Appeals Court Upholds Remedy of Consumer Restitution in FDA Dietary Supplements Enforcement Action

Date: Nov 11, 2005

Although the case has received little press attention, the U.S. Court of Appeals for the Third Circuit recently upheld a District Court's decision to order Lane Labs to issue refunds to all purchasers of three dietary supplement products allegedly marketed unlawfully. United States v. Lane Labs-USA, Case No. 04-3592 (3rd Cir.) (October 21, 2005). The authority of the government to seek restitution as a remedy for violations of the Federal Food Drug and Cosmetic Act (FDCA) has been in dispute, since there is no explicit statutory authority for that relief. Nevertheless, the Third Circuit concluded that "[t]hough the FDCA does not specifically authorize restitution, such specificity is not required where the government properly invokes a court's equitable jurisdiction under this statute." Lane Labs, slip op. at 11. In connection with an earlier decision from the Sixth Circuit Court of Appeals (and subject to a decision yet to come in a pending case in the Tenth Circuit), the Third Circuit's action may embolden FDA to pursue restitution as an available remedy in enforcement actions involving dietary supplements and other products that FDA regulates. The remainder of this article discusses the Lane Labs case and its potential implications in more detail.

  1. Factual Background and Procedural History
  2. Beginning in the mid-1990s, Lane Labs marketed three would-be dietary supplements directly to consumers through its CompassioNet division: 1) BeneFin, a product in pill or powder form that contained shark cartilage; 2) MGN-3, in capsule form, a polysaccharide fiber made from rice bran and enzymatic extract of Shiitake mushroom; and 3) SkinAnswer, a skin cream applied topically that contained an extract of sand brier. Lane Labs obtained all the products from overseas manufacturers.

    Lane Labs heavily promoted these products through two persons: William Lane, Ph.D. (the father of Lane Labs' president, Andrew Lane) and Mamdooh Ghoneum, Ph.D. Dr. Lane, ostensibly only a paid consultant to Lane Labs, touted the benefits of all three products mentioned above in articles and pamphlets easily available over the Internet. He claimed shark cartilage, and BeneFin in particular, was effective in treating cancer. He claimed MGN-3 was a safe and effective treatment for cancer and HIV, and he asserted that SkinAnswer was a safe and effective treatment for skin cancer. Along with information about ordering BeneFin, Lane Labs often sent potential customers an article by Dr. Lane in which he stated that "the use of shark cartilage in the complementary treatment of non-responsive solid cancer tumors has been widely used worldwide." Dr. Ghoneum, an associate professor of otolaryngology, is a leading researcher of MGN-3 and author of many articles discussing MGN-3 as a possible effective treatment for cancer, HIV, and AIDS. Dr. Ghoneum also had a financial arrangement with Lane Labs based, in part, on product sales.

    In addition to promotion through Drs. Lane and Ghoneum, Lane Labs distributed to potential customers an article from an alternative medicine newsletter promoting MGN-3 as a non-toxic treatment for cancer and for HIV and AIDS, and promoting SkinAnswer as a "skin cancer cream." Finally, Lane Labs' compassionet.com website was embedded with metatags such as "alternative cancer therapies," "cancer treatment," "skin cancer," "non-toxic cancer therapy," "thyroid cancer," "brain tumors," "testicular cancer," "cancer patients," "lung cancer," "squamous cell carcinoma," "melanoma," "Dr. Lane," and "Sharks Don't Get Cancer."

    In 1997, FDA issued a Warning Letter to Lane Labs about what FDA viewed as the company's unlawful promotions of BeneFin, MGN-3, and SkinAnswer. Another letter followed in September 1999. In December 1999, FDA, through the Department of Justice (DoJ), brought suit against Lane Labs, seeking a permanent injunction to prevent the company from committing further violations of the FDCA, as well as restitution to consumers and disgorgement of profits. FDA moved for summary judgment in 2002. Oral argument on the summary judgment motion was heard in November 2003, and special briefings were later filed with respect to the issues of restitution. On July 9, 2004, the District Court granted the government's summary judgment motion, issuing a permanent injunction and ordering restitution to all purchasers of the products.1

  3. District Court Decision
  4. The District Court found overwhelming evidence that Lane Labs' claims crossed the boundary of any permissible structure-function claims for dietary supplements under the Dietary Supplement Health and Education Act of 1994. Rather, the Court found that claims that these dietary supplements could mitigate or cure specific diseases were in violation of FDCA § 403(r)(6) and that they were intended to diagnose, mitigate, or prevent specific diseases, thereby placing them with the category of "drugs" under FDCA § 201(g)(1)(B). The Court rejected Lane Labs' argument that, subjectively, it did not mean for the products to be used for treating or curing disease; by any objective measure, which is what mattered legally, the products were so intended. The Court concluded that because Lane Labs had not obtained FDA approval for BeneFin, MGN-3, or SkinAnswer, and because the products did not bear adequate labeling for use, they constituted unapproved new drugs and misbranded drugs under FDCA §§ 201(p), 505(a), and 502(f)(1), and that Lane Labs was liable for marketing them in violation of FDCA §§ 301(a) and 505.

    In its Order, the Court permanently enjoined Lane Labs from marketing these three products and placed severe restrictions on the company's marketing of any other products with the same ingredients. The Court also required Lane Labs to make restitution to consumers who purchased the three products. The company argued that the Court had no power to order restitution under the FDCA. However, after analyzing the case law, the Court concluded that absent a clear statement from Congress to the contrary, it would not presume that the FDCA was intended to limit the federal courts' broad equitable powers, including the remedy of restitution. Lane Labs appealed.

  5. Appellate Court Decision
  6. The only issue on appeal was the authority of the District Court to order restitution to consumers.2 The Court reviewed the jurisprudence on the judiciary's equitable jurisdiction and concluded that a District Court may order restitution (1) "unless there is a clear statutory limitation" on that authority and (2) where restitution "furthers the purposes of the statute." Lane Labs, slip op. at 16. The jurisdictional provision at issue states that District Courts "shall have jurisdiction, for cause shown, to restrain violations of" the statute. FDCA § 302(a).

    By examining the language of the FDCA and similar provisions in other statutes, the Appeals Court concluded that there was no "clear statutory limitation" on the FDCA's broad grant of power to District Courts to "restrain violations." FDA's failure for many years to have pursued restitution as a remedy did not suggest that "Congress [had] stripped district courts of their equitable power to award it." Lane Labs, slip op. at 18.

    In addition, while the primary purpose of the FDCA is to protect public health, "Congress intended the statute to protect the financial interests of consumers as well. . .." Lane Labs, slip op. at 20. As a result, the Court found:

    Restitution that reimburses consumers who paid for unapproved drugs, and may have been defrauded or deceived about their effectiveness, restores aggrieved parties to the same economic position they enjoyed before the Act was violated. This strengthens the financial protection offered to the public by the FDCA and enhances consumer confidence in the drug market. Whether or not Congress specifically contemplated restitution under the FDCA, the ability to order this remedy is within the broad equitable power granted to the district courts to further the economic protection purposes of the statute. [Lane Labs, slip op. at 26.]

    The Third Circuit acknowledged that the issue was "arguably a close call," but concluded that "[t]hough the FDCA does not specifically authorize restitution, such specificity is not required where the government properly invokes a court's equitable jurisdiction under this statute" and that "the authority given is broad enough to encompass all equitable remedies that would further the purposes of the Act." Lane Labs, slip op. at 11 and 17. As a result, the District Court's order of restitution was affirmed.

  7. Potential Impact

The Lane Labs appeal is certainly a victory for FDA. This decision supports the Agency's view of the availability of such remedies from an earlier case in the Sixth Circuit, U.S. v. Universal Management Services., Inc.3 That decision also upheld a judicial order of consumer restitution and concluded that disgorgement of profits was another available, albeit implicit, remedy under the FDCA (although it was not applied in that case). Armed with what it claimed was judicial blessing from Universal Management, FDA negotiated substantial monetary settlements in three consent decrees with pharmaceutical manufacturers relating to violations of current good manufacturing practices (cGMPs).4

The debate over the availability of equitable remedies under the FDCA is not finished. In a case not discussed in the Third Circuit's Lane Labs opinion, a District Court in Oklahoma concluded in November, 2004, that the FDCA does not authorize the disgorgement of profits and denied the government's request for that sanction.5 That ruling has been appealed to the U.S. Court of Appeals for the Tenth Circuit, which has not yet heard oral argument.6 However, much of the same reasoning used by the Rx Depot District Court was presented in Lane Labs and rejected.

The Lane Labs decision may make FDA feel more empowered to ask courts to order restitution or other equitable relief in future enforcement actions. It remains to be seen whether it will become a routine practice or one reserved for particularly egregious situations (e.g., continued violations despite repeated efforts by FDA to obtain compliance).

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For further information about this case or FDA's the regulation of dietary supplements in general, please contact Frederick A. Stearns at 202-434-4288 or via e-mail at stearns@khlaw.com.

1U.S. v. Lane Labs, Civ. No. 99-5782 (D. N.J.) (July 9, 2004).

2Lane Labs and the government reached a settlement with respect to other issues of the case and agreed on consumer restitution of $8 million in the event that the Third Circuit upheld the District Court's order.

3U.S. v. Universal Management Services., Inc., 191 F.3d 750, 760-62 (6th Cir. 1999).

4See United States v. Abbots Labs, Civ. No. 99-7135 (N.D. Ill., Nov. 2, 1999) ($100 million); United States Wyeth-Ayerst Labs, Civ. No. 00-359 (E.D. Tenn., Oct. 4, 2000) ($30 million); and United States v. Schering-Plough Corp., Civ. No. 02-2397 (D.N.J., May 20, 2002) ($500 million).

5U.S. v. Rx Depot, Inc., et al., Case No. 03-CV-0616-EA (M) (N. D. Okla.) (November 4, 2004). In that case, the government charged Rx Depot with importing unapproved drugs in violation of several provisions of the FDCA and sought a permanent injunction, along with an order forcing the company to surrender all "ill-gotten" profits from its activities. The court granted FDA's request for the permanent injunction but denied the request for disgorgement.

6U.S. v. Rx Depot, Inc., et al., Case No. 05-5003 (10th Cir.) (filed January 7, 2005).