A recent settlement by global pharmaceutical giant Abbott Laboratories over its promotion of the drug Depakote shows that federal regulators remain prepared to pursue drug manufacturers for promoting unapproved uses of their products. Abbott has agreed to pay federal and state governments a total of $1.6 billion in criminal and civil fines and to plead guilty to a criminal misdemeanor violation of the Food and Drug Act to resolve allegations against it. This makes the case the second-largest in a series of multi-million dollar settlements of enforcement actions by the U.S. Department of Justice and state regulators against drug makers. Abbott will be subject to monitoring and reporting requirements as a condition of its plea.
When the Food and Drug Administration approves a drug as “safe and effective” for sale to the public, it specifies that the approval is for one or more defined medical purposes. It is a common practice among doctors, however, to prescribe drugs for other uses based on their understanding of other effects of use of the drug, and such “off label” prescriptions are not illegal.It is illegal, however, for drug manufacturers to promote off-label use of their products.
In the Abbott case, federal and state regulators and law enforcement agencies alleged that the company had promoted off-label use of Depakote, which the FDA has approved to treat epileptic seizures, migraines and the manic episodes suffered by people with bipolar disorder. As part of its settlement, Abbott has admitted that, beginning in 1998, it trained a portion of its sales force to promote Depakote to nursing home personnel as a way to control agitation and aggression in elderly patients suffering from dementia. Abbott continued to do so through 2006 even after it was forced to discontinue clinical trial testing in 1999 of the use of Depakote to treat patients with dementia because the drug caused increased drowsiness, dehydration and anorexia in the elderly test subjects.
The use of Depakote by nursing homes for the off-label use promoted by Abbott was attractive because, as Abbott’s sales force highlighted, Depakote was not covered by the Omnibus Budget Reconciliation Act of 1987 (OBRA) and its implementing regulations designed to prevent the use of unnecessary medications in nursing homes. Thus, use of the drug for this purpose could help nursing homes avoid the administrative costs and other burdens of complying with that law.
In some ways, the Abbott settlement is simply another reminder that pharmaceutical manufacturers that “misbrand” drugs by promoting off-label use will face scrutiny and enforcement from federal and state governments. On the other hand, the Abbott case is particularly egregious given the allegations that, after tests showed poor effectiveness and possible problems with the off-label use of Depakote, Abbott failed to disclose to its sales force the results of those studies. In highly regulated industries such as pharmaceutical manufacturing, the case is a reminder that companies that fail to adhere closely to legal and regulatory requirements do so at great risk.
Judge Jed Rakoff’s November 2011 ruling rejecting Citigroup’s settlement with the Securities and Exchange Commission sent tremors through the securities compliance world by challenging the seemingly well-accepted practice of permitting corporations to settle civil claims with the agency without admitting wrongdoing. But in its order granting a stay of the Citigroup proceedings pending appeal, the U.S. Court of Appeals for the Second Circuit has raised significant questions about Judge Rakoff’s previous ruling.
As we reported earlier, in November 2011, Judge Rakoff rejected the SEC’s proposed $285 million settlement with Citigroup on the ground that it was not fair, adequate, reasonable or in the public interest – primarily because it followed the common practice of permitting Citigroup to settle the case without admitting the allegations against it. The SEC appealed the ruling and sought a writ of mandamus, seeking to set aside the order altogether. Citigroup joined in the SEC’s motion.
On March 15, 2012, the Second Circuit granted the stay. In doing so, the court focused on three factors. First, the court faulted Judge Rakoff for failing to give sufficient weight to the SEC, as an executive administrative agency, to make discretionary decisions of governmental policy in the public interest. Second, in addressing Judge Rakoff’s stated concern that the settlement was not fair to Citigroup (because it imposed substantial relief without any proof of the underlying allegations), the court noted that it was unnecessary for the courts to protect a private, sophisticated, well-counseled litigant like Citibank from entering into a voluntary settlement in which it gives up things of value without admitting liability. Finally, the court noted that a rule that would not permit settlements without proof (or admission) of liability would be tantamount to a rule barring parties from compromising, and observed that there was no precedent to support the existence of such a rule.
The appellate court noted that both parties were united in seeking the stay and in opposing the district court’s order, with the result that the panel did not have the benefit of adversarial briefing. For that reason, the Court stated that it would appoint counsel to argue in support of the district court’s position.
Given the enormous resources that would be expended if the SEC’s case against Citigroup were to go forward without the settlement, and given that Judge Rakoff’s ruling would invalidate a common practice in securities regulatory litigation, it is not surprising that the Second Circuit was willing to stay the trial court proceedings until it has a full opportunity to consider this case. The unsettled status of the issues presented in the Citigroup appeal will obviously pose significant challenges to parties seeking to settle SEC litigation in the near term. How the Second Circuit resolves the matter could have a significant effect on the SEC’s enforcement practice during a period in which it claims to be ramping up its efforts in this arena
Recent headlines about the Securities and Exchange Commission have focused on Judge Jed S. Rakoff’s recent rejection of the agency’s proposed settlement of fraud charges with Citigroup Global Markets. In that case in the U.S. District Court for the Southern District of New York, Judge Rakoff rejected the Citigroup settlement because, in his view, there were no established facts on which to base a decision whether the settlement was “fair, reasonable, adequate and in the public interest.” The SEC and Citigroup have appealed Judge Rakoff’s decision, which is on hold as the U.S. Court of Appeals for the Second Circuit decides whether to grant an expedited hearing in the case.
Judge Rakoff’s decision is already having significant ramifications. In a December 20, 2011, letter to the SEC, Judge Rudolph T. Randa of the U.S. District Court for the Eastern District of Wisconsin cited Judge Rakoff’s Citigroup decision and requested that the commission provide a factual predicate showing the fairness and appropriateness of its proposed settlement of fraud charges against Koss Corporation, a Milwaukee-based maker and seller of stereo headphones. Like Judge Rakoff, Judge Randa would like the SEC to provide to the Court a factual predicate showing “the proposed final judgments are fair, reasonable, adequate and in the public interest.”
Koss and its chief executive, Michael J. Koss, were accused of maintaining materially inaccurate financial statements, books and records from 2005 through 2009 – a period during which the company’s chief accountant embezzled more than $30 million from the company. Koss and the company were also charged with failing to maintain adequate financial controls.
In addition to asking for a more detailed factual presentation, in his December 20 letter, Judge Randa also questioned whether he should – or even could – grant the relief that is specified in the proposed SEC-Koss settlement. The agreement would settle the case without any admission or denial of the charges (as is customary in SEC civil settlements). But the agreement also proposes the entry of an injunction restraining Koss from violating the same securities laws it was accused of violating, and would require the company to maintain adequate records and a system of internal accounting controls.
“If enforcement becomes necessary,” Judge Randa noted in his letter, “the terms of such a vague injunction would make it difficult for the court.”
The SEC has until January 24, 2012, to respond to Judge Randa’s letter, and an SEC spokesman has indicated that the agency intends to “provide the court with the information as requested.”
Citigroup and Koss are not the first companies to have judges call into question the adequacy of their proposed settlements with the SEC. In 2009, Judge Rakoff questioned the adequacy of a proposed settlement with the Bank or America, and settlements with Barclays and in an unrelated case with Citigroup were also questioned by federal district judges in Washington, D.C.
Going forward, the SEC may have to reconsider the way in which it settles civil enforcement matters with companies or, at a minimum, the way in which it presents those settlements to the courts for approval. The interesting question will be whether the need to present a factual predicate for the fairness of a settlement will still permit the SEC to settle cases with companies allowing the companies to avoid any admission of liability.
For those defendants – particularly companies – that seek to settle cases without admissions of liability, increased judicial scrutiny of SEC settlements may make it harder for them to resolve civil enforcement matters easily. In addition, if that scrutiny leads to more settlements in which companies admit liability, it may become more difficult for individual targets of investigations to defend themselves against legal claims and in the court of public opinion. The resolution of the Citigroup and Koss cases may give some hint of where things may be headed for those seeking to settle SEC cases in the future.
In 2001, federal inmate Richard Lee Pollard sustained two broken elbows after tripping over a cart in a privately operated prison housing federal inmates. He sued five prison employees for their actions after his injuries. On Nov. 1, 2011, the Supreme Court held oral argument in Minneci v. Pollard and considered the possibility of creating a new federal remedy against private employees who work for a federal government agency.
Pollard claimed that after his injuries, prison employees put him back to work before his arms were healed, causing him extreme pain in violation of his Eighth Amendment right against cruel and unusual punishment. Pollard pursued his claims under the authority of the 1971 Supreme Court case Bivens v. Six Unknown Federal Narcotics Agents, which held that, under limited circumstances, a plaintiff could bring a private cause of action for damages against federal employees who violated a constitutional right when there was no other adequate remedy under federal law.
While there was concern at the time that Bivens would open the door to a slew of federal cases, the Court has been reluctant to extend its holding beyond the facts of the Bivens case, and has done so only three times since 1971. The Supreme Court has not recognized a new Bivens right in the past 31 years.
In this oral argument, the Supreme Court was reviewing a Ninth Circuit ruling granting Pollard a Bivens right to sue the private employees in a prison for federal inmates. The issue that the justices focused on was whether the availability of a state law cause of action would be an “adequate remedy” for a plaintiff when there was no adequate remedy under federal law.
The attorney for the prison workers, Jonathan S. Franklin, argued against the creation of liability for employees of a private firm working for the government under contract, at least when the suing individual has an alternative remedy in state court. The court seemed inclined to agree with Franklin’s argument that since every state provides a state law remedy for such a claim, there is an adequate remedy available under law and therefore there is no need to create a federal cause of action for damages.
The federal government also sided with the prison workers. The Solicitor General submitted a merits brief that argued that Pollard could sue for damages under California law and probably receive a better result than he would in a Bivens lawsuit because California tort law imposes a lower standard of liability than the Eighth Amendment. At oral argument, Pratik A. Shah, assistant to the Solicitor General, focused on the language of prior Court opinions suggesting that the availability of an alternative remedy was likely fatal to any attempt to establish a new Bivens right.
The Justices’ line of questioning indicated that they found the state law claim to be an adequate remedy. Justice Elena Kagan questioned why Pollard brought the claim under Bivens. She said, “It seems mysterious to me. If you bring it as a negligence claim, you get a lower standard of liability, negligence versus deliberate indifference. You get vicarious liability. So I have been trying to puzzle out, why aren’t these brought as negligence claims rather than as Bivens claims?”
Pollard’s attorney, John F. Preis, struggled to give satisfactory answers as to why Bivens should apply. He tried to reframe the question in his opening argument, stating that this issue is “whether a Federal prisoner’s access to constitutional remedies should turn on the mere happenstance of where the prisoner is detained.”
Preis argued that federal remedies should be available to Pollard because it is not certain that state law remedies would be available for Pollard’s claims. The Justices seemed unconvinced by this argument. Justice Stephen Breyer pressed, “Tell me your specific claim that does not arise under state tort law, that’s all I want to know, which is the same question I heard – I just didn’t hear the answer to.” Preis could not satisfactorily answer this question, as every answer he gave — inadequate health care, deprivation of nutritious food, and others — the Justices believed could be addressed by state law tort claims. In the end, Preis had to weakly answer that this was brought as a federal claim because Pollard only had access to books on federal law in the prison library.
The Justices’ questioning indicates that they are unlikely to extend Bivens to cover cases against private employees where there is an adequate remedy under state law. Defendants will likely have to wait for another case before the holding in Bivens is extended again.