Medical Device Link.

Originally Published MX January/February 2006

GOVERNMENTAL AND LEGAL AFFAIRS

For medtech executives, avoiding costly litigation and court-imposed damages requires extensive forethought and serious defensive measures.

Moderated by Steve Halasey

For medtech executives, avoiding costly litigation and court-imposed damages requires extensive forethought and serious defensive measures.

The United States is an infamously litigious society in which the deep pockets of corporate entities are often turned inside out for a variety of causes, some plainly just and some of questionable merit.

Leaders of medical device companies often feel the pinch of litigation, which may come from a variety of sources—including other companies in the industry. Over the past decade, litigation over intellectual property (IP) rights has affected large and small medtech companies alike, forcing many to pay extensive damages—including punitive damages—and to negotiate licensing and royalty structures on decidedly unfavorable terms.

Product liability suits are another significant litigation risk for medical device manufacturers. Although medical device companies typically reach out-of-court settlements to resolve liability actions, the amounts of such settlements can be steep and, in some cases, potentially company-crippling.

With their companies' reputation and financial well-being on the line, medtech executives need to plan carefully to minimize the risks associated with such litigation. To find out more about these risks—and how companies can avoid them—MX recently spoke to three experts in the field (see sidebar). In this excerpted roundtable discussion moderated by MX editor-in-chief Steve Halasey, these industry experts review some of the key areas in which medical device companies are vulnerable to litigation that can significantly damage their financial status—and even threaten a company's continued existence.

MX: What is the magnitude of the financial risk that companies encounter during the product development life cycle?

Timothy J. Budacki: During the R&D stage, assessment of the clinical and product risks is crucial. Identifying the hazards and the quality systems that will control those hazards is most important during early product development. During early commercialization stages, companies must accept the risks associated with products and prepare to defend themselves against potential claims. In short, companies transition from an offensive perspective in early development to a defensive perspective following commercialization. Financial risks associated with product design and development trail along with those development stages.

Are most of the financial risks that companies face related to product development and intellectual properties?

Brooks R. Magratten: In strict product-liability litigation, product development is a story that pops up in just about every case. It's something that companies have to learn to deal with better than they have been.

I will throw out a few helpful hints for any company developing new products. One is to assume that every piece of paper produced during the development process can go in front of a jury. The manufacturer should be able to explain each piece of paper, and each piece of paper, on its face, should tell the story that the manufacturer wants it to tell.

Manufacturers need employees who, instead of writing memoranda that say, "My gosh, we have a problem," will write things like: "Here is an issue with the product. Here are recommended steps we can take, and here is how we can go forward." So a simple step, like teaching your employees how to write better and more clearly, can go a long way.

One last tip would be to put newer engineers and product development personnel through mock depositions. Many employees who are just coming out of school have not yet been deposed. They don't know what that experience is like. Once you have been through that fingernails-dug-into-the-upholstery experience, it changes your perspective and the way you approach your work.

How seriously do companies take the risks of eventual litigation when they begin developing products, and how do they educate their employees about those risks?

Michael T. Howard: At Medrad, we have an advanced development group that, whenever the company considers entering a new area, spends time looking at the technology and the IP minefields that are often out there. When we enter a new area, we make it a priority from the start to be thorough in this review of the IP landscape. Thoroughness in evaluating potential IP pitfalls is important whether a company is evaluating an acquisition or developing new product ideas.

Controlling Risk

Are companies sensitive to the risks attached to the sales and marketing of their products?

Budacki: Most companies have been sensitized to this issue due to the amount of concern expressed by FDA and the amount of litigation in which marketing and sales literature enters the litigation. Problems occur when companies don't establish boundaries for their employees, particularly for those who serve outside functions, such as field service, clinical application, sales, or marketing. An employee may sit through a training program, but that training may or may not be absorbed. However, if a company puts together a code of conduct and a process that they want their people to follow, the organization is better protected.

How hard is it for a company to control the actions of outside agencies, such as investor or public relations firms?

Howard: There may be less concern for that in the medical device industry than in other industries. We don't use the advertising medium as much. We use trade shows, and, for most of our products, customers receive the authoritative information through personal contact with sales reps or by coming to our Web site.

We do use distributors, and we have had some issues with them. Those issues remind us that we don't have direct control over distributors, and that remains a difficulty.

Budacki: When distributors, vendors, suppliers, consultants, and even board members enter the picture, they often want to be indemnified in some fashion. A control point for a manufacturer is not to give away that indemnity without some commitment from those outside the company that want to do business. For example, manufacturers can require their distributors to be trained in the same fashion as their internal personnel.

Magratten: There is another aspect to this that we really haven't touched. Historically, drug and device makers have been protected by the learned intermediary doctrine. This means that, in court, a company's warnings and what it says about its products are measured not by what the ordinary consumer thinks or comprehends, but by what the prescribing physician comprehends. For the last decade or so, attorneys have been warning their drug and medical device manufacturing clients that once they reach out to the popular media and target their advertising directly to consumers, they risk losing that defense.

How often in court do statements that a company makes about its products, such as those on consumer Web sites, come into play?

Magratten: The better plaintiffs' attorneys that I know begin their case preparation with a visit to Google or Yahoo to see what is out there—both what the manufacturer has said about the product and what consumer groups or other entities have said about the product.

Does that consumer angle increase the magnitude of a company's financial risk?

Magratten: It may. Under a learned intermediary doctrine defense, companies could possibly justify not giving certain warnings because the particular risk may be well known in the medical community. Once a company loses that defense, it is judged based on the adequacy of its warnings and promotions from the perspective of the common consumer. The common consumer is not educated about medicine, does not have a Physicians' Desk Reference, and may have little understanding about a product and its inherent risks.

There are several kinds of due diligence that a medtech manufacturer needs to have in place. How can companies approach this?

Budacki: Part of the solution for firms in controlling risk is to put processes in place, particularly processes that bring a cross-functional view of potential problems and risks at hand. Then companies have to teach their employees what the risks are and how to manage them. A great deal of this is awareness from a legal and risk perspective. In medical device firms, everybody is working so hard and running so fast that there are only so many things they can absorb. As medical device and life sciences firms of all types evolve and grow, the appropriate thing to do is to develop processes that help employees understand potential business risks so those employees can help themselves.

Some companies have established a C-level executive position for a corporate governance officer, who is responsible for those kinds of functions. Whose responsibility is that at Medrad?

Howard: About a year and a half ago, we established a separate senior vice president position for compliance. That person is a peer of mine, reporting to the CEO. Establishing that position lifted a burden off of my shoulders, for sure. And the position gives a single person the ability and independence to coordinate different programs: ethics programs, hotlines, various compliance programs.

From a defense standpoint, developing a position like this strengthens our position in court. It shows that we are doing everything possible to set up the programs and processes to avoid issues that could result in financial risk because we are applying great diligence. Compliance is important to us, and we want it. But companies must also have the business processes to support these inner desires. They must do everything in a controlled manner that results in safe and efficacious products.

Jury Duty

If a company can show that it is doing everything corporately possible to resolve issues and eliminate hazards, how does that play in the courts?

Magratten: Juries need to understand a manufacturer and how it does its business. Manufacturers get into trouble when the story doesn't get across clearly to a jury. They bring in experts who talk over the jurors' heads. The jurors don't get it. They don't understand why the corporation made the decisions it did. Again, if a company can write the story correctly the first time, it will do a lot better in the litigation that may follow.

Budacki: In my experience as an expert witness, jurors really don't understand the medical device industry. What they understand is how people behave. There are many things that can work in a company's favor: developing an ethics program, having a code of conduct, being able to demonstrate compliance with those programs, training people to respond to problems, having systems in place to help identify risks and correct these problems. Juries can accept that mistakes are made. But what they can't accept is when companies are trying to hide things or dance around mistakes with lawyers who can talk a mile a minute. Jurors get bored, but they aren't stupid. If a company just simply states in one or two sentences what it did to prevent this kind of behavior and activity, it works wonderfully and is very believable.

Magratten: Regulatory compliance puts the jury to sleep. Regulatory violations wake them up.

Would you rather have a jury that is asleep or one that is wide awake?

Magratten: I would love to parade a company's regulatory compliance in front of the jury, but I would run the risk, particularly on Thursday afternoon at 4:00 p.m., that their eyes would glaze over.

In the end, I'm not sure that issues of compliance connect with a jury. On the other hand, the plaintiff's attorney only has to point out one regulatory violation, and the jury will remember that.

The Role of Insurance

Can companies rely on their insurance coverage to handle these financial risks?

Budacki: In controlling risks and hazards, insurance should be a company's last bastion of protection. Companies have to be able to demonstrate that they did all that was necessary and reasonable to detect and assess those risks to prevent liability. This is especially important because most insurance policies contain provisions that specifically exclude coverage in the case of intentional acts that might result in harm or in legal penalties. For example, companies can't blatantly disregard FDA regulations and then expect their insurance companies to pick up the tab when the agency levies fines.

Magratten: Many manufacturers look at insurance as a product, which may not be the best strategy. They should be looking at insurers as partners for dealing with risk. The more financial risk the insurer assumes, the more likely the insurer will take the lead in terms of when to have settlement discussions, what should be said in those discussions, and if and when a case should be settled. It is important, therefore, for the manufacturer to understand early in the relationship exactly how litigation will be handled and who will have what say in this partnership.

As far as the settlement issue goes, when I began practice about 20 years ago, something like 20% of civil filings proceeded to trial. But with juries awarding greater and greater sums, sometimes including very large punitive damage awards, companies are becoming less and less inclined to take a suit all the way to trial. Today, the percentage of civil filings that go to trial where I practice is down to less than 5%.

Worst-Case Scenario

When things go horribly wrong, how well do companies in general handle their communications?

Budacki: From an operational perspective, companies must have a predetermined plan—prior to the material hitting the fan—for bringing key people together to respond to a crisis. That plan can simply be identifying who needs to come together and what needs to be said. Companies need to simply release some information immediately that says, "We are investigating. We will get back to you at 5:00 p.m. with another statement." That gives the company some time to investigate, to develop the facts, and to present them in a way that is truthful and able to be validated by outsiders. But frequently companies don't have a defined crisis-response plan. They tell outsiders that they will issue information at a certain time, and they frequently don't get back to them. Companies must keep in mind that reporters and regulators are just trying to do their jobs. By making it easy for them, companies help themselves in a trying situation.

When everything goes wrong, one of the big fears for medical device companies is that a case will go to trial and the court will award punitive damages. This has happened in numerous intellectual property cases, but, according to Medmarc, punitive damages are rarely awarded in a medical device liability case. Are punitive damages a real fear? How can companies protect themselves against them?

Magratten: Are punitive damages a fear for medical device makers? Yes. They have been, and to some extent they always will be.

When discussing punitive damage risk, the issue partly depends on the region of the country in which a case arises. Punitive damages are awarded more frequently in the Gulf Coast region, California, and some other urban areas.

What is the relationship between insurance companies and punitive damages?

Magratten: Some insurance policies purport to cover punitive damage awards and some do not, but companies that rely on insurance policies that are silent about coverage for punitive damages may be courting danger. There is variation from state to state about whether insurance coverage is allowed for punitive damages, and many of the most-populous states—including California, Florida, Illinois, New Jersey, New York, and Pennsylvania—prohibit carriers from insuring against punitive damages. In those states, no insurance carrier is permitted to reimburse a company for any punitive damages awarded by a jury. The theory is that punitive damages are intended to punish the wrongdoer. And insurance thwarts the sting of the punishment. But how that conflict is addressed varies from state to state.

Planning Ahead

What steps should executives take to mitigate the financial risk in their companies?

Howard: I support the idea of insurance as a last resort. Risk mitigation requires executives to take a programmatic approach. Having C-level executives in charge of compliance can help develop this approach. Companies should promote visible training and awareness of compliance ethics, as well as hotlines throughout the system. Companies need to put a focus on mitigating risk. They need to have it as part of the mission of the company.

Companies need to take the approach of managing risks properly, learning from incidents that do arise, and being sincere and forthright about their processes.

FDA wants a system. System, system, system, process, process, process. No matter how many bright people a company hires, if it doesn't have a system and a programmatic approach, it will come up short.

Magratten: An ounce of prevention is worth a pound of cure. The more resources devoted toward good product development, good corporate communications, and tight controls on processes, the more a company will reduce its litigation risk. This will also better arm the company to defend itself when product liability litigation arises down the road.

Budacki: As companies put their processes in place, they need to establish cross-functional lines of communication between the various units and departments of the company. When a situation occurs in the field, rarely do companies have a reactive system to conduct a product safety review. Many companies in the medical device and drug fields simply believe that compliance is going to help them with these issues. But when litigation occurs, the compliance activity is frequently used against them, especially if they've had any past problems with FDA.

Lastly, device companies must continuously educate their staffs. They must be educated about the things they write—like that e-mail an employee wrote this afternoon that may show up two or three years from now on the evening news or in a courtroom. Manufacturers need to start discussions early with local counsel or a law firm that can handle their litigation on a national basis. Get the lawyers educated on the company's product line. Start developing experts who know the company's product line, product development process, and people. These experts should be able to come in and testify on the company's behalf wherever necessary.

Company executives who have taken these steps, when that lawsuit lands on their desk, will already have a team ready to go and run with it.

Copyright ©2006 MX