“Theft of Honest Services” Fraud Statute Narrowed by Supreme Court

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A number of high profile white collar criminal prosecutions have included fraud charges based on the “theft of honest services ” fraud statute, 18 U.S.C. Sec. 3146.  This statute provides that the term, “scheme or artifice to defraud” includes not only a scheme to defraud someone of money, but also to deprive another of the intangible right of honest services.  Since its enactment, the “honest services” fraud statute has been a favorite charging statute for federal prosecutors.  For example, it is being used to prosecute former Illinois Governor Ron Blagojevich for his alleged attempt to sell a senate seat.  It has also been used to prosecute college basketball coaches who helped players violate rules to obtain scholarships.  Most notoriously, it was used to prosecute Enron executives for lying to auditors, and to prosecute Conrad Black, the former chair and CEO of Hollinger International, for paying himself illegitimate “noncompetition” fees that he failed to disclose to the board of directors.

A number of appeals courts have expressed concerns that the “honest services” fraud statute violates due process rights by failing to provide fair notice to defendants of what conduct violates the statute. The Supreme Court, in a June 24th decision, has now held that as interpreted in previous prosecutions, the statute is impermissibly vague, thereby violating the Constitution. In Skilling v. United States, the Supreme Court sharply limited the scope of the “honest services” statute, by ruling that it is unconstitutionally vague except in cases involving bribery and kickback schemes. The decision rejected the statutes constitutionality in cases where public officials or private-sector employees are charged with engaging in self-dealing or having undisclosed conflicts of interest, without a bribery or kickback scheme.  The Supreme Court stated that by limiting the “honest services” fraud statute to bribery or kickback schemes,  it “establishes a uniform national standard, define[s] honest services with clarity, (and) reach[es] only seriously culpable conduct”.

The effect of the Supreme Courts decision is to remove a tool from the government that was increasingly used to prosecute violations of ethics where there was no victim harm or proof that  a payment or inducement had actually affected any official action.  Now that the “honest services” fraud statute has been narrowed by the Court, it may be of minimal value to prosecutors who already have ample federal bribery and extortion statutes with which to prosecute wrongdoers. What the decision leaves businessmen and public officials alike, is with a more definite awareness of what conduct will be considered a violation of the federal criminal fraud statute.

Newly Released Mexican Regulations Imposing Restrictions on Mexican Banks for Transactions in U.S. Currency

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The Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) issued guidance on June 21, 2010 regarding the newly released Mexican Regulations, which are likely to impact financial institutions in the United States.  The regulations are an attempt to decrease the significant amount of U.S. currency in Mexican banks that are proceeds of illegal activities, including the sale of narcotics within the U.S.  The Mexican Finance Ministry, Secretaria de Hacienda y Credito Publico de Mexico (SHCP), recently published the new anti-money laundering regulations, which will restrict the amount of physical U.S. Currency Mexican Banks may receive.  The regulations are expected to go into effect approximately ninety calendar days after official publication, which is expected to be on or about September 14, 2010.

The regulations provide that Mexican Banks shall be prohibited from receiving U.S. currency for transactions involving currency exchange, for receipt of payment for services, or for transfers or remittances of funds.  The regulations make a distinction between customers and non-customers.  All U.S. currency transactions are prohibited for legal entities and trusts that are non-customers.  Individual non-customers may deposit up to $300 of U.S. currency per day and $1,500 per month.  For non-Mexican non-customers (e.g. foreign tourists), the daily threshold will not apply, but they will be subject to the $1500 monthly threshold for individual non-customers.  Legal entities and trusts classified as customers are generally prohibited from U.S. currency transactions with one exception.  The exception involves legal entities or trusts who are customers and conduct most of their business within a tourist area, within twenty miles of a United States border, or within the States of Baja California or South Baja California.  The bank may receive an aggregate limit of $7,000 in U.S. Currency per calendar month from the legal entities and trusts meeting the qualifications of this exception.  The individual customers have an aggregate limit of $4,000 that can be deposited in a Mexican Bank per calendar month.  Finally, the regulations do not restrict non-cash transactions denominated in U.S. Currency such as wire transfers, ACH payments, credit card transactions, and travelers checks. 

The change in Mexican regulations is likely to have a significant impact on the operations of U.S. financial institutions.  When a financial institution is determining whether to file a suspicious activity report (SAR), they are advised to consider these regulations in conjunction with other information such as transaction volumes and source of funds.  FinCEN and law enforcement have stated that if a financial institution determines that a transaction is suspicious and thus has an obligation to file a SAR, and the facts and circumstances of the transaction lead the institution to suspect that the transaction is being entered into as a result of the Mexican currency restrictions, the financial institution is to include the specific term, “MX Restriction” in the narrative portion of the SAR filing.  FinCEN and law enforcement further request that the financial institution include all information available for each party suspected in engaging in this activity within the suspect/subject information section of the SAR.  This section should also include any available information on the common carrier, courier, or shipper of the currency, and information on the point of exportation of the currency from Mexico and the point of importation in the United States, if known. 

FinCEN expects changes in transaction activity before the regulations become effective.  Some of these predicted changes include the decline of the overall amount of U.S. currency repatriated by Mexican banks to the United States.  FinCEN anticipates that individuals and businesses who are no longer able to deposit U.S. currency in Mexican banks may instead look directly to U.S. financial institutions to deposit U.S. currency.  The limitations may also lead to increased demands by Mexican persons and non-Mexican persons doing business with Mexico to utilize other types of payment services or products to settle debts.   Additionally, the regulations may lead criminals in the United States to attempt to launder U.S. currency within the United States, possibly through trade-based money laundering conducted by transfers of non-cash proceeds to Mexico.  Criminals may also use intermediary countries to divert U.S. currency to Mexico.  Because of this concern, FinCEN asks financial institutions to consider and monitor significant increases in U.S. currency activities involving countries other than Mexico. 

If you have any questions pertaining to the newly released Mexican regulations above or any other anti-money laundering provision, contact Fuerst Ittleman PL at contact@fidjlaw.com.

IRS Associate Chief Counsel Musher on FATCA Guidance, Withholding,

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IRS associate chief counsel (international), Steven Musher, told tax practitioners on June 21, 2010, that the IRS will attempt to balance the needs of taxpayers and their advisers when issuing guidance on the Foreign Account Tax Compliance Act (FATCA)(1). Musher stated that the IRS is weighing the benefits of issuing quick guidance against the push to make that guidance as comprehensive as possible. He explained that the government realizes how important FATCA guidance is to taxpayers, but issuing guidance too quickly may result guidance that is overly broad. During the conversation, Musher stated that the government intends to issue FATCA guidance in several parts over time.

FATCA was enacted on March 18, 2010 with a stated purpose to prevent perceived tax evasion, possible money laundering and terrorist financing activities. According to Musher, the IRSs plan is to issue an initial round of guidance that will attempt to answer important questions, as determined by meetings conducted by the IRS with stakeholders, in headline form. Musher said the initial round of guidance may include information about the following: which financial institutions will be subject to the rules; which accounts are subject to the regulations; exemptions available to entities from statute requirements; and an interpretation of the statutes grandfather provisions.

In addition to speaking with tax practitioners about FATCA guidance, Musher spoke about the acts withholding regime. FATCA, in part, contains a 30% withholding requirement on specific payments and a reporting requirement that financial intermediaries report US account holders to the Treasury. According to Musher, the IRS is trying to design a system that creates reporting rather than a withholding regime through a manner of processes. Musher added that if one were to obtain a refund, documentation, presumably to prevent fraud, would need to be produced.

Other items in FATCA that may need guidance include the types of payments subject to withholding. To that, Musher provided that congressional intent pointed to “business oriented payments” as being a possible payment category exposed to FATCA.

Musher concluded by stating that the rules are partly designed to minimize the need for refunds, but that some taxpayers will deserve refunded amounts, and thus the IRS will have to prepare a refund process.

If you have any questions regarding the FATCA or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

(1) FATCA was enacted by the Hiring Incentives to Restore Employment Act (P.L. 111-147), requiring, in part, that non US financial institutions disclose data to the IRS on entities that invest in accounts outside the United States. FACTA also requires non US entities to provide information about US account owners to withholding agents.

Qualified Health Claim Approval May become easier for Dietary Supplement Marketers

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On May 27, 2010, the United States District Court of the District of Columbia granted a summary judgment in the matter of Alliance for Natural Health US v. Sebelius, suggesting that a qualified health claim is free speech protected under the First Amendment. Sparked by the FDAs denial of a petition to approve qualified health claims, The Alliance for Natural Health (“ANH”) along with prominent dietary supplement activists, Durk Pearson and Sandy Shaw sought to invalidate the FDAs denial of the qualified health claims and permanently preclude the FDA from preventing dietary supplement marketers from placing qualified health claims on dietary supplement labels.

The ANH petitioned the FDA with ten qualified health claims touting a reduction in cancer risk from selenium. The FDA rendered a decision completely rejecting two of the ten claims, calling them misleading for a failure to state the type of cancer risk associated with the benefits of selenium supplementation. The FDA further denied seven other claims that delineated site-specific cancers citing a lack of scientific evidence. The last claim dealt with a reduction in the risk of prostate cancer. Given the scientific evidence, the FDA, deemed the prostate claim to be false and misleading but did not discard it. Instead, in an uncharacteristic move, the FDA proposed a redrafted version of the prostate claim, which the ANH deemed pointless and the Court, ironically, found to be false and misleading.

The Court, relying on the FDAs own Guidance for Industry: Evidence-Based Review System for the Scientific Evaluation of Health Claims and prior case law, declared that the FDA had violated the First Amendment when it chose to suppress the qualified health claims rather than find a less restrictive means such as a short, succinct disclaimer. While the Court did not grant the permanent injunction ANH had requested, it did send the petition back to the FDA for re-review.

Unless reversed on appeal, this decision will make it almost impossible for the FDA to deny a qualified health claim that accurately reflects the scientific evidence; it would conflict with supplement marketers rights to free speech. This could pave an easy path for dietary supplement labels to bear appropriately disclaimed qualified health claims on selenium or presumably any other dietary supplement.

Miami-Based Trade is Booming (So is Enforcement)

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WorldCity, a Miami, Florida, media company focused on the impact of global trade “ and a strategic partner of Fuerst Ittleman “ reported on June 16, 2010 that import and export trade through South Florida ports is showing double-digit growth in 2010. From the Ports of Key West north to Palm Beach County, exports rose by more than 14% and imports surged by more than 26% through April.

This resurgence in trade is welcome relief following 2009, which saw record drops in trade activity in the Miami District. Tony Ojeda, executive director of Miami-Dade’s International Trade Consortium commented in a Miami Herald article, “I think 2009 didn’t exist. It was a terrible year for all of us. But this year, there’s a feeling of optimism.”

While many trade exports pin most of the trade growth on the revival of moribund Latin American economies, trade through the Miami Customs District with other countries such as the Bahamas, China and Switzerland are on pace to set new records in 2010. Moreover, the overall Latin American economy did not suffer as much as that of the United States and Europe in the recession which began in 2008.

Adding fuel to the resurgence in local trade is a significant increase in commerce between China and Latin America “ trade which very often transits the ports of the Miami area. Ojeda pointed out that Taiwan is planning to bring a 40-member delegation to South Florida later this summer. “They are very interested in establishing a foothold here in Miami to serve as their gateway to Latin America,” he told the Miami Herald.

Trade Enforcement is Increasing as Well

Yet hand-in-hand with this resurgence in trade is a surge in enforcement by U.S. Customs and Border Protection (CBP) and the other federal agencies which monitor imports and exports such as the U.S. Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA).

CBP recently announced the seizure of almost $220 million counterfeit goods “ in April 2010 alone “ as part of a focused enforcement effort against intellectual property rights violations. Compare this number with fiscal year 2009, in which CBP seized a total of $260 million in counterfeit merchandise.

Similar enforcement initiatives by Investigative and Enforcement Services, an arm of USDAs Animal and Plant Health Inspection Service, have resulted in increased fines and penalties for importers introducing invasive species and not conforming to phytosanitary requirements. The FDA has also jumped on the enforcement bandwagon targeting importers of food products and medical devices for increased scrutiny.

For guidance on how your import/export business, or related business, can take advantage of the surging trade economy while maintaining strong regulatory compliance, contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

UBS Deal with U.S. Threatened by Vote in Swiss Lower House

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Switzerlands lower house voted on June 8 to reject a bill that would have allowed the Swiss government to provide the United States with names of UBS account holders allegedly dodging United States taxes. The vote has jeopardized a deal with the U.S. government concerning a tax battle with UBS AG, a giant global financial services company headquartered in Basel and Zurich Switzerland.

The U.S. and Switzerland reached a deal in August last year to settle a case involving hidden offshore accounts at UBS AG. The U.S. accused UBS of having helped thousands of Americans avoid paying taxes in the U.S by setting up offshore accounts. UBS admitted wrongdoing and agreed to provide the U.S. Internal Revenue Service (IRS) with the names of 4,450 American account holders by August. The U.S. has alleged that UBS AG has helped Americans hide approximately $20 billion.

A Swiss court threw a wrench in the works, however, in January when it ruled that the deal broke Swiss law. In April, the government presented a special bill that would have laid the legal groundwork to allow it to hand over the names. The Swiss Senate approved the bill in May.

On June 8 the IRS said it is prepared to reopen its case against UBS AG if the Swiss fail to meet the August deadline. An IRS spokesman indicated that the IRS is ready to pursue any legal options available if the Swiss do not provide the information required.

The Swiss government had hoped to put its dispute with the U.S. to rest and the rejection of the bill in the lower house puts a damper on that hope. If an agreement cannot be reached before the Swiss parliament adjorns later in June, the deal between the U.S. and UBS could be voided. These developments also complicate UBS AGs efforts to rehabilitate its image and improve its wealth-management department. The wealth-management unit which has seen a significant loss of clients as a result of the U.S. tax squabble.

The Swiss parliament is seeking a compromise that could lead to another vote on the bill in both chambers. There is obviously considerable time pressure to obtain another vote. The U.S. has indicated that it will not extend the August deadline. If Switzerland does not hand over the names, the U.S. could begin a new tax case against UBS AG.

The current tax case against UBS AG has been particularly damaging to the banks wealth-management unit. The U.S. case has opened the door to pressure from other European states to urge Switzerland to loosen its bank-secrecy laws and relinquish its status as a tax haven. UBS AG has lost about 1,500 private bankers and the banks wealth-management department has experienced an outflow of almost $200 billion since 2008.

Severe Tax Penalties to be Imposed for Violation of Newly Codified Economic Substance Doctrine

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The realm of tax law has been significantly changed by the recent codification of the economic substance doctrine in the Health Care and Education Reconciliation Act of 2010(i) supplementing the Patient Protection and Affordable Care Act(ii), signed into law on March 30, 2010 (together, herein, as the “Act”).  The new provision takes a judicially created doctrine that has existed for decades and turns it into a statutory weapon for the Internal Revenue Service (IRS) to use.  With this codification, taxpayers need to pay attention and beware. 

There are several judicially created tax law doctrines, including the business purpose, sham transaction, and step transaction doctrines.  However, the Acts inclusion of the economic substance doctrine represents the first codification of a judicially created doctrine.  The new provision provides for the imposition of severe penalties for violations of the economic substance doctrine.

History of the Economic Substance Doctrine

The substance over form doctrine provides that even though the form of a taxpayers transaction may have met the literal requirements of a statute or regulation, the court can still look to whether the transactions substance was consistent with its form.(iii)  The purpose of the substance over form doctrine being that a transaction that lacks such substance should not be given the tax benefit prescribed for the form of the transaction.  In other words, a taxpayer is usually bound to the form it has chosen, however, the government may dispute that form on the basis that the form does not reflect the actual substance of the transaction.

The economic substance doctrine is a subcategory of the substance over from doctrine.   The economic substance doctrine, a judicially created principle, has been treated by courts as a principle of statutory interpretation to construe the text of the Internal Revenue Code (IRC).  This doctrine allows the government to reclassify a transaction in a way that reflects its substance when the transaction has no economic substance other than its tax consequences.  The IRS and courts have used the economic substance doctrine as a primary tool in challenging questionable tax shelters.

The doctrine is universally recognized and applied by the courts.  However, the doctrine has not been consistently applied in the U.S. Circuit Courts of Appeal.  The Fourth and D.C. Circuits have adopted a two-prong conjunctive test.  In order to disregard a transaction for federal income tax purposes under this test, the court must conclude the transaction fails two requirements: 1) subjective business purpose, and 2) objective profit potential.  The Sixth, Eleventh, and Federal Circuits adopted the same test but in a disjunctive fashion.  Under the disjunctive version of the test, if the transaction fails either of the two prongs, the transaction at issue may be disregarded.  Finally, the Third, Ninth, and Tenth Circuits, adopted a unitary test in which the subjective business purpose and the objective profit potential combined shape the analysis of the transactions substance in relation to the tax consequences. 

The Acts Codification of the Doctrine

The Act provides that the economic substance doctrine will be applied in any situation in which the courts would have applied it in the past.  Therefore, there is no definition as to when the doctrine should be applied.  The law codifies the conjunctive test previously applied by some jurisdictions, requiring that the taxpayer show that the transaction: 1) changes in a meaningful way (apart from federal income tax effects) the taxpayers economic position, and 2) that the taxpayer has a substantial non-tax purpose for entering into the transaction.(iv)

For a taxpayer to justify a transaction using potential economic profit, the taxpayer must demonstrate that the pre-tax profit is substantial in relation to the present value of the expected tax benefits.  The taxpayer may take into consideration fees expenses, and foreign taxes when determining pre-tax profit but state tax and financial accounting benefits do not count if the benefits are related to the federal tax treatment.

A noteworthy aspect of this provision is that the IRS may dissect any transaction or series of transaction if it claims that specific parts of the transaction fail the economic substance test even if, overall, the transaction is driven by non-tax economic reasons.(v)

With the enactment of this new law, Congress has indicated that it does not intend to alter the tax treatment of specific business transactions, like choosing to capitalize a business enterprise with debt or equity, engaging in corporate reorganization or choosing a foreign or domestic entity to make a foreign investment. 

The penalties dictated by this provision are a major facet of which taxpayers and tax professionals need to be aware.  A penalty equal to 20% of the tax is assessed if the transaction fails the two-prong test.  The penalty jumps to 40% of the tax if the IRS finds that the transaction was not sufficiently disclosed.  Moreover, taxpayer does not get to show that it had reasonable cause for its position regarding the transaction at issue.  If the taxpayer loses, the 20% or 40% penalty is automatic.

The new law, along with the resulting penalties, is already in effect.  All transactions that occur after March 30, 2010 are subject to the rule.

Conclusion

With the codification of the economic substance doctrine in the Act, Congress has provided the IRS with a serious weapon to utilize in its examinations.  The effects will likely be seen from the IRS, taxpayer, and tax practitioner perspectives.  Tax professionals may be less apt to push the boundaries with innovative tax planning and structuring transactions.  Additionally, IRS agents conducting examinations will likely be quick to use this new power instilled by the codification of the doctrine.  Ultimately, because the government has provided no guidance in the law and because the previous case law concerning this doctrine is so inconsistent, taxpayers must act at their own risk when entering into tax-benefitting transactions now that the economic substance doctrine has been codified.

(i)    Pub. L. No. 111-152 (2010).

(ii)   Pub. L. No. 111-148 (2010).

(iii)   See Gregory v. Helvering, 293 U.S. 465 (1935).

(iv)   See Health Care and Education Reconciliation Act of 2010 Pub. L. No. 111-152, § 1409 (2010).

(v)    Id.

New Healthcare Program Gives $1B in Tax Credits and Grants for Small Pharmaceutical and Medical Device Firms

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A major escalation in revenue for pharmaceutical and medical device manufacturers, both large and small, will be the inevitable consequence of the increased number of insured Americans as a result of the recently enacted healthcare legislation. Approximately 30 million more Americans will have access to health insurance as a result of the developing overhaul of the public and private healthcare systems in the United States.

Small businesses in the pharmaceutical or medical device industries, and those small companies wishing to break into these industries, should pay attention to certain the new Therapeutic Discovery Project Program (the “Program”) provided for in the Patient Protection and Affordable Care Act (the “Act”), signed into law by President Obama on March 23, 2010. The program is geared toward promoting the development of new therapeutics by small businesses. Here we outline two of the Acts provisions aimed at encouraging the development and growth of small pharmaceutical and medical device companies that are operating in the development of new therapies.

Small Business Tax Credit to Encourage Development of New Therapies

Under the Act, the government is providing a Qualifying Therapeutic Discovery Project Credit. This is a tax credit available to companies with 250 or fewer employees. The credit is designed to encourage the research and development of new therapies in the pharmaceutical and medical device industries. The tax credit is available for an amount equal to 50% of “qualified investments” made in the years 2009 and 2010. There is a maximum credit of $5 million per firm available with $1 billion available in total. “Qualified investments” are costs directly related to conducting a “qualifying therapeutic discovery project” that are incurred during the taxable year.

“Qualifying therapeutic discovery projects” include three different categories of pharmaceutical or medical device endeavors:

1. Projects designed to treat or prevent diseases through conducting pre-clinical or clinical studies and research protocols;
2. Projects that intend to diagnose diseases or conditions or to develop diagnostic procedures to assist doctors and patients in making therapy decisions; and
3. Projects with the purpose of creating or developing a product or technology to further the delivery of therapeutics.
This credit is geared toward projects that show potential to produce new therapies, address unmet medical needs, reduce the long-term growth of healthcare costs, and advance the goal of curing cancer within the next 30 years. This tax credits allocation will also factor the projects potential to create and sustain jobs in the United States.

Small businesses that have engaged in any of these categories of projects in the tax year 2009 or plan to operate projects of this nature in 2010 are eligible for consideration for this tax credit.

The Internal Revenue Service (IRS) released guidance (more information available here) on May 24, 2010 outlining the process by which firms can apply to have their research projects certified as eligible for this credit. Small businesses interested in taking advantage of this tax credit must submit an application to the Secretary of Health and Human Services (the “Secretary”) for consideration. The Secretary, when determining which businesses will receive the credit, will consider projects that show potential to develop new therapies in areas of medicine where there are unmet needs, projects that are seeking to develop treatment and prevention methods for chronic or severe diseases, and those operations that intend to advance the goal of discovering a cure for cancer. The Secretary will also take into consideration the projects potential for creating jobs and advancing the United States competitiveness in the biological and medical sciences.

Small business owners and operators who have interest in taking advantage of this credit should speak with their tax attorneys as the $1 billion allocated for this tax credit could be utilized rather quickly given the high cost of drug and device research and development. Firms may begin submitting applications for certification beginning June 21, 2010 and applications must be postmarked no later than July 21, 2010.

Research and Development Grant Program

The Cures Acceleration Network (“CAN”) is a program to be implemented by the Act and administered by the National Institute of Health (“NIH”). (More information from the National Cancer Institute here.) The purpose of CAN will be to award grants and contracts to eligible entities. This program is especially relevant to start-up firms that are not yet profitable. These grants are not includable in the taxpayers gross income.

These awards will be for the promotion and acceleration of the development of “high need curesthrough the development of medical products and behavioral therapies.” A “high need cure” is a drug, device, or biologic that “is a priority to diagnose, mitigate, prevent, or treat harm from any disease or condition; and for which the incentives of the commercial market are unlikely to result in its adequate or timely development.” Whether or not a drug, device, or biologic is a high need cure is determined by NIH.

CANs functions will include supporting advances in research, awarding grants to eligible entities to promote the advancement of high need cures, reduce obstacles that often come between laboratory discoveries and clinical trials for new therapies, and facilitate review in the United States Food and Drug Administration (“FDA”) for high need cures. CAN will communicate and coordinate with FDA to help expedite development by ensuring strict adherence to FDA regulations and requirements during protocols and clinical trials.

Entities eligible for a CAN award include any public or private entity, including biotechnology companies, pharmaceutical companies, disease advocacy organizations, medical centers, and research institutions.

The award program supported by CAN includes three different types of awards, described as follows:

1. The Cures Acceleration Partnership Award is available for up to $15 million dollar per project per year with the possibility for renewal after the first year. Under this award, there is a condition that the entity receiving the award must contribute one dollar for every three dollars awarded by the government;
2. The Cures Acceleration Grant Award is also an award of for up to $15 million per project per year with the possibility of subsequent funding after the initial year; and
3. The Cures Acceleration Flexible Research Award is an award that is available at the discretion of the Director of NIH based on the Directors determination that a project is in furtherance of the goals and objectives of the provision.

Companies or organizations interested in obtaining a grant must submit an application describing, in detail, the project, a timeframe for completion, and a description of the protocols to be utilized, among other information. The protocols must, of course, comply with FDAs standards and regulations at all times.

CAN has been allocated $500 million dollars for the remainder of the year 2010 which, given the cost of pre-clinical and clinical studies, could be used very quickly. These grants and awards will be awarded on a competitive basis, therefore, businesses wishing to compete for them need to act decisively and submit complete, structured application materials expeditiously.

Conclusion

With the passage of this new legislation, small companies doing business in the pharmaceutical and medical device industries have opportunity and incentive to move forward with research and development of new drug products, therapies, and medical devices. The Patient Protection and Affordable Care Act represents revolutionary change in the United States healthcare system and, combined with the escalation of Americans with access to health insurance, the potential for increased revenue for pharmaceutical and medical device manufacturers is boundless.

The inclusion of the tax credit provision for the encouragement of new therapies and the awards for research and development of life saving cures presents an excellent opportunity for small businesses to make advancements in pharmaceutical and medical device development which will profit the businesses themselves, the industries, and society as a whole. Operators and owners of small pharmaceutical and medical device companies should look into taking advantage of these credits and awards in their pursuit of new and innovative therapeutics.

For more information on how these tax credits and/or grants could help your business, please contact us at contact@fidjlaw.com.

What Chain Restaurants and Vending Machine Operators Need to Know About New Federal Law Requiring Nutritional Disclosure on Menu and Menu-Boards

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New legislation is changing the way chain restaurants and vending machine operators do business. On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“PPACA”). The PPACA includes a provision that requires certain chain restaurants and vending machine operators to disclose some nutritional information on the foods and beverages they market and sell. This nutrition disclosure provision, Section 4205 of the PPACA, amends the Federal Food Drug and Cosmetic Act (“FDCA”) by specifically inserting a new subclause (H) into Section 403(q)(5) of the FDCA.

Nutritional Disclosure Requirements

Chain Restaurants:

The nutritional disclosure requirements apply to restaurants and similar retail food establishments that is part of a chain with 20 or more locations doing business under the same name and offering substantially the same menu. These chain restaurants must disclose in a “clear and conspicuous manner” the following required nutritional information on menus and menu boards, including drive-through menus:

¢ The number of calories contained in the standard menu item as usually prepared and offered for sale. The calorie disclosure statement must be adjacent to the name of the standard menu item and clearly associated with the standard menu item.

¢ A suggested daily caloric intake statement posted prominently on the menu, menu board, including drive-through menus, that is designed to enable the public to understand the context and significance of the calorie information posted on the menus and menu boards.

In addition, the menu or menu board must inform consumers that the above required calorie count and suggested daily caloric intake statement, as well as the nutritional information normally found on the Nutrition Facts Panel on packaged food is available in written form on the restaurants premises.

Vending Machines:

A vending machine operator who owns or operates 20 or more vending machines must comply with the applicable nutritional disclosure requirements. The law requires that if the vending machine does not provide visible nutritional information, such as the Nutrition Facts Panel, before purchasing, then the vending machine operator shall provide a sign in close proximity to each article of food or the selection button that includes a clear and conspicuous statement disclosing the number of calories contained in the food or beverage.

Self-Service Food and Food on Display:
The nutritional disclosure provision requires that food sold at a salad bar, buffet line, and cafeteria line, as well as self-service beverages or food that is on display and is visible to customers must place a sign next to each food offered that lists calories per displayed food item or per serving.

Exceptions:

The nutritional disclosure requirements do not apply to the following:

¢ Items that are not listed on a menu or menu board (such as condiments);
¢ Daily specials;
¢ Temporary menu items appearing on the menu for less than 60 days per calendar year;
¢ Custom orders; or
¢ Such other food that is part of a customary market test appearing on the menu for less than 90 days.

Reasonable Basis for Nutrient Content

Restaurants are given some flexibility in determining the calorie count information included on their menus, menu boards, and written information. The restaurant must have a “reasonable basis” for the nutrient content disclosures, including nutrient databases, laboratory analysis, and other reasonable means. This flexibility protects the restaurants from the unavoidable variation found any given serving.

Menu Variability and Combination Meals

The Secretary of the Department of Health and Human Services (HHS), through the U.S. Food and Drug Administration (FDA), shall determine how nutrient content for standard menu items that come in different flavors, varieties, or combinations, but that are listed as a single menu item (for example, pizza, ice cream, soft drinks, and doughnuts) are to be disclosed and labeled.

Regulatory Power to Expand Disclosure Requirements

The law provides that the federal regulators may expand the nutrient disclosure requirements to include additional nutrients if doing so would assist consumers in maintaining healthy dietary practices.

Federal Preemption

Many states and local governments have already adopted their own nutritional disclosure laws. This federal nutritional disclosure law preempts state and local menu-labeling requirements that are not identical to the federal menu-labeling requirements. Note, however, that the federal law does not preempt state and local requirements for food labels that provide a warning concerning the safety of the food or food component.

Voluntary Compliance

Restaurants and vending machine operators who are exempt from these requirements may elect to voluntarily provide the nutritional data. Those who wish to voluntarily comply with the program may register with the FDA and meet the program requirements. The Secretary of HHS is required to publish within 120 days of enactment the terms by which restaurants and vending machine operators may voluntarily provide nutritional information.

Compliance Date

Chain restaurants and vending machine operators that are subject to the new law are not required to comply with the requirements until the Secretary of HHS finalizes and implements the regulations. The law requires the Secretary of HHS to publish proposed regulations within one year of the laws enactment date of March 23, 2010. Therefore, while the new law takes effect immediately, retailers do not have to take mandatory action until the rules are further clarified.

Fuerst Ittleman will continue to monitor the Secretary of HHS and the FDA for proposed rulemaking concerning this new law. If you are an owner or operator of a restaurant, vending machine, self-service food restaurant, gas station franchise, or large food distributor who services 20 or more corporate or school cafeterias with the same food products, please contact us at (305) 350-5690 or contact@fidjlaw.com to determine how this new federal law may impact your business.

Government Accountability Office Issues Report On Herbal Supplement Marketing

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When speaking of deceptive claims the Federal Trade Commission (FTC) comes to mind.  When discussing a dietary supplement the Food and Drug Administration (FDA) rolls off the tongue.  But who regulates the regulators?  The U.S. Government Accountability Office (GAO) does.  The GAO is an independent, nonpartisan agency that acts as Congress? ?watchdog" by investigating how tax dollars are spent.  Last week the GAO released its 28 page report on Deceptive or Questionable Marketing Practices and Potentially Dangerous Advice of Herbal Supplements.

Recent studies have noted a significant increase in the use of herbal dietary supplements by baby boomers.  These studies prompted the GAO to investigate dietary supplement selling practices, and whether the herbals, namely chamomile, echinacea, garlic, ginkgo biloba, and ginseng, contain contaminated or harmful substances.  Representatives of the GAO posed as aging customers seeking products that would provide them with certain health benefits.  The ?secret shoppers? questioned staff at both brick-and-mortar and mail order retailers about the potential health benefits of herbal dietary supplements and the possible interactions with over-the-counter (OTC) and prescription drugs.  (Excerpts of phone calls can be heard here.)  Additionally, they examined marketing claims from several dietary supplement websites and tested forty herbal supplements for hazardous contaminants such as lead, arsenic, mercury, cadmium, organichlorine pesticides, and organophosphorous pesticides.

The outcome of the investigation revealed that the retailers and websites reviewed repeatedly represented that a product could treat, cure or prevent diseases such as diabetes, cancer, Alzheimer?s and cardiovascular disease amongst others.  Claims that expressly state or infer the improvement of a disease state violate the Dietary Supplement Health Education Act of 1994 (DSHEA).  Moreover, some of the herbal supplement sellers made affirmative statements that a supplement can replace a prescription medication or that it was completely safe to take an herbal supplement with an OTC or prescription drug.  For example, at least one sales clerk indicated it was safe for a person taking aspirin as part of a blood-thinning regimen to also ingest ginko biloba to boost their memory.  However, the FDA has emphatically stated that a combination of ginko biloba and aspirin poses a risk of increased bleeding.  The GAO has turned over the details of its investigation to the FDA and the FTC for further action against the merchants for violating the statues and regulations promulgated by the respective agencies.  As to the product testing, 37 out of the 40 products contained a trace amount of at least one hazardous contaminant.  However, the levels did not rise to a level that would cause a health concern.

The impact of this report reaches far beyond dietary supplement industry; it resonates throughout the marketing and merchandising world.  The actions by the GAO demonstrate that inappropriate claims for any product or service could come under regulatory scrutiny regardless of venue, corporate size or revenue.  Marketers, merchants and web retailers should seek legal advice and training for all personnel to ensure compliance with the regulations and guidelines of the FTC and if necessary, other applicable regulatory agencies or governing bodies.  After all, that little old lady, mother pushing a baby in a stroller or the business executive who seems in a hurry may actually be a regulator in disguise. 

Fuerst Ittleman, PL has decades of experience in evaluating product claims, assisting in compiling product substantiation files as well as successfully litigating against the FDA and FTC.  We also work closely with marketers to review advertising materials and train personnel on regulatory compliance.  Please feel free to contact us at contact@fidjlaw.com  to discover how we can help your company with advertising advice, marketing review, to set up a personnel training program tailored to your company and its product, provide legal defense for an action involving deceptive trade practice.