Law360 Article - U.S. and French Sunshine Laws Present Compliance Challenges for Manufacturers

In “From Sea to Shining Sea: French and US Sunshine Laws,” (Law360 subscription required), Reed Smith attorneys Elizabeth Carder-Thompson and Daniel Kadar discuss recent legislation from both sides of the Atlantic designed to increase the transparency of relationships between drug and medical device manufacturers on one hand and physicians and teaching hospitals on the other. While both the U.S. and French Sunshine Acts are intended to address the same general issue, there are several key differences between the two resulting from the respective environments in which they were passed. In addition to providing an overview of the legislation and its immediate effects, the article also discusses some of the compliance issues that have resulted from these laws, including determination of the extent to which non-U.S. headquartered entities or non-U.S. based physicians are subject to U.S. Sunshine Act requirements, and regulation of the amount, organization, and frequency of data disclosure required under the French Sunshine Act.

California AG's Guidance on California Online Privacy Protection Act

The California Attorney General, Kamala D. Harris, has issued a long-awaited guide on how companies can comply with the California Online Privacy Protection Act (CalOPPA). CalOPPA applies to all companies which collect personally identifiable information from California residents online, regardless of whether that information is collected via a commercial website or a mobile application. This far-reaching statute requires virtually every company with an online presence in California, including drug and device companies, to have a company-drafted privacy policy that conforms with its guidelines.

The Attorney General’s guide, entitled “Making Your Privacy Practices Public,” can be found here. It provides specific recommendations on how businesses are to comply with CalOPPA’s requirements to disclose and comply with a company-drafted privacy policy. CalOPPA was recently amended to include information on how the website operator responds to Do Not Track signals or similar mechanisms. The law also requires company privacy policies to state whether third parties can collect personally identifiable information about the site’s users.

Reed Smith attorneys Lisa Kim, Paul Cho, and Divonne Smoyer have written a client alert summarizing the recommendations made by the Attorney General in this guide. To read the alert, click here.

Closing Time: Considerations and Hurdles in Completing Pennsylvania-Based Health Care Transactions

The health care industry has seen a recent shift towards consolidation, driven in part by legislation such as the Patient Protection and Affordable Care Act which encourages integration within the industry. As a result, health care entities are increasingly considering opportunities to merge with or acquire other companies. While this can be an exciting prospect for many organizations, the health care industry’s high level of both federal and state regulation has resulted in a myriad of potential legal issues that can stand in the way of a successful transaction. In particular, there are a number of regulatory hurdles that must be cleared in the state of Pennsylvania before a health care transaction can take place.

To address many of the potential issues that deal counsel must consider when involved in health care transactions in Pennsylvania, Reed Smith attorneys Karl Thallner and Zach Portin authored “Seal the Deal: Health Care Mergers and Acquisitions in Pennsylvania,” which was published in the April 2014 edition of the Pennsylvania Bar Association Quarterly. The article addresses a wide range of topics, including review by the state attorney general’s office and the Orphans’ Court; regulatory approvals at both the federal and state level; antitrust; the corporate practice of medicine doctrine; fiduciary duties; and other various matters for consideration.

Navigating the Complicated, Yet Rewarding, World of Social Media

The social media phenomenon has radically transformed the ways in which commercial businesses promote their services and products. However, as a result, companies must consider potential legal risks from an entirely new angle. To become a successful user of social media, a company must draft, review, disseminate and enforce a social media policy that addresses potential legal issues while at the same time emphasizing positive exposure for the business.

For more information on how your business can utilize social media to maximum effect while exercising compliance with legal guidelines, see Reed Smith’s newly published Third Edition of its white paper on social media, “Network Interference: A Legal Guide to the Commercial Risks and Rewards of the Social Media Phenomenon (3rd Edition).” This updated guide now covers practical, action-oriented guidelines as to the state of law in both the United States and Europe, and is an invaluable resources for companies navigating the social media world.

Recent OCR Enforcement Activities Cause Serious Case of Déjà Vu: Theft of Unencrypted Laptops Leads to Two Separate HIPAA Settlements

This post was written by Brad Rostolsky, Nan Bonifant and Jillian Riley

We have heard this story before: unencrypted laptop containing electronic protected health information (ePHI) is stolen. The covered entity’s subsequent breach self-report triggers not only an incident investigation by the Department of Health and Human Services, Office for Civil Rights (OCR), but a de facto HIPAA compliance audit as well. While the covered entities involved change, the consequences and enforcement message remain the same.

Now, two more covered entities have settled potential violations of the HIPAA Privacy and Security Rules arising from the theft of unencrypted laptops by paying a total of $1,975,220, and agreeing to continued oversight by OCR through Corrective Action Plans (CAPs). In both instances, the breaches were self-reported and the settlements resulted from OCR’s subsequent investigations.

On December 28, 2011, Concentra Health Services (Concentra), a national health care provider and subsidiary of Humana Inc., reported to OCR that an unencrypted laptop was stolen from one of its facilities. OCR’s subsequent investigation revealed that while Concentra previously recognized that a lack of encryption on laptops, desktops, medical equipment, and tablets presented a critical risk to ePHI, Concentra failed to fully implement necessary steps to address those vulnerabilities. OCR’s investigation further found that Concentra had insufficient security management processes in place to ensure proper safeguarding of patient information. Concentra paid OCR $1,725,220 to resolve these alleged HIPAA violations and will adopt a CAP to evidence their remediation efforts.

The second settlement, which resulted in a $250,000 payment to OCR, stemmed from the theft of an unencrypted, stolen laptop from an employee’s car on October 8, 2011. The laptop, belonging to a workforce member of QCA Health Plan, Inc. of Arkansas (QCA), contained the ePHI of 148 individuals. While QCA instituted company-wide device encryption following discovery of the breach, OCR’s subsequent investigation revealed that QCA had failed to comply with multiple requirements of the HIPAA Security Rule, beginning from the Rule’s compliance date in April 2005. In addition to the monetary settlement amount, QCA agreed to provide HHS with an updated risk analysis and corresponding risk management plan that includes specific security measures to reduce risks to vulnerabilities of its ePHI. QCA also agreed to retrain its workforce and document its ongoing compliance efforts.

Unfortunately, as the proliferation of portable devices in the health care industry increases, the question for most covered entities is not if a laptop or mobile device will be stolen, but when. Encryption not only provides a safe harbor under the Breach Notification Rule, but it has also become a practical necessity to HIPAA compliance. Failure to address encryption of portable devices in Security Rule risk analyses and, in most cases, failure to implement some form of encryption, will continue to expose covered entities (as well as business associates) to significant compliance risk.

Additional information about OCR’s enforcement activities can be found at http://www.hhs.gov/ocr/privacy/hipaa/enforcement/examples/index.html.

Do You Know Where Your Pharmaceuticals Are From? Navigating the "Country of Origin" Question for Pharmaceutical Products

Drug and medical device manufacturers are often faced with difficult — and sometimes unexpected — challenges in sorting out the country of origin for their products, which are often sourced, processed and manufactured in multiple countries.

One would think it would be easy to answer the question, “What is a pharmaceutical product’s ‘country of origin’?” Unfortunately, as Jeffrey Orenstein and Lorraine Campos point out in “Origin of the Pieces: How to Determine a Pharmaceutical Product’s ‘Country of Origin,’” the answer to this question is not as simple as many would think – and the correct answer can depend on who is asking. Jeff and Lorraine’s article is published in the Spring 2014 edition of the Public Contract Law Journal.

Don't Forget: FDA Frequents Facebook

This post was written by Jillian Riley and Kevin Madagan

In only the second Untitled Letter of the year, FDA’s Office of Prescription Drug Promotion warned a Swiss drug company about statements the company made on its Facebook page. Notably, FDA became aware of the company’s Facebook promotion through its own monitoring and surveillance program.

The alleged violations themselves were straightforward and similar to more traditional advertising actions: failure to include risk information and omission of material facts. What makes this letter interesting is that the activity occurred on a social network. On its Facebook page, the company suggested consumers talk to their doctor if they have been diagnosed with the condition for which the drug at issue is indicated. Nowhere on the page did the company warn consumers about the risks associated with the product – risks serious enough to require a boxed warning on the label. Neither did the company include any discussion about limitations of the drug’s use. FDA requested the company immediately cease this promotional activity – and the company has complied. The Facebook page at issue is no longer active.

The takeaway here is to remember that FDA’s advertising and promotion rules apply regardless of how or where you promote your product.  You must assume that all activity on social media networks, including Facebook and others, will be scrutinized by the FDA.

There are HOW many calories in that? FDA Proposes First Overhaul to Food Label in 20 Years - Comment Opportunity

 This post was written by John Feldman and Jillian Riley

Today FDA announced long-awaited changes to the iconic Nutrition Facts label for foods.  According to FDA, the goal of the proposed changes is not to tell consumers what they should or should not be eating, but to expand and highlight the information consumers need most to make a well-informed food choice.

Calories and Serving Size

The most notable changes involve the display. The proposed label emphasizes through font size and bold type the number of calories per serving size and the number of servings per container. In order to better capture how average Americans eat, FDA is also proposing changes to how serving sizes themselves are calculated. Gone will be the days where a pint of ice cream is four serving sizes; now FDA says it is two. FDA stresses that these proposed changes are based on current scientific thinking in the area of nutrition science and based on the most recent public health and nutrition surveys. The current nutrition Facts Panel, which has been in use for 20 years, relied on consumer consumption data from the 70s and 80s. American eating patterns have changed and FDA hopes these new labels will better reflect current consumption patterns.

Added Sugars

Another major change involves how the Nutrition Facts panel displays the amount of sugar contained in a food. The current label lists just “Sugars” which can refer to both naturally occurring and sugars added during the production process, the propose label requires “Added Sugars” to be a separately listed category which would include only those sugars added to the food during production.

Nutrient Content and % Daily Value Calculations

Other changes include updates for to how to calculate the Percent Daily Value for nutrients such as fiber and calcium, requirements to list nutrients such as Potassium and Vitamin D, and no longer requiring the label to include Vitamins A and C.

From a public health standpoint, the proposed changes raise three important and related questions:

  1. Will consumers read and understand the new information provided on the Nutrition Facts panel?
  2. Will the updated and highlighted information lead consumers to make better food choices? 
  3. Will those better food choices lead to better health outcomes?

The new Nutrition Facts panel has implications in the advertising world as well. Claims about nutrition content of foods are based on what the manufacturer is permitted to say in the Nutrition Facts panel. Changes to the panel necessarily mean changes to how food companies are permitted to advertise their products. We will certainly see a new wave of advertisers capitalize on foods with “No Added Sugars” but what other patterns should we expect?

The proposed rules are available here: Revision to the Nutrition and Supplement Facts Labels; and Serving Sizes of Foods That Can Reasonably Be Consumed At One-Eating Occasion, et. al

FDA will be accepting comments for 90 days.

FDA Takes First Step to Overhaul OTC Drug Review Process

As mentioned on our Health Industry Washington Watch blog, the Food and Drug Administration (FDA) has announced that it will hold a public hearing on March 25 and 26, 2014 to receive input on the current processes for reviewing over-the-counter (OTC) drugs. In the announcement, the FDA concedes that the current OTC drug review “needs a critical examination at this juncture to examine whether and how to modernize its processes and regulatory framework.” This hearing will be a major step in FDA’s long-standing plan to overhaul the OTC drug system. To read the entire post, click here.

'Country of Origin' Compliance: The Top 10 Things Pharmaceutical Companies Need to Know

This post was written by Jeffrey Orenstein

What is the “country of origin” for the drugs you manufacture? This question arises every time a pharmaceutical company labels a drug, imports it, exports it, markets it, or sells it to the U.S. government. Unfortunately, the answer to this question is more complicated than many think. In fact, the correct answer often changes, depending on which government agency is asking.

For a Reed Smith-authored white paper on the Top 10 things pharmaceutical companies need to know before determining their products’ country of origin, click here.

CMS Seeks Public Comment on its Imposition of CMPs for Noncompliance with Medicare Secondary Payer Reporting Requirements; Opportunity for Clinical Trial Sponsors to Request Discretion

This post was written by Celeste Letourneau, Catherine Hurley and Jennifer Pike

The application of the Medicare Secondary Payer (MSP) law to clinical trial sponsors has long been a point of significant contention between sponsors and CMS, with CMS insisting (via subregulatory guidance, and a widely circulated letter) that clinical trial sponsors are like insurers, and thus subject to the law. In a positive development, however, Congress has now directed CMS to promulgate regulations addressing the circumstances under which CMS will exercise discretion not to impose civil monetary penalties (CMPs) for noncompliance with MSP insurer reporting requirements. This affords sponsors an important new opportunity to engage with CMS on this issue, and to request appropriate enforcement discretion.

On December 11, 2013, CMS released an advance notice of proposed rulemaking (ANPRM) soliciting comments on specific practices for which CMPs may or may not be imposed for failure to comply with MSP reporting requirements. Among other issues, CMS is seeking comments and proposals on mechanisms and criteria that it would employ to evaluate whether and when it would impose CMPs for noncompliance with MSP reporting requirements.

Although clinical trial sponsors are not mentioned in the ANPRM, CMS has expressly stated elsewhere that the MSP reporting requirements do apply to clinical trial sponsors.1 Specifically, CMS has taken the following position on clinical trial sponsors under the MSP reporting statute:

When payments are made by sponsors of clinical trials for complications or injuries arising out of the trials, such payments are considered to be payments by liability insurance (including self-insurance) and must be reported. The appropriate Responsible Reporting Entity (RRE) should report the date that the injury/ complication first arose as the Date of Incident (DOI). The situation should also be reported as one involving Ongoing Responsibility for Medicals (ORM).2

In sum, CMS views clinical trial sponsors, by virtue of any promise to pay for complications or injuries, as insurance companies, and subjects clinical trial sponsors to the same reporting obligations that liability insurers must meet. Failure to comply with the MSP reporting requirements can carry a CMP of $1,000 for each day of noncompliance, per individual, that should have been reported.3 Congress amended the MSP statute last year to afford CMS discretion with regard to whether to impose CMPs in instances of noncompliance.4 Prior to that, CMS had no such discretion. The purpose of the ANPRM is to solicit input for the circumstances under which CMS should exercise this discretion.

Clinical trial sponsors should consider whether they are prepared to comply with the MSP reporting requirements and face potential CMPs for failure to do so, or whether CMS should be urged not to impose CMPs on clinical trial sponsors. For example, clinical trial sponsors should consider whether they are prepared to:

  • Report to CMS all complications and injuries involving Medicare beneficiaries arising out of a clinical trial that they have agreed to pay for. This includes everything the sponsor has agreed to pay for; it is not limited to adverse events. For example, this could involve medications included in the study protocol and paid for by the sponsor that are intended to prevent or mitigate an anticipated adverse event.
  • For Medicare beneficiaries, collect and produce all of the data CMS requires to be reported, including identifiable information (such as patient name, social security number, date of birth, dates of incident, etc.), and all relevant ICD-9-CM/ICD-10-CM (International Classification of Diseases, Ninth/Tenth Revision, Clinical Modification) Diagnosis Codes describing the alleged injury/illness.
  • Potentially forgo Medicare reimbursement for routine costs associated with clinical trials, even though there is a national coverage determination (NCD) stating that CMS will pay.
  • Manage study subjects who are Medicare beneficiaries and who may be aggrieved because, as a result of the sponsor reporting their ICD-9-CM/ICD-10-CM codes to CMS pursuant to MSP, all their Medicare claims associated with those codes could be routinely denied during their participation in the study. 
  • Unblind clinical trials if necessary in order to satisfy reporting requirements.
  • Incur significantly increased administrative and financial costs to ensure compliance with MSP reporting. 
  • Incur the burden of complying with MSP reporting as both a clinical trial sponsor, and as a potential defendant in a product liability suit, if and when the investigational product is commercialized. This may include implementing complex and detailed processes in both the research and development, or the medical side of a company (for clinical trial sponsor reporting), and the legal department (for products liability reporting). Additionally, the former may be trial-specific, meaning that different internal processes for addressing MSP reporting may be needed for different trials. 
  • Refrain from offering to pay for research-related injuries in order to avoid triggering the MSP reporting requirements, even though this would likely result in the loss of Medicare beneficiaries as study subjects.
  • Pay a CMP of up to $1,000 per beneficiary per day for noncompliance.

The ANPRM presents the opportunity to explain to CMS that, because of the many complexities associated with imposing the MSP reporting requirements on clinical trial sponsors, CMS should not impose CMPs on clinical trial sponsors for failures to report.

The ANPRM is available at http://www.gpo.gov/fdsys/pkg/FR-2013-12-11/pdf/2013-29473.pdf. Comments to the ANPRM may be submitted in writing, or electronically at www.regulations.gov, on or before February 10, 2014.

_________________________________

1See CMS’ Office of Financial Management, Financial Services Group Director (Gerald Walters) to Holly Thames Lutz, Esq. of Gardner, Carton & Douglas, dated April 13, 2004.
2See CMS, MMSEA section 111 Medicare Secondary Payer Mandatory Reporting, Liability Insurance (Including Self-Insurance), No-Fault Insurance, and Workers’ Compensation USER GUIDE, Chapter III: POLICY GUIDANCE, Version 3.4 at 40 (July 3, 2012), available at http://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Mandatory-Insurer-Reporting-For-Non-Group-Health-Plans/Downloads/New-Downloads/NGHPUserGuideVer40Ch3Policy.pdf.
342 U.S.C. § 1395y(b) (Social Security Act § 1862(b)).
4Medicare IVIG Access and Strengthening Medicare and Repaying Taxpayers Act of 2012 [Public Law No: 112-242].

Keeping FDA Up-to-Date on Your Drug Company's Social Media Activity - Comment Opportunity

This post was written by Jillian W. Riley.

FDA has issued draft guidance addressing the unique challenges of drug promotion in the age of social media. Specifically, the draft guidance sheds light on how to comply with FDA’s postmarket submission requirements when interactive promotional media constantly changes. In laying out the criteria for how and when to submit interactive promotional media for postmarket review, FDA gives important insight into the type of social media promotion in which it is most interested.

What type of social media activity does FDA want to review?

The draft guidance provides several scenarios to consider when determining whether interactive promotional media should be submitted to FDA for review. The unifying theme appears to be the degree of control the firm can assert over the content of the website.

  1. The first scenario is where a firm is responsible for product promotional communications on sites that are owned, controlled, created, influenced, or operated by, or on behalf of, the firm. This specifically includes Twitter and Facebook. The central question becomes “whether the firm, or anyone acting on its behalf, is influencing or controlling the promotional activities in whole or part.” Regardless of the scope of the influence, if the firm can exert any influence, it is responsible for the scope of the content and needs to submit that content to FDA for review. If the content is both firm generated and user generated, FDA still wants to see it.
  2. The second scenario is where a firm is responsible for promotion on third-party sites. The same framework applies: whether the firm has any control or influence on the third-party site, regardless of the scope of that influence. FDA distinguishes here between sites where the firm has editorial, preview, or review privileges and sites where the firm only provides financial support and has no role in the information contained on the site, with only the former needing to be submitted for FDA review. As an example of content that needs to fulfill the postmarketing submission requirement, FDA discusses a firm making suggestions regarding the placement of its promotional message on an independent third-party site. When submitting this type of content for FDA review, FDA wants to see the firm’s content in addition to the surrounding pages so as to provide adequate context for FDA’s review.
  3. The third scenario is where a firm is responsible for content generated by an employee or agent who is acting on behalf of the firm to promote the firm’s product. This includes all user-generated content on any site if the user is acting on behalf of the firm. For example, a blogger writing on behalf of the firm or an employee or agent of the firm commenting on a third-party site about the firm’s product. FDA recommends transparency for this type of communication; disclosing the firm’s involvement on a site by clearly identifying the user-generated content of its employees or agents.

How should these materials be submitted to FDA when the social media sites change so frequently?

“FDA recognizes the challenges of submitting promotional materials that display real-time information” and provides a framework for how best to notify the agency of that promotional material.

  • “At the time of initial display, a firm should submit in its entirety all sites for which it is responsible.…” The firm should include annotations alerting FDA to which parts of the site are interactive and allow for real-time communications. Any subsequent changes should be submitted when those changes are made. FDA prefers to receive the submission in an archivable format that allows the agency to interact with the submission in the same way the end-user would. Screen shots or other visual representations are an acceptable alternative.
  • For third-party sites, at the time of the initial display, the firm should submit the home page of the site along with the interactive page within the site and the firm’s initial display.
  • “Once every month, a firm should submit an updated listing of all non-restricted sites for which it is responsible or in which it remains an active participant and that include interactive or real-time communications.” As long as the site does not restrict access, these monthly submissions do not need to include screenshots, because, presumably, FDA will be visiting these sites. Multiple sites and the corresponding document can be provided in one submission, with each site contained in separate document. Further, the firm should notify the agency when it ceases to be active on a particular site.
  • For restricted access sites, “a firm should submit all content related to the discussion” in order for FDA to conduct an adequate review. This may or may not include independent user-generated content. Screenshots or other visual representations of the actual site, including all interactive or real-time communications, should be submitted monthly.

Comments on the document, “Draft Guidance for Industry on Fulfilling Regulatory Requirements for Postmarketing Submissions of Interactive Promotional Media for Prescription Human and Animal Drugs and Biologics,” are due April 14, 2014.

How to Mitigate Compliance Requirements and Code of Conduct Obligations with Data Protection Regulation: Reed Smith Paris Provided Some Illustrative Examples

As reported on our Global Regulatory Enforcement Blog, Reed Smith Paris partner Daniel Kadar and counsel Séverine Martel hosted on 25 October 2012, a new edition of the conference cycle organized by Reed Smith Paris with the European American Chamber of Commerce, dedicated to the mitigation of Compliance obligations, particularly as set forth in Codes of Conduct, with data protection requirements.

The panel, which included compliance directors of French health care giant SANOFI and General Electric Health, brought examples of how to mitigate compliance obligations, in particular as set forth in Codes of Conduct most International organisations have now adopted, with applicable data protection regulation.  The first example was dedicated to the New French Health Care Regulation and its transparency and disclosure requirements as to the existence (and the financial range) of agreements between the health care and cosmetics industry with health care professionals (including Medicine students), showing that the disclosure of financial and private information (such as the home address for the medicine students) had to be managed carefully with respect to the data owner’s information and access rights.  To read the full post, click here.

Increased Scrutiny for the 510(k) Process

This post was written by Michelle Lyu Cheng.

On November 14, 2011, the Senate Health, Education, Labor and Pensions Committee held a hearing called "Medical Devices: Protecting Patients and Promoting Innovation." The hearing focused on the continued viability of a medical device clearance process that clears for market medical devices that are "substantially equivalent" devices to previously cleared devices (also known as the "510(k) process," in reference to the statutory provision governing this process). Class III medical devices not cleared through this process must undergo the more rigorous and time-consuming Premarket Approval process. Among the issues considered were whether the 510(k) process sufficiently evaluated the safety of devices when clinical data is not necessarily always considered or part of the submission; whether high-risk medical devices should always be considered for the 510(k) process; the user fees for medical device applications; strengthening post-approval monitoring requirements; and the resources and needs for the FDA and the Center of Devices and Radiological Health (CDRH) in reviewing, clearing and approving medical devices. 

Testifying witnesses before the panel were as follows: Jeffrey Shuren, Director of the CDRH of the Food and Drug Administration; Ralph Hall, Professor of Practice, University of Minnesota, Minneapolis; David R. Challoner, M.D., Vice President (emeritus) of Health Affairs, University of Florida, and Chair, IOM Committee on the Public Health Effectiveness of the FDA 510(k) Clearance Process, Gainesville, Fla.; and Gregory Curfman, M.D., Executive Editor, New England Journal of Medicine, Boston. 

The first discussion panel centered on Dr. Shuren and his work with CDRH. In late 2009, the CDRH initiated a review of the 510(k) process, among others, and in 2010, released two reports concluding that the FDA had not managed its premarket programs sufficiently, with the most dire problem being unpredictability in the 510(k) and other premarket processes. This led to other increases in costs to the industry and delays in bringing innovation to the market. The root causes were determined to be the lack of personnel resources in CDRH, as compared with the center for drugs and biologics, insufficient reviewer training, insufficient managers and frontline reviewers, rapidly growing workload caused by increased complexity of devices and number of admissions, insufficient guidance for FDA, and poorly drafted submissions by the industry. In 2011, Dr. Shuren testified that concrete steps for improving the transparency, predictability and consistency of the premarket programs were outlined and evaluated. The Committee members generally focused on the sufficiency of CDRH/FDA's resources and an increase in review times for both the 510(k) and the Premarket Approval processes. One suggestion from Sen. Harkin (D-Iowa) was that the user fees for these submissions should be increased, although later it was conceded that the optimal solution would be if the FDA was independently funded. 

The second discussion panel with Mr. Hall and Drs. Challoner and Curfman focused on the 510(k) process and the National Academies of Science, Institute of Medicine (IoM) report that heavily criticized the 510(k) process. Mr. Hall started first, outlining that the drug and medical device sectors are very different, including because medical device development is an iterative process that builds upon previously created devices, and clinical testing is not necessarily an optimal or feasible method of measuring safety and effectiveness for medical devices compared with drugs. In response to Sen. Harkin's question about 510(k) devices bearing little resemblance to each of its predicate devices that may compromise patient safety, Mr. Hall noted the FDA has resources and regulatory powers at its disposal to satisfy itself for any issues relating to safety and effectiveness. Mr. Hall also stated in response to Sen. Blumenthal's (D-Conn.) question that post-market surveillance should be improved but that currently, FDA does have controls and regulatory systems in place for monitoring. Mr. Hall also emphasized that the 510(k) process does control for safety and effectiveness.

The discussion with Dr. Challoner primarily focused on IoN's report, as he chaired the committee that drafted it. The IoN report concluded that the 510(k) process generally does not evaluate safety and effectiveness, but only evaluates whether it is substantively equivalent to prior devices previously cleared. He stated that the IoN committee concluded that overhauling the 510(k) process was an optimal scenario, but per Sen. Mikulski's (D-Md.) question, Dr. Challoner stated that he did not expect the 510(k) process be eliminated overnight. He considered the IoN report to be a conversation starter. Dr. Challoner also testified that since the 510(k) process will not be immediately overhauled, it may be necessary to evaluate and strengthen the post-market processes and improve quality control. Dr. Curfman provided testimony similar to Dr. Challoner, namely that post-market surveillance controls would be helpful in monitoring the safety and effectiveness of devices. One potential way of doing so would be to institute a uniform device identification system so that a device can be tracked over its lifetime.

Sen. Harkin, the Committee Chair, concluded that this hearing was helpful in illustrating the need to take a more intense look at the approval process and post-surveillance controls, especially for certain higher-risk devices. While Sen. Harkin conceded that user fees may not be the optimal solution to compensate for the FDA's lack of resources, he did not consider that any changes to this would be feasible in light of the current climate. Based on some of the discussion points raised during this hearing, the 510(k) process and the post-market surveillance requirements may see increased scrutiny.

A link to the videotaped hearing is here.

MMSEA Section 111 Mandatory Insurer Reporting Updates

This post was written by Catherine A. Hurley.

The Centers for Medicare & Medicaid Services (CMS) has recently updated the information on its website with respect to the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA), Section 111 “Mandatory Insurer Reporting” requirements. The recent updates cover (1) a revised implementation timeline for certain liability insurance (including self-insurance) total payment obligation to claimant settlements, (2) revised guidance on claims involving exposure, ingestion, and implantation issues, (3) upcoming improvements to the Medicare Secondary Payer (MSP) program, (4) a new exception for certain settlements paid into a qualified settlement fund and (5) a new way for certain injured Medicare beneficiaries to satisfy their past and future MSP obligations.

Revised Implementation Dates

First, CMS has delayed Section 111 reporting for certain liability insurance (including self-insurance) total payment obligation to claimant (TPOC) settlements, judgments, awards, or other payments. The revised implementation date for reporting will be based on the TPOC amount. A schedule of the new dates is provided here.

Exposure, Ingestion, and Implantation – Revised Guidance

Second, CMS has posted revised guidance pertaining to liability insurance (including self-insurance) responsible reporting entities (RREs) where the claims involve exposure, ingestion, and implantation issues. In the guidance, CMS explains its policies for claims involving exposure, ingestion, and implantation. Specifically, CMS discusses when Medicare will, and will not, assert a recovery claim against the settlement, judgment, award, or other payment, and when the MMSEA, Section 111 mandatory reporting rules must (or need not) be followed. CMS also provides examples of various factual scenarios involving exposure, ingestion, and implantation, and discusses how its policies will be applied to each. 

Upcoming MSP Improvements

Third, according to CMS, certain improvements to the MSP program can be expected within the next three to nine months, including:

  • The implementation of a Medicare Secondary Payer Recovery Contractor (MSPRC) web portal, where the beneficiary or representative can obtain information about Medicare's claim payments, demand letters, etc., and input information related to a settlement, disputed claims, etc.
  • The implementation of an option that allows for an immediate payment to Medicare for future medical costs that are claimed/released/effectively released in a settlement. 
  • The implementation of a process that discloses Medicare's conditional payment amount, prior to settlement in certain situations.

If implemented, these new options and processes could significantly improve the efficiency of the existing MSP system and provide greater certainty to all parties where settlements involve Medicare beneficiaries. More information can be found on CMS’s website. 

Narrow Exception for Qualified Settlement Funds Prior to October 1, 2011

Fourth, in an “Alert” dated September 20, 2011, a narrow exception has been announced for certain settlements that are paid into a qualified settlement fund (QSF) under Section 468B of the Internal Revenue Code (IRC) prior to October 1, 2011.  Specifically, each of the following criteria must be met in order for exception to apply:

  • The settlement, judgment, award, or other payment is a liability insurance (including self-insurance) TPOC amount, where no ongoing responsibility for medicals (ORM) is involved
  • The settlement, judgment, award, or other payment will be issued by a QSF under Section 468B of the IRC, in connection with a state or federal bankruptcy proceeding
  • The funds at issue were paid into the trust prior to October 1, 2011

New “Fixed Percentage Option”

Finally, for certain settlements that are less than $5,000, there is a new "fixed percentage option" for beneficiaries to satisfy Medicare's total MSP claim.  Details are provided on the MSPRC website and are reprinted below. Although this option is currently only available under narrow circumstances, it represents a significant departure from CMS’s historical and complicated approach to the MSP recovery process.  

 

Effective November 7, 2011, the Centers for Medicare & Medicaid Services has implemented a new and simple fixed percentage option that is available to certain beneficiaries. This option is available to beneficiaries who receive certain types of liability insurance (including self-insurance) settlements of $5,000 or less.

A beneficiary who elects this option will be able to resolve Medicare's recovery claim by paying Medicare 25 percent of his/her total liability insurance settlement instead of using the traditional recovery process. This means that a beneficiary will know what he/she owes and will be able to immediately pay Medicare.

In order to elect this option, the following criteria must be met:

  • The liability insurance (including self-insurance) settlement is for a physical trauma based injury. (This means that it does not relate to ingestion, exposure, or medical implant)
  • The total liability settlement, judgment, award, or other payment is $5,000 or less
  • The beneficiary elects the option within the required timeframe and Medicare has not issued a demand letter or other request for reimbursement related to the incident
  • The beneficiary has not received and does not expect to receive any other settlements, judgments, awards, or other payments related to the incident

 

CMS and FDA Announce Parallel Review Pilot Program

This post was written by Susan Edwards, Elizabeth Carder-Thompson, Gail Daubert, Celeste Letourneau, and Debra McCurdy.

On Friday, October 7, 2011, the Centers for Medicare & Medicaid Services ("CMS") and the Food and Drug Administration ("FDA") (collectively, the "Agencies") announced they were soliciting nominations from sponsors of medical devices to participate in the Agencies’ parallel review pilot program. The Agencies officially published a Federal Register notice announcing the program October 11, 2011 (the "Notice"), with an effective date of November 10, 2011, although the Agencies began accepting nomination submissions October 7.

To read the full alert, which summarizes the Notice and discusses potential implications for manufacturers that may be considering participation in the pilot program, click here.

Transcending the Cloud: A Legal Guide to the Risks and Rewards of Cloud Computing - Health Care in the Cloud

This post was written by Vicky G. Gormanly and Joseph I. Rosenbaum.

The interest level in storing health records in digital format has grown rapidly with the lower cost and greater availability and reliability of interoperable storage mechanisms and devices. Health care providers like hospitals and health systems, physician practices, and health insurance companies are among those most likely to be considering a cloud-based solution for the storage of patient-related health information. While lower cost, ubiquitous 24/7 availability, and reliability are key drivers pushing health care providers and insurers to the cloud, a number of serious legal and regulatory issues should be considered before releasing sensitive patient data into the cloud. The issues are highlighted in the Health Care chapter  of our Cloud Computing White Paper.

Prospects Unclear for CMS/FDA Proposed Parallel Review of Medical Products

This post was written by Susan A. Edwards, Elizabeth B. Carder-Thompson, Gail L. Daubert and Celeste A. Letourneau.

Notably absent from last month’s Department of Health and Human Services Semiannual Regulatory Agenda was any indication of where the Centers for Medicare and Medicaid Services ("CMS") and the Food and Drug Administration ("FDA") stand with respect to their notice with request for comments, issued last fall, on the proposed parallel review process for medical products. While CMS and FDA officials confirmed that they are currently reviewing comments submitted during the review period, they declined to speculate on when they intend to act. The comments submitted, however, provide insight into industry views on this important issue, including widespread discontent with the approval mechanisms currently available. We have undertaken a review of all of the comments submitted and extracted the eight main concerns cited in the following analysis.

Food and Drug Law Institute's Upcoming US-China Food and Drug Law Conference in Beijing, China

The Food and Drug Law Institute (FDLI) has an interesting upcoming conference on June 13-14 in Beijing, China that will address current legal, regulatory and economic issues regarding food, cosmetics, dietary supplements, pharmaceuticals and medical devices in China and the United States. Speakers are top government officials and internationally renowned experts who will discuss the issues in both countries.  They include Dr. Margaret A. Hamburg (Commissioner of Food and Drugs, US Food and Drug Administration), Wu Zhen (Deputy Commissioner of China's State Food and Drug Administration), Ralph Tyler (Chief Counsel, US Food and Drug Administration), Rosemary Gallant (Principal Commercial Officer Beijing, US Embassy Beijing, Commercial Section), Ding Jianhua (Deputy Director-General, Department of International Cooperation, SFDA), Wang Lanming (Supervisor-General, Department of Medical Devices Supervision, SFDA), Lin Wei (Deputy Director-General, Bureau of Import-Export Food Safety, AQSIQ) and Jinjing Zhang (Deputy Director General, Department of Food Licensing, SFDA).  Reed Smith partner Gordon Schatz will be speaking on the panel "Innovation and Access: Key Success Factors in China."

Sebelius Issues Section 1135 Waiver

This post was written by Kevin Madagan and Paul Sheives.

On October 24, 2009, President Obama signed a proclamation declaring the 2009 H1N1 influenza pandemic a National Emergency to facilitate the nations ability to respond to the H1N1 pandemic by enabling – if warranted – the waiver of certain statutory federal requirements for medical treatment facilities.  

This proclamation provided Kathleen Sebelius, the Secretary of the U.S. Department of Health & Human Services, the ability under section 1135 of the Social Security Act [42 U.S.C. § 1320b–5] to waive certain legal requirements that could otherwise limit the ability of the nation’s healthcare system to respond to the surge of patients with the 2009 H1N1 influenza virus. 

Secretary Sebelius recently issued a Section 1135 waiver that becomes effective at 5:00 p.m. today but is retroactive to October 23, 2009.  

Accordingly, healthcare facilities may now petition the Department for 1135 waivers to ensure that sufficient healthcare items and services are available to meet the needs of Medicare, Medicaid, and CHIP beneficiaries. Listed below are a few examples of when 1135 waivers may be necessary:

  • Hospitals request to set up an alternative screening location for patients away from the hospital’s main campus (requiring waiver of sanctions for certain directions, relocations or transfers under EMTALA).
  • Hospitals request to facilitate transfer of patients from ERs and inpatient wards between hospitals (requiring waiver of sanctions under EMTALA regulations).
  • Critical Access Hospitals requesting waiver of 42 C.F.R. § 485.620, which requires a 25-bed limit and average patient stays less than 96 hours.
  • Skilled Nursing Facilities requesting a waiver of 42 C.F.R. § 483.5, which requires CMS approval prior to increasing the number of the facility’s certified beds.

FDA Commissioner Announces Aggressive New Enforcement Policy

This post was written by Frederick H. Branding, R.Ph., JD, Areta L. Kupchyk and Kevin M. Madagan.

After just passing her eighth week as FDA Commissioner, Dr. Margaret Hamburg announced on August 6, 2009, six new enforcement procedures to a group of industry representatives, attorneys, consumers, and others attending a speech sponsored by the Food and Drug Law Institute in Washington, D.C.

“The FDA must be vigilant, the FDA must be strategic, the FDA must be quick, and the FDA must be visible,” according to Commissioner Hamburg. She stated that vigilance means regular inspections and follow-up to ensure problems are resolved; identifying and resolving problems early; a “greater emphasis on significant risk and violations”; rapidly responding to egregious violations or violations that jeopardize public health; and using “meaningful penalties to send a strong message” to discourage future offenses. The Commissioner also said that the agency must be visible and publicize its enforcement actions (and the rationale for those actions) widely and effectively. Commissioner Hamburg described six new policy changes to meet these goals.

 

1. 15 Day Post-Inspection Deadline

FDA will now set post-inspection deadlines. When FDA finds that a firm is significantly out of compliance and issues inspectional observations on Form FDA-483, it will expect a prompt response, generally no more than 15 days. Failing to respond in 15 days will trigger FDA to move forward with a warning letter or enforcement action.

2. Streamlined Warning Letter Process – Chief Counsel Pre-Review Policy Abandoned

Abandoning a policy implemented in 2002, FDA’s Chief Counsel Office will no longer review every warning letter issued by the agency. The Chief Counsel will limit warning letter review to significant legal issues only. In other words regional offices will now be permitted to issue warning letters.

3. Closer Collaboration with Regional Partners

FDA will continue to seek to work more closely with regulatory partners (e.g., state, local, and international officials) to develop risk control and enforcement strategies, as these entities have more authority to take action quickly than FDA. “When the public health is at risk, the FDA will reach out to our partners to take rapid action while we alert the public and prepare longer-term responses.”

4. Prioritize Enforcement Follow-Up

FDA will prioritize its follow-up with non-compliant firms. After a warning letter is issued or a product recall occurs, FDA will “make it a priority to follow up promptly with appropriate action.” This may include an inspection or investigation to ensure the problem has been resolved.

5. Swift and Aggressive Action Without a Warning Letter

FDA is prepared to take swift aggressive action to protect the public. The agency will no longer issue multiple warning letters. In addition, FDA will consider immediate action, such as action before it issues a warning letter, to address significant health concerns or egregious violations. Although FDA has had the authority to take enforcement action without issuing a warning letter, the agency generally reserves use of enforcement actions such as seizure or injunction for serious public safety situations requiring immediate action to stop manufacturing or distribution to prevent harm. 

6. Warning Letter “Close-Out” Process

FDA is developing a formal warning letter close-out process. For example, after FDA reinspects a facility to ensure that a firm has fully corrected violations identified in a warning letter, FDA may provide to the firm a formal “close-out” letter, indicating that the issues have been successfully addressed. This letter will then be posted on FDA’s website. However, not every warning letter will be eligible for a formal close-out letter. Such letters will likely be sent to companies with a history of ongoing violations. 

Commissioner Hamburg expects these new policies will ensure violative inspection results are taken seriously, warning letters and enforcement actions occur in a timely manner, and steps are taken promptly to protect consumers.

CMS Proposes to Relax Controversial Physician Supervision Requirements for Hospital Outpatient Services

On July 1, 2009, the Centers for Medicare & Medicaid Services (“CMS”) proposed to relax its controversial position concerning physician supervision of hospital outpatient services. The hospital industry had recently been vocal in its objection to CMS’s position, and the latest proposal signifies a potential important win for hospitals. If adopted, hospitals will be able to meet Medicare supervision requirements for outpatient services, without incurring some of the high costs necessary to ensure physician presence while those services are furnished. 

The July 1 proposal is contained in CMS’s hospital outpatient prospective payment system (“HOPPS”) rule for 2010. The controversy arose a year earlier in CMS’s HOPPS rule for 2009. In the 2009 HOPPS rule, CMS “clarified” that direct supervision by a physician is required for outpatient hospital therapeutic services furnished “incident to” a physician’s services – not only in an off-campus hospital-based location, but also in the main hospital building or an on-campus department. This means that a physician must be present in each provider-based department when these services are furnished. While styled as a clarification, most hospitals saw CMS’s position in the 2009 HOPPS rule as a significant change from prior CMS guidance. Specifically, in the original HOPPS regulations from 2000, while CMS required that services furnished at a location designated as a department of a provider under the Medicare “provider-based” rules must be furnished under the direct supervision of a physician, CMS also stated that it “assumed” that the direct supervision requirement would be met when the services are furnished on a hospital’s campus. 

In the latest proposal, CMS articulated three new proposed policies for physician supervision for hospital outpatient services that would go into effect Jan. 1, 2010. 

  • First, nonphysician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, and certified nurse-midwives) would be permitted to directly supervise all hospital outpatient therapeutic services that they may perform themselves in accordance with state law, and scope of practice, hospital-granted privileges, and other Medicare requirements. 
  • Second, for outpatient services furnished in the hospital or in an on-campus outpatient department of the hospital, the “direct supervision” requirement would be met if the physician or nonphysician practitioner is present on the same campus, in the hospital or on-campus provider-based department, and is immediately available to furnish assistance and direction throughout the performance of the procedure.
  • Third, for hospital outpatient diagnostic services, the physician supervision requirements attributable to each particular test under the Medicare physician fee schedule would have to be satisfied, whether the test is performed directly or under arrangements. While the same definition of “direct supervision” applicable to therapeutic services would also apply to diagnostic tests, nonphysician practitioners would not be permitted to supervise diagnostic tests.

These changes would allow hospitals significantly more flexibility in meeting the supervision requirements, and would represent a relaxation not only from CMS’s policy articulated in the 2009 HOPPS rule, but in some respects also from CMS’s policy prior to 2009. In particular, for example, nonphysician practitioners will be able to supervise therapeutic services furnished in off-campus provider-based departments.

An advance copy of the proposed 2010 HOPPS rule, which is scheduled to be published in the Federal Register July 20, 2009, is available here. Hospitals desiring to comment on the proposal must do so by Aug. 31, 2009. The final HOPPS rule is likely to be released in December 2009. Hospitals should monitor regulatory developments in this area in order to be able to adjust physician and nonphysician staffing and scheduling of services accordingly.

DDMAC's Increased Scrutiny of Promotional Materials

This post was written by Kevin M. Madagan.

FDA has repeatedly stated over the past year that more enforcement activity in the promotional arena is likely. It appears that time has arrived. Half of FDA’s Division for Drug Marketing, Advertising, and Communications’ (“DDMAC”) citations for misleading advertisements in 2008 were sent in September and October. The citations address typical misbranding issues such as failing to adequately disclose risks, overstating efficacy, broadening indications, and asserting unsubstantiated superiority claims. Whether these citations are the result of DDMAC’s increased budget and new hires, or a continued interest by Congress and the Department of Justice over drug industry promotional issues, one thing appears clear: a new era of increased scrutiny is likely here. 

A particularly interesting position that DDMAC has taken in a few of the September and October letters concerns descriptions of disorders and the consequences of failing to obtain treatment. For example, in five letters targeting drugs indicated to treat attention deficit hyperactivity disorder (“ADHD”), DDMAC cites marketing materials that list the difficulties and consequences of untreated ADHD (e.g., poor social-emotional development and job success, inability to complete schooling, illegal behaviors, contraction of sexually transmitted diseases, motor vehicle accidents, and physical injury). In each letter, DDMAC takes the position that listing such difficulties and consequences in association with an ADHD drug constitutes an implied claim that the drug will have a positive impact on these issues. If deemed an implied claim, DDMAC requires studies with endpoints that support each claim. 

This is similar to DDMAC’s position on quality-of-life (“QOL”) claims, with health-related QOL claims requiring substantial supporting evidence in the form of adequate and well-controlled studies designed to specifically assess these outcomes. 

While the need to have adequate studies to support claims is nothing new, drug manufacturers should remain cognizant of everything listed in marketing materials, including statements concerning the difficulties and consequences of untreated disorders, diseases, or conditions. Drug manufacturers wishing to include such statements must ensure that all implied claims arising from these general statements are supported by substantial evidence (i.e., adequate and well-controlled studies with endpoints targeting each implied claim/impact). Stated otherwise, drug manufacturers must design specific study endpoints to support a disease state description, or must carefully tailor disease state descriptions to pre-existing specific study endpoints.

The Oct. 13, 2008, Pink Sheet provides further detail about DDMAC’s increased activity. DDMAC’s 2008 warning letters can be accessed at fda.gov.

FDA to Open Offices in the People's Republic of China

On March 14, 2008, the U.S. Food and Drug Administration (“FDA”) received approval from the U.S. State Department to place eight full-time, permanent FDA employees at U.S. diplomatic posts in the People’s Republic of China, pending authorization from the Chinese government. The FDA will also be hiring five local Chinese nationals to work with the new FDA staff at the U.S. Embassy in Beijing and the U.S. Consulates General in Shanghai and Guangzhou. The FDA expects to be fully staffed in China within 18 months.

In China, the proposed permanent offices are intended to allow the FDA greater access for inspections and increased interactions with manufacturers to help assure products shipped to the United States meet U.S. standards for safety and manufacturing quality. With the opening of an FDA China Office, the FDA’s enforcement arm will more easily extend across the globe and bring some benefits as well as greater challenges for global life sciences companies. The FDA is clearly positioning itself for the demands of the current economy. According to a statement from FDA’s deputy commissioner for International and Special Programs, Murray M. Lumpkin, M.D.:

In an age when a border is not a barrier, the globalized economy demands nothing less than heightened regulatory interoperability, information exchange, and cooperation, especially on product quality and enforcement matters.

The FDA’s “Beyond the Borders” initiative is intended to facilitate the building of stronger cooperative relationships with the FDA’s counterpart agencies around the world, and to enhance technical cooperation with foreign regulators.

Private Sector Responsibility for Import Safety

Although the FDA’s announcement of a permanent presence in China is the latest indication of significant U.S. administrative activity on import safety, ultimate responsibility for product safety and regulatory compliance still generally rests with the private sector manufacturers, importers, distributors, and retailers. The private sector may look to government initiatives for guidance, but must simultaneously employ corporate best practices to contract safely with Chinese manufacturers and suppliers. Such best practices include an appropriate level of due diligence, contract terms that highlight product safety and protect the company, implementation of import compliance procedures, enhanced safety through independent testing, and development of a recall strategy in the event imported products are determined to be unsafe or fail to meet quality standards.

Due Diligence

Proper due diligence must be undertaken with respect to the overseas suppliers or manufacturers. Begin with the basics—know the manufacturer’s name, address, telephone number, fax number and e-mail address. Understand how the manufacturer is incorporated, organized, and registered to do business. Know how the manufacturer is owned—whether it is government-owned, owned by government officials, or otherwise. Understand who owns the manufacturer’s parent company, and the citizenship of any individual owners. Have a handle on the manufacturer’s profile—does it have the expertise and capacity to undertake the work required? Where does the manufacturer bank? Has the manufacturer been involved with any criminal charges, convictions, bankruptcies, or cases of civil litigation in which the company has been a defendant?

Other questions to ask include: What is the manufacturer’s record of and reputation for product safety, plant safety, workers’ rights, and environmental protection? What can be discovered through business references, personal references, and financial references? What information can you obtain from public sources, the local chamber of commerce, the diplomatic corps, from a media search of local and international press accounts, or from lawyers and consultants who are knowledgeable about Chinese manufacturers?

Contracting. As a threshold matter, importers should include clear specifications and safety or quality standards that are to be met by the supplier. The supplier should warrant and certify that it understands and will comply with the applicable specifications or standards. Contracts should include testing procedures and an agreement as to how testing will be accomplished. The contract should include terms about the rejection of non-conforming goods and resulting remedies.

The contact should provide the purchaser with visibility into the supplier’s own supply chain. Importers may insist that the supplier certify facts or make warranties regarding the source of raw materials, manufacturing techniques, or the chain of custody of particular products, such that the manufacturer assumes liability in the event that any of this information is false and the products cause harm.

If intellectual property or know-how is to be exchanged, then the contract should account for and protect those assets. The contract should specify the supplier’s duty to complete the paperwork and assign liability for any failure. The contract may require the inclusion of information required by customs on invoices, such as the date of sale, the identity of the seller, Harmonized Tariff Schedule (“HTS”) classification and valuation of the items, and the port of entry. The contract should require the provision of country-of-origin markings as required.

Child or prisoner labor issues should be verified along with the conditions of general workers’ rights. Environmental degradation possibilities should also be investigated and addressed in contracts. The contract may rightly address local anti-corruption compliance in addition to these other “social” concerns.

An importer should be sure that the Chinese supplier has indemnified it for any harm that may be caused by the products being supplied. This warranty may require the supplier to submit to jurisdiction in the United States for disputes arising under the contract, particularly if the supplier has U.S.-based fixed assets. If the supplier has no fixed assets anywhere other than China, international arbitration is probably preferable to attempting to collect a foreign judgment in China itself.

Import Compliance. In general, it is advisable to have an import compliance program. Such a program should cover overall importation requirements such as shipping, entry, inspection, and related business aspects. An import program should include classification (what is the unique HTS number the product falls under?), appraisal (how much in import duties must be paid based on the tariff rate and value of the imported product?), and country of origin (where does it come from and does it need to be marked “Made in China”?). An import compliance program should address all customer recordkeeping requirements (essentially five years for key documents supporting the entry process). The compliance program should also address what to do in the case of an audit or enforcement action involving customs issues.

 

Inspections/Audits. An important provision of the written agreement between the parties should allow the importer to have access to the supplier’s or manufacturer’s facility and records for purposes of inspecting the manufacturing operations and evaluating the level of regulatory compliance. Regulatory agencies such as EPA, FDA OSHA, USDA, etc. have broad inspectional authority in the United States. Through memoranda of understandings, certain agencies such as the FDA are allowed to inspect foreign manufacturing sites that produce products or ingredients destined for import into the United States. The reach of these ex-U.S. inspections, although greater with the opening of the FDA office in China, remains much less than in the United States. Allowing a firm’s own employee auditors or third-party auditors retained by a firm to be on-site to observe manufacturing operations and review production records can provide an “early warning” of potential issues to be addressed or avoided.

Product Testing and Systems Evaluation. Product safety and product testing must be an integral part of any supplier or manufacturing contract. This product testing procedure should set forth who will conduct the testing, whether opposite party verification will be available, what party or non-party entity will conduct the testing, and which party will be responsible for payment of testing costs. Parties will need to understand which regulatory industry standards apply, how those standards will be monitored, and how those standards will be extended and enforced though the supplier-sub-prime supplier supply chain—think lead paint on children’s toys.

Importers should consider utilizing “pre-approved” testing facilities such as those identified by National Oceanic Atmospheric Administration and the Consumer Product Safety Commission as identified above. Importers should also consider separate independent testing to be utilized should a level of doubt be raised as to the safety of a particular product or line of products.

In addition to product testing, mechanisms should be put in place, through contract, that allow for the evaluation of the quality control processes extant at the supplier’s operations. This access affords an opportunity to identify potential deficiencies in production, quality control, inspection, and quality assurance/tracking. These mechanisms can be included as part of the provisions allowing for inspections or audits of manufacturers’ facilities.

Recall Strategies. Prudent importers should have a plan in place to minimize the impact of shortcomings in their import safety measurers. That plan should include a recall strategy that addresses the products at issue and the relevant government agencies, such as the CPSC, USDA, and NHTSA, or the FDA. Likewise, the plan should include a tailored approach to address the particular safety risks at issue. The FDA has several levels of recalls that should be addressed—Class I for the recall of products that could cause serious health problems or death, Class II for recall of product that may cause a temporary health problem, and Class III for those recalls involving minor labeling violations. Devising tailored recall plans requires an understanding not only of the company’s supply chain, but also of its distribution chain, and might rightly even include discussions with cognizant governmental recall officials prior to any recall event occurring.

Reed Smith’s Life Sciences Practice In China

Through its offices in Hong Kong and Beijing, Reed Smith represents many life sciences clients regarding their activities in China. From pharmaceutical and medical device companies to distributors, hospitals and physicians, Reed Smith’s lawyers in China advise on foreign direct investment, corporate organization, business operations, securities, protection of intellectual property, technology transfer, mergers and acquisitions, drug registration, product registration, distribution, clinical testing, regulatory compliance, regulatory approval, employment, and dispute resolution. Two members of Reed Smith’s life sciences team in China are dual-qualified physicians and lawyers.

Chris Howse heads up Reed Smith’s leading medical/product liability practice in Hong Kong, advising doctors, hospitals, device and pharmaceutical companies in matters involving the Medical Council, and in civil and criminal litigation disputes.

Hugh Scogin has been based in Beijing for 20 years and is recognized as one of the foremost authorities on Chinese law in the United States, having taught at leading law schools including Yale Law School and New York University School of Law. Hugh’s clients include medical device and diagnostic product manufacturers, and he advises on numerous China-related medical device issues, mergers & acquisitions, foreign direct investment, technology transfer, business operations, securities, and employment and dispute resolution.