Summary Judgment Granted to FDA in Challenge to Dietary Supplement Good Manufacturing Practices

The U.S. District Court for the District of Columbia granted summary judgment for the U.S. Food and Drug Administration (FDA) in a case challenging good manufacturing practice (GMP) regulations for dietary supplements. The order, dated April 6, 2011, can be found here.

In the case Alliance for Natural Health U.S. v. Sebelius, No. 09-1523, 2011 U.S. Dist. LEXIS 37027 (D.D.C. April 6, 2011), the plaintiffs include Sandy Shaw and Duke Pearson, scientists who formulate dietary supplements and license the formulations to dietary supplement distributors and manufacturers. Other plaintiffs to the lawsuit include industry organizations, Alliance for Natural Health USA and the Coalition to End FDA and FTC Censorship. The plaintiffs sought to have various provisions of the dietary supplement GMPs declared invalid and to have the enforcement of the GMPs enjoined. The FDAs dietary supplement GMP regulations and guidance documents can be found here.

The plaintiffs challenges to the GMP regulations included the following:

1) That several GMP regulations went beyond the statutory authority of the FDA to regulate dietary supplements;

2) Some of the GMP regulations were unconstitutionally vague and in violation of the Fifth Amendments Due Process Clause; and

3) Due to the vague sections of the GMP regulations, these regulations were arbitrary and capricious and an abuse of the FDAs discretion under the Administrative Procedure Act (APA).

The plaintiffs asserted that under Section 402(g) of the Federal Food, Drug, and Cosmetic Act (FDCA) (21 U.S.C. § 342(g)), the FDA is prohibited from issuing GMP regulations that “impose Ëœstandards for which there is no current and generally available analytical methodology.”

In Judge Beryl Howells order, the court explains that “the plaintiffs read this clause to mean that the FDA is only permitted to issue GMP regulations that are based on analytical methodologies and that these methodologies must also be current and generally available” while on the other side “the FDA reads the clause to mean that if and when the FDA issues a regulation that incorporates a standard based on an analytical methodology, then that analytical methodology must be one that is current and generally available.”

The court first stated that the plaintiffs were precluded from contesting the FDAs regulatory authority because the plaintiffs had failed to raise this issue during the rulemaking process. The court then proceeded to evaluate the plaintiffs challenges to the the FDAs statutory authority using the two-step analysis of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Under the first step of Chevron, the court analyzed the text of the FDCA, as well as the structure and legislative history, and “conclude[d] that the clear meaning of Section 402(g) is the FDAs interpretation of the statute.” The court stated that once “the FDA imposes a standard that requires the use of an analytical methodology, the methodology must be current and generally available to manufactures. The statute does not mean that the FDA may only adopt GMP regulations that require the use of such an analytical methodology.”

The court went on with the second step of its Chevron assessment and found, quoting Chevron, that “if a statute is ambiguous with respect to a specific issue, the Court must uphold the agencys interpretation if it is Ëœbased on a permissible construction of the statute.” Under the two steps of the Chevron analysis, the court held that it “could not conclude that the FDAs construction of the statute is impermissible.”

The court went on to address the plaintiffs contention that certain GMP regulations are unconstitutionally vague by stating that, while certain words are not defined in the GMPs (like “adequate,” “suitable,” “qualified,” etc.), the regulations explain the terms by providing “numerous details clarifying what the FDA means.” The court ultimately concluded that the regulations are not facially unconstitutional and “are not arbitrary and capricious under the APA.”

United States Petitions Court for Leave to Issue “John Doe” Summons to HSBC

On April 7, 2011, the U.S. Department of Justice “ Tax Division, filed a petition in U.S. District Court for the Northern District of California, San Francisco Division, for leave to issue a “John Doe” summons to HSBC. The case number is CV-11-1686-LB. On the same day, the Department of Justice issued a press release, available here.

the government alleges that since at least 2002, thousands of U.S. taxpayers of Indian origin have opened and maintained accounts at HSBC. The government further alleges that HSBC used representative offices in New York and California to solicit and maintain those accounts, and that HSBC assured its customers that the accounts in India would not be disclosed to the IRS.

The press release states that although HSBC India closed those offices in June 2010, its clients may still access their accounts at HSBC India from the United States. According to the petition documents, HSBC clients have told IRS investigators that HSBC representatives in the United States assured the clients that they could invest in accounts at HSBC India without paying U.S. income tax on interest earned on the accounts and that HSBC would not report the income earned on the HSBC India accounts to the IRS.

The governments attempt to obtain documents from HSBC comes in the wake of recent activity where grand jury subpoenas have been issued to taxpayers to produce their documents of the foreign bank accounts as required by the Bank Secrecy Act and the federal regulations issued by the Department of the Treasury.

The attorneys at Fuerst Ittleman, PL have been actively litigating against the Department of Justice in response to recent grand jury subpoenas. Additionally, the attorneys at Fuerst Ittleman, PL have extensive experience dealing with both the IRS and the Department of Justice in regards to undisclosed foreign bank accounts, civil and criminal tax evasion, and voluntary disclosures. You can reach an attorney by emailing: contact@fidjlaw.com.

FDA Issues Nutritional Labeling Proposed Rule

The U.S. Food and Drug Administration (FDA) has just issued two proposed rules involving a provision of the Patient Protection and Affordable Care Act (“PPACA”), the 2010 Healthcare Reform Law, which requires certain food establishments and vending machines to post caloric and nutritional information on menus, including drive-thru windows. As we have previously blogged (here, here, here, and here) this provision amends the Federal Food, Drug, and Cosmetic Act (“FDCA”) in attempt to provide uniformity in menu nutritional labeling around the country and to assist consumers in making healthier food choices while eating out.

Under the PPACA, restaurants, bakeries, grocery stores, convenience stores, coffee shops and other establishments with 20 or more locations operating under the same name and offering for sale substantially the same food items are required to post caloric information directly on the menu and have nutritional information available upon request. Under the proposed rule, the calorie declaration must be “adjacent to” the name of the standard menu item, so as to be “clearly associated with” it. For standard menu items that come in different flavors, varieties, or combinations but are listed as a single menu item, such as combination meals or ice cream that comes in different flavors, the FDA is proposing allowing calorie ranges as opposed to median (middlemost) or mean (statistical average) calories. Self-service establishments such as buffets and cafeterias must display the caloric information on a sign adjacent to the food.

The PPACA requires that menus post a clear and conspicuous statement regarding the availability of nutrition information upon request. Under the proposed rule, this statement must be no smaller than the smallest type size for any calorie declaration, be on the first page of the menu, and be prominently displayed (i.e., the same color and contrasting background as the standard menu item).

Additionally, a succinct statement concerning the total daily suggested caloric intake must be prominently displayed “to enable the public to understand…the context.” An example of this statement is “A 2,000 calorie daily diet is used as the basis for general nutrition advice; however, individual calorie needs may vary.” The FDA has been using the 2,000 calorie reference point since at least 1993. The proposed rule requires this statement on the bottom page of each page of the menu.

We previously blogged regarding whether movie theaters would be covered under the proposed rule. In the proposed rule, movie theatres, amusement parks, bowling alleys, trains, airplanes, general merchandisers, hotels and other business operations who do not primarily sell food items are generally exempted from the nutritional labeling requirements.

For vending machines, the proposed rule requires that caloric information be posted adjacent to the vending machine, but not necessarily attached to the vending machine. The number of calories contained in the article should be expressed to the nearest 5-calorie increment up to and including 50 calories, and 10-calorie increment above 50 calories. Foods that have fewer than 5 calories may be expressed as zero. For vending machines that sell varieties, such as different flavors and types of hot beverages (e.g., coffee), caloric information should be listed for each flavor or variety in close proximity to each selection rather than posting a single range for the item.

Only vending machines operated by a person engaged in the business of owning or operating 20 or more vending machines are covered under the PPACA. It is believed that 90-95 percent of vending machine operators have 20 or more machines, and therefore, will be included.

Any food establishment or vending machine operator not covered under the PPACA may voluntarily participate and register with the FDA every two years. Interestingly, the posting of calories and nutritional information for beer, wine, and other alcoholic beverages is exempt. Food not in compliance with the final rule will be deemed misbranded under the act and subject to FDA enforcement.

The FDA is seeking comments on the proposed rules. The comment period for the proposed rule for menu labeling is 60 days (until June 6, 2011), and comments on the proposed rule on vending machines is 90 days (until July 5, 2011). Once implemented, these rules will preempt state and local food labeling requirements for restaurants, similar retail food establishments, and vending machines that are covered under the proposed rules. Establishments not covered under PPACA and the proposed rules will remain subject to existing state and local laws. The FDA plans to issue final rules before the end of the year and begin enforcement in 2012. For more information regarding the labeling of food products, the misbranding provisions of the FDCA, or how the PPACA will impact your business, please contact us at (305) 350-5690 or contact@fidjlaw.com.

Fair Value Measure Rules to be Issued in April by FASB, IASB

This month the Financial Accounting Standards Board (FASB) and The International Accounting Standards Board (IASB) plan to issue joint final standards on how companies should gauge fair value amounts. FASB regards these rules as “targeted improvements” to the current guidance that features standard statements of generally accepted account principles (GAAP) or FAS 157 as auditors and rulemakers call them.

The changes considered by FASB and the IASB do not greatly depart from common practice in the US as stated during public comment and the later changes to the June 2010 proposed accounting standards update, Fair Value Measurements and Disclosures (Topic 820): Amendments for Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS. Even though the IASB board does not consider the rules a fundamental change to many of the requirements for measuring fair value or disclosing information about fair value measurements, it considers the fair value measurement a major new standard. The IASB points out that the biggest difference between the now existing standard and the one to come is defining fair value “as an exit price rather than as a neutral exchange amount.” Agenda Paper 2A.

FASBs fair value measurement prescriptions are said to become effective for public companies interim and annual reporting for fiscal years commencing after December 15, 2011. The annual period-only reporting for private companies is said to be on the same timetable. FASB is also allowing early adoption of the rules for non-public entities thus allowing them to issue interim-period financial reports during the first quarter of the 2012 year. The early adoption also gives private companies the option of mirroring the timetable for public companies before the private companies annual statements for 2012 are required to be in compliance with the new US GAAP rules.

The IASB anticipates that the new rules will apply by January 1, 2013, allowing entities time to analyze requirements and make necessary system changes. The IASB also anticipates permitting the early adoption of new IFRS rules on fair value amendments.

Aside from fair value measurements, FASB also anticipates prescribing disclosures for changes to valuation methods stemming from the application of the new rules and reporting the quantification of the total effect of the change within the companys report footnotes. The FASB board provided that during the adoption period, all entities should disclose any change in valuation technique and related inputs resulting from the application of the amendments and should quantify the total effect.

For more information on FASB, the IASB, and/or the new rules they plan to prescribe, please contact us at contact@fidjlaw.com.

Shutdown Will “Severely” Limit FDA Inspections

A U.S. Food and Drug Administration (FDA) official told CNN on Thursday that a shutdown of the federal government will severely restrict FDA inspections. The FDA has announced that it will furlough 86% of its staff and that 1,962 of its approximately 13,000 staff members will continue working. All drug and device reviews and all public meets will be canceled in the event of a shutdown. Food importation inspections will continue without interruption.

The FDAs Office of Regulatory Affairs (ORA) is responsible for food inspections and will not be operating with its full staff should the shutdown occur. The ORA will have some inspectors on staff next week in the event that a resolution regarding the budget is not reached. FDA inspections of drug manufacturing facilities and food processing plants will be conducted in order of the level of risk involved. Inspections of plants and facilities that are deemed “high risk” by the agency will be inspected in lieu of routine plant inspections. Facilities that are classified as “high risk” typically have a history of violations or significant safety concerns.

When a drug or medical device manufacturer files a new product or registration with the FDA, the FDA conducts an initial inspection. These initial inspections will not be conducted in the event of a shutdown and pending applications with the FDAs Center for Biologic Evaluation, Center for Drug Evaluation and Research, Center for Devices and Radiological Health, and Center for Veterinary Medicine will be subject to delayed review. All of these centers will be operating at reduced staffing levels.

Should an emergency situation, such as a food borne illness outbreak, occur during a government shutdown, the FDA will recall the furloughed staff into action. The anonymous FDA official told CNN that the agencys monitoring of food products coming from Japan for possible radiation contamination will not be affected in the event of a shutdown.

Interestingly, of the agencys nine centers, only the Center for Tobacco Products will remain fully staffed should the shutdown occur. The Center for Tobacco Products is funded by the tobacco industry and will not be affected.

New York Clarifies Position On Licensing Of Internet Based Money Transmitters

On March 31, 2011, the New York State Banking Department issued an Industry Letter clarifying its position on whether money transmitters with no physical presence in the state of New York are required to obtain a license to do business in the state. The New York Banking Department concluded that even those money transmitters with no physical location or office within the State of New York must obtain a license to do business with residents and persons located within New York. As a result, internet based money transmitters who do business with persons of New York must obtain a license from the state to continue doing business in New York. A copy of the Banking Departments Industry Letter can be viewed here.

New Yorks announcement is a reversal of prior Banking Department opinions which found that physical presence within the state was necessary in order for a money transmitter to be subject to New Yorks licensing requirements. The Department found that New York law contains no express physical presence requirement. Further, the Department cited numerous other states which currently require internet based money transmitters with no physical presence to obtain a license to conduct business as support for its decision. Additionally, the Department found that its prior physical presence requirement was outdated because “with the prevalence of the internet and the growth of a global economy, financial services businesses are no longer necessarily locally based.”

Internet based money transmitters that currently do business with residents or persons of New York have until September 30, 2011 to file to obtain a license from the Superintendent of the New York Department of Banking. Additionally, such money transmitters may continue to operate without a license until six months from the date their application is considered complete or until notified their application has been denied, whichever occurs first.

A special thank you to David Landsman of the National Money Transmitters Association for making this information available to us. Fuerst Ittleman is a correspondent member of the NMTA and will be presenting at the upcoming International Money Transmitters Conference in Los Angeles. For more information on the effect of this decision on your business, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

Tax Court Adopts Daubert Standard for Expert Witnesses in Tax Court Trials

On April 5, 2011, the Tax Court in BOLTAR, L.L.C., JOSEPH CALABRIA, JR., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, 136 T.C. No. 14 (April 5, 2011) held in a conservation easement donation case, where the IRS moved to exclude the taxpayer’s experts report as unreliable and irrelevant under Fed. R. Evid. 702 and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), that the standards of reliability and relevance apply in trials without a jury, including Tax Court trials, and are subject to the discretion of the trial Judge to receive evidence. The full opinion can be found here.

Although the reach of the Boltar decision is debatable for the majority of Tax Court cases, in the current economic landscape the decision has substantial ramifications for those Tax Court cases where valuation is at issue. In particular, valuations of real property (especially in those locations that saw the greatest appreciation and subsequent depreciation of real property values, e.g. Florida) as it relates to cancellation of indebtedness income and/or bad debt deductions often are dependent on appraisals. The appraisals that are being used, and the correspondent testimony from the same appraisers or independent appraisers that are being offered into evidence before the Tax Court now must withstand judicial scrutiny under Federal Rule of Evidence 702 and as developed by the Supreme Court in Daubert v. Merrell Dow Pharm., Inc.. The full decision can be found here.

The lesson learned from Boltar is that an expert that a taxpayer attempts to use must be fully vetted and his/her methodology must be appropriate for the analysis that is being conducted.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating tax cases against the IRS and the U.S. Department of Justice – Tax Division before the Tax Court, U.S. District Courts, and U.S. Courts of Appeal. You can reach an attorney at Fuerst Ittleman by email us at contact@fidjlaw.com.

Government Persists with Efforts to End Marketing of “Cancer Cures”

Continuing the Daniel Chapter One (DCO) saga, the Department of Justice (DOJ), on behalf of the Federal Trade Commission (FTC), has recently resumed its action against the dietary supplement distributor. DCOs troubles with the FTC began nearly three years ago when the FTC sought to enjoin the company from marketing its products as effective in curing cancer. According to the FTCs Final Order, DCO was prohibited from advertising its dietary supplements in this manner because it had no scientific evidence to support these claims. However, that was not the end of DCOs troubles.

At the direction of the FTC, the DOJ brought a complaint in 2010 for civil penalties, seeking to disgorge DCOs “ill-gotten” profits. According to DOJ, the Company continued marketing and selling its products in violation of the FTC Final Order. However, because DCO appealed the FTCs final order, this contempt action has been stalled pending the resolution of the remaining issues in the original FTC action. With DCOs appeal being denied, the stay has recently been lifted and the DOJ is continuing its efforts to stop the dietary supplement company from reaping the rewards of its deceptive advertising.

While it appears that DCO has its hands full with the FTC and DOJ, other federal agencies have pursued actions against the company as well. For instance, the U.S. Food and Drug Administration (FDA) and the Internal Revenue Service (IRS) have each targeted DCO in connection with its marketing and sales of these products. In August of 2008, the FDA issued a Warning Letter (found here) to Daniel Chapter One based on a review of the companys website. The Warning Letter stated that four of the companys products were “promoted for conditions that cause the products to be drugs . . .” and the marketing of these products was a violation of the Federal Food, Drug, and Cosmetic Act (FDCA). Specifically, the Warning Letter pointed out claims describing the ingredients of the products, as well claims in the form of testimonials. Many of these claims indicated that the products reduce the risk of cancer or that ingredients in the products are cancer-fighting or can inhibit tumors.

While the FTC, FDA, and IRS all have distinct areas of regulatory authority, as revealed by the case of Daniel Chapter One, their paths often cross. For more information regarding the jurisdictional overlap between FDA, IRS and FTC, please contact us at contact@fidjlaw.com.

U.S. Attorney Seeks $7 Million In Forfeiture Trial Of Privately Printed “Liberty Dollars”

On April 4th, federal prosecutors will resume the forfeiture trial of approximately $7 million in precious metals used to create “Liberty Dollar” coins, a privately minted and distributed currency which prosecutors believed was designed to compete with US currency in violation of federal law. The forfeiture trial comes after the March 18, 2011 conviction of the Liberty Dollars creator, Bernard von NotHaus, on multiple charges including making coins resembling US currency, issuing and passing Liberty Dollars coins intended for use as “current money,” and conspiracy. A copy of Federal Bureau of Investigations press release announcing the conviction can be read on their website here.

The authority of the federal government to regulate and coin money traces its roots directly to the U.S. Constitution. Article I, section8, clause 5 of the U.S. Constitution grants Congress the power to coin money. The power of Congress to regulate and coin money also necessarily includes the power to place restrictions on circulation of money printed by non-federal entities. However, no law currently exists that prevents a local community from printing and circulating it own currency.

Although locally printed and circulated alternative or “local currencies” do exist, they are subject to several federal laws. For example, 18 U.S.C. § 485 prohibits possession and sale of local currencies in “resemblance or similitude of any coin of a denomination higher than 5 cents.” This not only prevents local currencies from printing currency with the marks of U.S. minted coins and dollars, such as “In God We Trust,” but also prevents local currency minters from printing currency with marks which closely resemble those familiar U.S. marks, such as “Trust in God.” 18 U.S.C. § 485 protects against local money being printed and passed off as official legal tender of the U.S. Additionally, 18 U.S.C. § 486 prohibits individuals and organizations from creating “current money,” private coin and currency systems to compete with the official coinage and currency of the U.S. as the recognized legal tender.

In this case, prosecutors alleged that von NotHaus, and his organization National Organization for the Repeal of the Federal Reserve and Internal Revenue Code (NORFED), minted Liberty Dollar currency with features that resembled U.S. coin and currency. Additionally, prosecutors alleged that based upon the widespread sale of the Liberty Dollar through the U.S. and Puerto Rico, “NORFEDs purpose was to mix Liberty Dollars into the current money of the U.S.”

Von NotHaus, who remains free on bond, faces a sentence of up to 15 years imprisonment on count two of the indictment and a fine of not more than $250,000. Von NotHaus faces a prison sentence of five years and fines of $250,000 on both counts one and three. In addition, the United States is seeking the forfeiture of approximately 16,000 pounds of Liberty Dollar coins and precious metals, currently valued at nearly $7 million. For more information, please contact us at contact@fidjlaw.com.

FDA allows Pharmacy Compounding of Preterm Labor Drug

On Wednesday, March 30, 2011, the U.S. Food and Drug Administration (FDA) issued a statement to compounding pharmacies regarding FDAs enforcement discretion with regard to compounded versions of Makena┞¢, KV Pharmaceuticals branded preterm labor drug. As we previously reported, the FDA approved KV Pharmaceuticals Makena┞¢ (hydroxyprogesterone caproate) for the reduction of the risk of certain preterm births in women. After receiving approval, KV Pharmaceuticals began charging $1,500 a dose for a compound that had been available for years for approximately $10 to $20 a dose. The FDA statement is intended to neutralize the public outcry, not only from members of Congress, but from many doctors and medical groups over the huge price increase.

The FDA states that “KV Pharmaceuticals has sent letters to pharmacists indicating that the FDA will no longer exercise enforcement discretion with regard to compounded versions of Makena. This is not correct.” The FDA “does not intend to take enforcement action against pharmacies that compound hydroxyprogesterone caproate based on a valid prescription for an individually identified patient [].” This statement goes against the FDAs policy on compounding pharmacies. In Compliance Policy Guide 460.200 on pharmacy compounding, the FDA states it will consider enforcement action when a pharmacy engages in compounding drug products that are commercially available in the marketplace. As a way to explain its change in position with regard to compounding pharmacies, the FDA states that it is not going to take enforcement action in an effort “to support access to this important drug, at this time and under this unique situation.”

Fuerst Ittleman will continue to monitor FDAs enforcement posture for Makena┞¢ and other compounded products. For more information, please contact us at contact@fidjlaw.com.