Life Sciences Legal Update : Life Sciences Lawyers & Attorneys : Reed Smith Law Firm : Healthcare, Food and Drug Law, Biotechnology, Privacy, Product Liability

Background

PhotoMedex – a direct competitor of defendants Ra Medical Systems, Inc. and Dean Stewart Irwin (collectively, “Ra Medical”) – alleged that Ra Medical engaged in misleading advertising in violation of the Lanham Act by representing that its dermatological laser product had been approved by the FDA. The device at issue – the Pharos EX-308 Excimer Laser System (“Pharos”) – is considered to be a Class II medical device under the Medical Device Amendments of 1976 (MDA) to the FDCA. The regulatory scheme provided by the FDCA and MDA, which governs FDA approval of the laser, was therefore central to the court’s decision. 

A manufacturer of a Class II medical device must obtain “clearance” from the FDA under what is known as the “510(k)” process under the MDA, before it markets the product. Alternatively, a Class II device deemed “substantially equivalent” to a pre-existing FDA-approved device, may be marketed without further regulatory analysis. A device manufacturer, however, must submit a new 510(k) application if a Class II device is about to be “significantly changed or modified in design, components, method of manufacture, or intended use.” It is the responsibility of the manufacturer of a Class II device to pursue a new 510(k) application. 

Ra Medical – which had previously obtained a licensing agreement to sell a third company’s “EX-308” laser (“SurgiLight”) – did not submit a new 510(k) application for the Pharos device. Rather, Ra Medical took the position that the Pharos was “substantially equivalent” to the SurgiLight, which had previously received FDA clearance under 510(k). Ra Medical argued that, because the Pharos was “substantially equivalent” to the SurgiLight, its representation that the Pharos had FDA approval was not false or misleading.

Legal Analysis

The Ninth Circuit, focusing on the regulatory scheme governing the “clearance” process for the medical device at issue, held that PhotoMedex could not maintain its cause of action for a violation of the Lanham Act. Specifically, the court explained that litigation of PhotoMedex’s Lanham Act cause of action would require the trial court to determine whether the Pharos was in fact “substantially equivalent” to the SurgiLight. Such a determination was prohibited because it would conflict with the statute prohibiting private enforcement of the FDCA, which provides that “all such proceedings for the enforcement, or to restrain violations, of [the FDCA] shall be by and in the name of the United States.” 

The court’s reasoning suggests that the opinion may not be as broad as it would appear at first blush, and is properly read as limited to the facts presented. The court stated that its opinion did “not suggest that the Lanham Act can never support private party claims involving FDA approval or clearance of drugs or medical devices.” Rather, a plaintiff may not pursue such a claim where the FDA “ha[d] not itself concluded there was such a violation.” 

In the case of the Pharos, the court explained that although PhotoMedex had complained on different occasions to the FDA that the Pharos had been promoted without 510(k) clearance, the FDA never reached such a conclusion. At one point in 2005, the FDA inspected the Pharos manufacturing plant , specifically discussing the clearance issue with Ra Medical. The FDA, however, never took further action. Additionally, in 2007, the FDA responded to a 510(k) notification from Ra Medical regarding additional indications for use of the laser by finding the laser “could proceed to market” for the new indications. In sum, although the FDA had the opportunity to take enforcement action against Ra Medical for the alleged violations, it never opted to do so.  

Of additional significance to the court was the fact that FDA approval itself never depended upon an affirmative statement from the FDA to the effect that the product had clearance under 501(k). Rather, the approval itself depended in the first instance on the manufacturer’s decision that the product was “substantially equivalent” to an already approved device. The mere fact that the FDA had not affirmatively approved the Pharos, therefore, did not mean the device did not have clearance under the approval of the SurgiLight. 

Accordingly, PhotoMedex was not permitted to “circumvent the FDA’s exclusive enforcement authority” by attempting to prove that Ra Medical violated the FDCA, where the FDA had not reached that conclusion, and where the regulatory scheme permitted marketing the device without an affirmative statement of approval from the FDA. To rule otherwise would “permit PhotoMedex to assume enforcement power which the statute does not allow and require the finder of fact to make a decision that the FDA itself did not make.”

Hewlett-Packard filed a patent infringement, trademark infringement and false advertising lawsuit against a company called Nu-kote. The case related to HP’s ink jet cartridge technology. Nu-kote apparently marketed products designed to refill HP ink jet cartridges after they ran out of ink. HP argued that Nu-kote’s products infringed HP’s patented technology, and that Nu-kote used deceptive packaging that copied HP’s trade dress. Nu-kote filed counterclaims against HP alleging antitrust violations, unfair competition, trade libel, false advertising and other alleged wrongful conduct.

HP tendered the defense of the counterclaims to its insurer, Ace Property and Casualty Company, seeking a defense under the advertising liability provisions of its general liability policy. A coverage lawsuit between HP and Ace followed. The coverage lawsuit entitled Hewlett-Packard Company v. Ace Property and Casualty Insurance Company, Case No. C-99-20207, was venued in the Northern District of California. The district court judge, The Honorable James Ware, found that Ace had an obligation to defend the counterclaims.

HP purportedly incurred approximately $28 million in litigation fees and costs after it tendered the case to Ace for a defense. The parties stipulated to have a Special Master determine the amount of those litigation expenses that were incurred in connection with the defense of the covered counterclaims, and to make a recommendation to the district court. Ace argued that more than $13 million of the litigation expenses were not covered because Ace contended they were not related to the defense of the counterclaims, or were otherwise not appropriate defense expenses. The Special Master rejected the insurer’s arguments and held that all of the expenses were covered. The district court ultimately affirmed the Special Master’s decision overruling extensive objections filed by Ace. The court entered judgment for HP in the amount of $51 million, which includes the past litigation expenses plus costs and prejudgment interest.

The moral of this story is that cross-complaints and counterclaims must always be analyzed for coverage and tendered to insurance carriers where there might be a potential defense obligation. Defense expenses are often payable in addition to policy limits, so in many cases obtaining a defense can be even more important than obtaining indemnity coverage for an ultimate settlement or judgment.

As evident from the HP case, in many situations it is appropriate to argue that once a counterclaim or cross-complaint has been filed, all or substantially all of the subsequent litigation expenses should be covered as being related to defensive litigation activities, as opposed to being purely related to the offensive claims that started the litigation.