Hyman, Phelps & McNamara
Criminal prosecutions of device companies and employees by FDA are rare. Prosecutions that result in significant jail time—including incarceration of a company’s compliance officer—are rarer still. And prosecutions that yield both significant jail time and a court decision that may have a significant effect on the medical device industry are rarer yet. The Seventh Circuit’s recent decision in United States v. Caputo contains all of these elements.1
This article describes the background leading up to this important case, which amply demonstrates that bad facts make bad law—at least for criminal defendants. The article then discusses the ruling and how the court’s decision may have broader effects on the device industry.
In 1990, AbTox Inc. sought 510(k) clearance for a new medical device known as the Plazlyte. The Plazlyte was designed to sterilize medical instruments at low temperatures using a peracetic acid as the sterilant. Ross Caputo, the company’s president and CEO, and Robert M. Riley, the vice president of regulatory affairs and chief compliance officer, both worked on the 510(k) submission to FDA. The 510(k) submission showed that the Plazlyte was substantially equivalent to another low-temperature sterilization device that used ethylene oxide (EtO) as the sterilant.
The duo’s alleged criminal activities began with the firm’s 510(k) submission. AbTox manufactured the Plazlyte in two different models, a small size and a large size, which used different mixtures of peracetic acid and different temperatures, pressures, and gas flow rates. However, AbTox submitted only the small model for clearance. As is often the case, the company conducted several studies to support the submission. According to the court of appeals, AbTox submitted only the studies whose results were favorable, concealing the results of less-helpful or unfavorable studies. (In reviewing disputed evidence, the court of appeals construed it in favor of the government.) The district court stated that the scientific staff at AbTox referred to the FDA submission as the “submission of omissions.”
FDA cleared the small Plazlyte in 1994, but limited the clearance to use with solid stainless-steel instruments without hinges or lumens. The limited clearance meant that the Plazlyte was essentially useless, because hospitals were already using autoclaves, which cost significantly less than a Plazlyte, to sterilize stainless-steel instruments without hinges or lumens. AbTox began promoting the larger model as an all-purpose sterilization system. It provided hospitals with “printed promotional material boldly proclaiming the ability of the [Plazlyte] to process instruments with hinges and lumens.”2 It also described the machine in much broader terms than the clearance permitted. Many hospitals relied on this information and purchased the Plazlyte to use on a variety of medical instruments.
Unfortunately, the Plazlyte damaged many of these non-stainless-steel instruments and left a residue on some brass ophthalmic instruments. Even worse, the residue allegedly caused adverse reactions in many patients, and some patients experienced loss of vision. According to trial testimony, Riley was told of these eye injuries in 1996, but he never conducted an investigation or notified FDA. Outbreaks of eye injuries continued through 1997, when some hospitals sent the eye instruments to AbTox for testing. Testing revealed both soap residue and perennial copper acetate, but AbTox did not file a required medical device report (MDR) with FDA. Six months after the testing, FDA ordered AbTox to submit an MDR, but Riley filed an allegedly false report that concealed the information on perennial copper acetate and attributed the eye injuries to the soap residue.
Meanwhile, in May 1995, FDA learned that AbTox was promoting the larger Plazlyte, which had not been cleared, for conditions outside the original clearance. FDA reminded AbTox of the scope of clearance and told the company that the large Plazlyte was misbranded. Shortly thereafter, AbTox submitted a 510(k) for the large Plazlyte, but again allegedly did not include adverse test results. FDA found the 510(k) submission deficient, and sent AbTox a letter rejecting the submission and explaining the kinds of data and materials that should be included if AbTox chose to resubmit its information. The agency warned AbTox not to market the device and said that doing so would be a violation of the Federal Food, Drug, and Cosmetic Act (FD&C Act). AbTox continued to sell the larger machine, despite the lack of clearance.
FDA also sent AbTox a warning letter instructing the company to stop off-label promotion of the Plazlyte. This time, AbTox agreed to discontinue its most egregious promotional material and edit the device’s operation manual to reflect the language set out in the original 510(k) clearance. However, the defendants’ cooperation with FDA apparently stopped there. When one hospital saw the revised language, it approached the defendants and told them that it had been misled. The hospital had relied on AbTox’s representations and used the machine to sterilize endoscopes. The Plazlyte damaged several of the hospital’s instruments. Caputo and Riley agreed to pay for the damaged endoscopes, but Caputo allegedly insisted that the Plazlyte could sterilize any instrument that could be sterilized in EtO, and gave the hospital a written guarantee that the machine could sterilize off-label instruments. The hospital also served as a host site for potential customers, which meant that many other prospective customers saw the Plazlyte being used outside the scope of its clearance.
According to the trial court, AbTox devised an aggressive marketing program that criticized EtO and promoted the Plazlyte as an alternative, even though the Plazlyte was not cleared as a direct replacement for EtO. AbTox offered hospitals $20,000 worth of sterilant in exchange for replacing their EtO sterilizers with the Plazlyte. On September 27, 1996, FDA sent another warning to AbTox directing the company to stop marketing the larger Plazlyte.
FDA inspected AbTox’s facilities in January 1998 and found that AbTox was still selling the larger Plazlyte. The agency again told AbTox to stop selling the machine, and again AbTox ignored FDA’s order. On April 2, 1998, FDA issued a nationwide warning that the large Plazlyte was linked to at least 10 injuries associated with ophthalmic instruments and directed Plazlyte users not to use the machine with copper, zinc, or brass instruments.3 U.S. marshals seized AbTox’s inventory and a criminal prosecution followed.
Caputo and Riley were charged with 19 criminal counts, including conspiracy, fraud, mail fraud, wire fraud, and the introduction of an adulterated or misbranded device into interstate commerce. To the apparent annoyance of the district court, both defendants filed multiple motions throughout the trial, including a motion to dismiss the indictment, a motion for a bill of particulars, two motions to compel, three motions in limine to limit evidence, and a motion to show cause. In its final opinion, the court showed considerable exasperation, stating, “This is the seventh and last opinion this court plans to issue in this criminal case.”4
A jury convicted both Caputo and Riley. The court sentenced Caputo to 10 years in prison and Riley to 6 years in prison, and both were ordered to make restitution of $17.2 million to the 144 U.S. hospitals that had purchased the machines. At sentencing, the court’s unhappiness with the defendants’ conduct was scarcely concealed. In explaining that the sentences were reasonable, the court stated:
Essentially, both defendants viewed FDA as a regulatory nuisance that could be neutralized through various misleading and false submissions. Both defendants were motivated by individual economic greed and the desire to capture market share, and they placed these goals over and above our nation’s complex regulatory scheme, which protects the health of our country...It is hard to imagine a more egregious corporate crime.5
After the decision, Caputo and Riley both appealed to the Seventh Circuit Court of Appeals.
Court of Appeals
The Seventh Circuit Court of Appeals affirmed the lower court decision except with respect to restitution. First, the court rejected the defendants’ First Amendment arguments. Caputo and Riley claimed that the FD&C Act violated their First Amendment rights by restricting the promotional materials they could use to promote their machines. The defendants relied on the ruling in Virginia Board of Pharmacy v. Virginia Citizens Consumer Council Inc., 425 U.S. 748 (1976), in which the Supreme Court held that if it is lawful to sell a product, then it must be lawful to inform consumers about the product. However, the court of appeals rejected this argument because Caputo and Riley could not lawfully sell the large Plazlyte, thus there was no lawful activity for speech to promote.
The court found that the district judge did not abuse his discretion when he refused to admit expert testimony about the meaning of FDA regulations and statutes. The court of appeals commented that the meaning of statutes and regulations is not an appropriate subject for expert testimony and that “[t]he only legal expert in a federal courtroom is the judge.”6
The court also found that the defendants were not entitled to a new trial on the basis that one of the jurors had forgotten to report that he had been convicted of six misdemeanor crimes. After the trial, it was discovered that the foreman had six misdemeanor convictions related to heroin and alcohol use. After a hearing on the matter, the district court concluded the juror’s failure to report these crimes was an honest mistake. Further, the district court found that even if that juror had reported his convictions, the convictions would not have supported a challenge for cause.
The defendants earned a small victory on the issue of how much restitution was owed. First, the restitution was based on a list price of $100,000 per Plazlyte, but this was not the actual price paid by all hospitals. Some hospitals received a $20,000 discount and thus had a list price of $80,000, and other hospitals purchased the machines shortly before the recall and therefore never paid the $100,000, so their list price was essentially zero. Second, the district court calculated the restitution based on the total number of hospitals that purchased the Plazlytes, but some hospitals continued to use and derive benefits from the Plazlyte after the recall. The court of appeals found that if the hospitals continued to use the machines with knowledge that they had been recalled, those hospitals should not receive restitution. Even illegally sold instruments can have some economic value. The defendants’ victory on restitution, however, was trumped by the court’s ringing affirmation of the convictions and the jail sentences.
Implications for Industry
Caputo is primarily a cautionary tale of what can happen if a device company repeatedly and knowingly violates the FD&C Act. According to the trial and appeals courts, the defendants knowingly violated the law—and put patients at risk—for economic gain. Given these findings, the outcome at the appellate court is not surprising. Thus, above all, the case serves as a warning for companies and individuals about the possible consequences if they are found to have committed repeated and purposeful violations of the FD&C Act that harm patients.
Yet the case has implications beyond the incarceration of Caputo and Riley. One of the principal theories for FDA was that the defendants had misbranded the Plazlyte through their promotional activities. The defendants raised a spirited First Amendment defense. They even received support from the Washington Legal Foundation, which filed an amicus brief on their behalf.
The appeals court recognized that the question of whether FDA could limit off-label promotion for a cleared device raised constitutionally significant issues. Citing Supreme Court precedents, the Seventh Circuit said, “The doctrine of unconstitutional conditions places limits on the promises that an agency may extract from those who seek approval.”7 The court noted that it made little sense for bloggers to be able to talk about a device’s off-label uses, but not “to allow speech by the device’s manufacturer, which after all will have the best information.” On the other hand, the court hypothesized that taking this approach could lead FDA to not approve products with off-label uses. (The court apparently was unaware of a provision in the FD&C Act that precludes FDA from denying 510(k) clearance because of foreseeable off-label uses.)
In the end, the court was able to duck what it perceived to be a thorny constitutional question—whether off-label promotion of cleared devices was constitutionally protected. Instead, the court found that the large Plazlyte could not be lawfully sold, so this did not present the situation of off-label promotion of a lawful device.
Thus, the court did not decide whether off-label claims for legally marketed devices were constitutionally protected. That issue remains open. The prudent course for device companies is to behave as though this conduct is unlawful. No device company wants to have to resort to a First Amendment defense in an FDA enforcement action.
Yet the legal issue posed by the Seventh Circuit still lingers. The common assumption is that off-label promotion of cleared devices can be the subject of enforcement action. However, over the past 30 years, as the Supreme Court has broadened the reach of the First Amendment, many assumptions relating to federal restrictions on speech have proven false. This may be another. A defense arguing that off-label promotion of a legal device may be legal might be raised in desperation, but perhaps it will turn out to be a successful argument.
A second important issue before the court involved the defendants’ argument that the large Plazlyte was lawfully on the market because it represented a modification of the 510(k)-cleared small Plazlyte. In response to FDA’s position that a new 510(k) was needed under 21 CFR 807.81, the defendants asserted that the regulation violated the due process clause because it was unconstitutionally vague.
Certainly, many device companies have found the phrases “significantly affect” and “major change...in the intended use” to be imprecise and have struggled with those terms. So has FDA. The court conceded that the terms were “not self-defining.” Nevertheless, after stating that “no legal phrase is” self-defining, the court found the criteria in 807.81 not to be unconstitutionally vague.
Whatever discomfort the court might have had regarding the definitional uncertainties was more than offset by the ample notice FDA had given AbTox that a new 510(k) was needed. “The uncertainty that is inevitable in legal standards...often is offset by notice, so that people need not guess what is required of them. FDA gave AbTox notice, and to spare.”8 Communications from the agency precluded AbTox from saying it did not know FDA’s position. As various recent scenarios have shown, device companies should be aware that even informal communications from the agency may be used later to rebut a defense that the law or regulations were ambiguous.
In rejecting the vagueness argument, the court drew a curious and unfounded inference involving the lack of an “advice of counsel” defense. When prosecuted, a defendant may cite reliance on a lawyer’s advice to show that he or she acted in good faith. “[N]o one gets into a multi-million-dollar medical device business without legal counsel,” asserted the court.6 While it is probably true that any sizable device company has retained counsel, not all companies have retained counsel who are knowledgeable about FDA’s regulations.
Given the complexity and ambiguity of the regulations, the defendants planned to call expert witnesses to testify at trial to explicate the meaning of the regulations. The district court excluded this testimony, and the court of appeals agreed. This ruling has broader applicability, because experts (including one of the authors) are often retained in cases involving FDA issues with the goal of helping the judge or jury understand what the regulations mean. This opinion, and others like it by other courts, may mean that courts and juries will be deprived of the chance to hear from witnesses who can help explain FDA’s regulations and put them in context. (Even FDA introduced testimony on the meaning of a custom device regulation in United States v. Endotec in April 2008. The agency eventually lost the case.)
The court did say that “[a]n advice of counsel defense might have got something along these lines in through the back door.”6 Thus, consulting with counsel might allow additional defense opportunities, although raising the defense could also waive the attorney-client privilege. In any event, the reason to consult counsel is not to aid a defense in the event of a prosecution, but to avoid ever being put on trial in the first place.
Want more? Read Jeffrey Gibbs’s Regulatory Outlook columns on drug-device combinations and FDA policies online.
Read narrowly, Caputo is about two individuals who were found to have committed serious, repeated, knowing violations and were then sent to jail for a long time. The behavior may seem so egregious as to be inapplicable to anyone else.
Read more broadly, the case touches on important legal issues: the First Amendment, the role of informal FDA communications in mitigating the ambiguities of FDA’s regulations, and the role of expert witnesses.
At its core, the case is about the facts. And yet, as extreme as the facts are, individuals in the device industry should not smugly assume that there are no lessons to be learned. Other companies have submitted 510(k)s without including negative data, marketed modified devices without getting 510(k) clearance, continued to sell devices when told to cease, or failed to report adverse events caused by the device. What makes Caputo unusual—but not unique—is that all of these factors are combined in a particularly stark fashion.
Jeffrey Gibbs is a director at the law firm Hyman, Phelps & McNamara (Washington, DC). He can be contacted at firstname.lastname@example.org. Susan Matthees is an associate at Hyman, Phelps & McNamara. She can be reached at email@example.com.
1. United States v. Caputo, 517 F. 3d 935 (2008).
2. United States v. Caputo, 456 F. supp. 2d 970, 973 (N.D. Ill., 2006).
3. FDA Talk Paper No. T98-17 (April 2, 1998), available from Internet: www.fda.gov/bbs/topics/ANSWERS/ANS00860.html.
4. United States v. Caputo, 456 F. supp. 2d 971 (N.D. Ill., 2006).
5. United States v. Caputo, 456 F. supp. 2d 982–983 (N.D. Ill., 2006).
6. United States v. Caputo, 517 F. 3d 942 (2008).
7. United States v. Caputo, 517 F. 3d 939 (2008).
8. United States v. Caputo, 517 F. 3d 941 (2008).