sentencing, the district court concluded that certain sentencing factors were present, specifically that:  (i) a tax loss of $1.3 million for the period from 1998-2008 (based on relevant conduct), resulting in a base offense level of 22 under 2T1.1 of the U.S. Sentencing Guidelines, available here; (ii) sophisticated means enhancement, a 2 level increase; (iii) an abuse of trust enhancement, a 2 level increase, and (iv) an obstruction enhancement, a 2 level increase.  For a total base level of 28, see
here, Mr. Jinwright was sentenced to 105 months, and Mrs. Jinwright to 80 months.

On appeal, the Fourth Circuit addressed the defendants contentions of error and affirmed in all respects.  The relevant analysis is as follows:

First, the Court affirmed the trail court’s use of the willful blindness instruction and the contents of the instruction.  The Court agreed with the Jinwrights that the request for willful blindness instructions should be handled with care, but declined to provide a categorical exclusion of a willful blindness instruction as no court had previously adopted such a rule.  The Fourth Circuit relied on Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2069 (2011), available here, for the proposition that "[t]he traditional rationale for [the willful blindness] doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge."

The Fourth Circuit also held that "the district court properly set a high bar in its instruction for the government to prove willful blindness, while simultaneously recognizing the powerful evidence of such blindness in this case." The Court found that the conditions for use of the jury instruction were present: “Willfulness with respect to tax crimes has been defined in essence as a knowledge requirement, or the "intentional violation of a known legal duty." United States v. Pomponio, 429 U.S. 10, 12 (1976) (per curiam), available here. When applied, the doctrine of willful blindness permits the government to prove knowledge by establishing that the defendant "deliberately shield[ed] [himself] from clear evidence of critical facts that are strongly suggested by the circumstances." Global-Tech, 131 S. Ct. at 2068-69. Willful blindness may satisfy knowledge in a criminal tax prosecution, where "the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability." United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011). 

According to the Fourth Circuit, these conditions were satisfied in the Governments prosecution of the Jinwrights. Mr. Jinwright denied knowledge of his legal obligations and testified that he and Mrs. Jinwright did not know that their tax returns contained a deficiency. But the Government presented evidence to suggest that defendants were aware of a "high probability" that they were understating their income to the IRS. The Fourth Circuit further discussed and affirmed the content of the willful blindness instruction, stating as follows:

The trial court’s instruction here was thus faithful to the willful blindness standard set forth in Global-Tech.  Global-Tech synthesized the case law on willful blindness to identify "two basic requirements": "(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact." Global-Tech, 131 S. Ct. at 2070. The district court included this relevant language here, instructing the jury: "If you find that the defendants were aware of a high probability" that they were violating the law "and that the defendants acted with deliberate disregard to these facts, you may find the defendants acted knowingly" (emphasis added). The Jinwrights were convicted before the Global-Tech decision, but the language of the willful blindness instruction still tracks the factors enumerated there by the Supreme Court.

The Fourth Circuit also addressed the "gift issue" as to whether a gift is taxable and the jury instruction appropriate for the issue. The defendants claimed that at least some of the income was not taxable under which Section 102(a), available here. However, payments to employees from employers cannot be treated as gifts, 26 U.S.C. § 102(c).  The Court held that the instruction was not erroneous or an abuse of discretion, insofar as the jury was left to determine the factual issue as to whether the defendant received payments from their employer (the church) instead of the parishioners, which the 4th Circuit concluded the defendants conceded.

Next, the defendants argued that some income was not taxable, and hence not reportable on a tax return, if they were reimbursements for employer-related expenses.  More specifically, the defendants argued that the Government had to prove that the payments they received were not reimbursements, but in contrast, the Government contended that it must merely prove the payments and then the burden was shifted to the defendants to prove that the payments were reimbursements.  The Court held that once the prosecution introduced credible evidence that there was income, the taxpayer was required to rebut this showing by introducing credible evidence showing that there were deductions reducing or eliminating the tax due.

The Court next turned to the claims of sentencing error, but dispensed with all of these issues quickly and we will not discuss them here.

In sum, this case shows that the Department of Justice and the IRS have been and continue to be aggressive in the areas of unreported income.  Further, inconsistent positions taken on filings with the IRS, in this case the defendants personal income tax returns and the 501(c)(3) application by the church, continue to provide the IRS with initial evidence of income tax evasion, which often, as in this case, lead to an IRS audit and/or criminal investigation.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice, in addition to addressing taxpayers’ needs during IRS audits.  You can reach an attorney by emailing us at: contact@fidjlaw.com or by calling us at 305.350.5690.

GlaxoSmithKline Agrees to $3 Billion Settlement to Resolve Fraud Allegations

On July 2, 2012, the U.S. Department of Justice (“DOJ”) announced that British drug maker GlaxoSmithKline (“GSK”) agreed to plead guilty and to pay $3 billion in criminal and civil penalties for liabilities arising from the companys unlawful activities involving the promotion and sale of several pharmaceutical products. The settlement is the largest health care fraud related settlement in U.S. history. A copy of the DOJs press release can be read here.

According to the terms of the settlement agreement, GSK has agreed to plead guilty to a three-count criminal information which includes two counts of introducing misbranded drugs into interstate commerce in violation of 21 U.S.C. § 331 (a) and one count of failing to report safety data about a drug to the FDA in violation of 21 U.S.C. § 331(e) and 21 U.S.C. § 355(k)(1). A copy of the Information can be read here.

The information alleges that for two drugs, Paxil and Wellbutrin, GSK unlawfully promoted both for unapproved “off-label” uses. Generally speaking, while doctors are free to use their medical judgment to prescribe FDA approved medicines for any use, pharmaceutical manufacturers cannot promote medicines for any use that is not approved by the FDA. The promotion of a drug for “off-label” uses by a pharmaceutical manufacturer results in the drug being considered “misbranded” under the FDCA. See generally 21U.S.C.§352(f)(1); 21 C.F.R. § 201.100. According to the Information, between 1998 and 2003, GSK promoted Paxil for treating depression in patients under age 18, despite the FDA never approving the drug for pediatric use. The Information alleges that GSK promoted this “off-label” use through publishing a medical journal article which misrepresented the drugs efficacy in treating depression in patients under age 18 as well as through a series of promotional events such as dinners and spa programs. The Information further alleges that GSK promoted Wellbutrin, an anti-depressant, for various off-label uses including weight-loss, sexual dysfunction, and attention deficit hyperactivity disorder.

GSK also pled guilty to one count of failure to report safety data to the FDA regarding its drug Avandia. The information alleges that between 2001 and 2007, GSK failed to report safety data regarding two studies conducted in response to concerns of European regulators about the cardiovascular safety of Avandia. As a result of these violations, GSK has agreed to pay a total of $1 billion in criminal fines and forfeitures.

GSK also reached a civil settlement with the DOJ regarding allegations of  violating the False Claims Act for: 1) the “off-label” promotion of Paxil, Wellbutrin, Advair, Lamictal, and Zofan (including using paid spokespersons such as Dr. Drew Pinsky from MTVs Loveline to tout the various off-label uses of such products in settings where it would appear he was not acting on behalf of GSK); 2) paying kickbacks to doctors to prescribe those drugs; 3) making false and misleading statements regarding the safety of Avandia; and 4) reporting false best prices and underpaying rebates owed under the Medicaid Drug Rebate Program. A copy of the Civil Complaint can be read here. As a result of these numerous violations, GSK agreed to pay a civil penalty of $2 billion. Additionally, GSK has entered into a 5-year Corporate Integrity Agreement with the Department of Health and Human Services which has required GSK to restructure its executive compensation program to permit the company to recoup annual bonuses and incentives from executives if they, or their subordinates, engage in misconduct.

The attorneys at Fuerst Ittleman have extensive experience litigating criminal and civil cases against the federal government at both the trial and the appellate levels. You can contact an attorney by calling us at 305.350.5690 or by emailing us at contact@fidjlaw.com.