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

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. According to many critics, one effect of such extensive litigation has been to cripple the U.S. healthcare system by increasing malpractice insurance rates, driving some physicians out of practice, and significantly increasing the overall costs of caring for patients. Though often proposed—and just as often opposed—national tort reform that might limit court-imposed damages has yet to become a reality.

Leaders of medical device companies also 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. Winners in this high-risk area may walk away with uncontested rights and enhanced market leverage; losers are sometimes lucky to walk away with their companies intact.

Product liability suits are another significant litigation risk for medical device manufacturers. According to industry experts, plaintiffs' attorneys are increasingly seeking to identify participants to join in class-action suits that could eventually begin to rival the much-larger actions traditionally brought against pharmaceutical companies. 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? Are companies in danger of going out of business if they make bad decisions in their risk management?

Timothy J. Budacki: From the financial perspective of developing a product, companies evolve in roughly three stages. They start in research and development, transition into early commercialization, and finally get up and running commercially. Those three stages of development have different and varying risks.

I have consulted for Medrad Inc. (Indianola, PA) and more than 100 other medical device manufacturers through the various product development stages and life cycles and the financial risks associated with them. 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.

How do you put a dollar amount on risk during a product's development cycle?

Michael T. Howard: Most of our business at Medrad to date has been bridged from already-successful product concepts. As far as internal, organic product development, we haven't addressed that risk.

But, with about $400 million in sales this year, we are larger, and we are getting into that early-development stage. We now have to put a value on technology based on its future potential. In those cases, the risk is that we are paying ahead of time for the technology before we are sure a needed product can be developed for our markets.

The other area that we are getting into with this early-stage development of products relates to intellectual property. It is easier to put a dollar value on risk when you can already see how the market values the purchase of certain intellectual property. You can also better assess the potential lawsuits. However, when a company is developing a product itself, the risk is hidden.

One of the toughest things to gauge is the risk of not adequately protecting a technology, thereby exposing a company to its competitors. What is the value of something that a company does not patent? We spend a lot of time concerning ourselves with this issue. It is hard to put a dollar amount on that risk, but regardless, it plays a significant role in the future success of a company. And it sometimes goes unnoticed.

The first two issues I mentioned are more apparent to companies that are buying other companies or existing technologies. Determining the answer to the last question is more difficult: What aren't you buying? Manufacturers that focus on new products might forego an opportunity that wouldn't show up for two or three years.

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 can take a lesson from last summer's Vioxx litigation: don't bury bad news. Embrace bad news and deal with it in a way that can be explained to a jury.

Juries do not automatically punish manufacturers that encounter problems with their products. Juries can be forgiving of manufacturers that can tell their stories well. But in telling their stories, manufacturers often get into trouble. Manufacturers that are about to face juries need to identify a key employee or employees who have been with the company for some time, who know the corporate history, and who can tell the company's story from a personal perspective. Being able to tell a manufacturer's story is a challenge my firm runs into time and time again. Often, the key people involved in a product's development have long since left the company, and we struggle to find people who can tell the story from firsthand experience.

I recommend every manufacturer hire a consultant like Tim Budacki to teach employees how to write. A common problem manufacturers encounter is employees who write in lunchroom jargon. They don't write what they intend to say. We had a case, years ago, in which an employee who was somewhat of a space fanatic began every other memo with the phrase, "Houston, we have a problem." When jury members see this popping up time and time again, it creates a message that resonates with them. The jury interprets those memos as meaning that the company has serious problems. 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. The challenge for product development people is that they must work in a manner in which any person objectively looking at their work would understand it and approve of the decisions being made.

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?

Howard: Fortunately, most of the engineers coming out of school have some concept of the value of intellectual property. But there is a need for training in that area, such as mock depositions. The issues are real. Medrad is like most medical device companies; the company encounters litigation that can go on for some time.

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. We have put IP considerations on our standard checklist for the genesis phase of our product development, and we have been expanding our intellectual property department. We now have two full-time lawyers and a paralegal in IP, and that department is expanding more rapidly than the general counsel side of our business. By moving IP up front, we have given it the proper importance.

Patents in Court

If intellectual property issues go to trial and a company settles or winds up paying damages, is that indicative of some failure in a company's process early on?

Howard: Not necessarily. It could have been a difference in interpretation of the patent. For example, there is some dispute in the courts as to whether to use the dictionary definition of a term in a patent or to define a term within the patent itself. This is a problem when a patent was written eight or 10 years ago. That makes it difficult for anyone in the business to operate effectively, and that is going on right now.

But other times, a company might just honestly overlook a patent. Reputable companies rarely just close their eyes to a patent. We would never see a conflicting patent and just go ahead, hoping it doesn't catch up with us. Everybody is going to respect a patent and do his or her best when proceeding with a product in that space to design around that patent. A competitor still might contend that a design-around isn't extensive enough, but then it becomes a matter of interpretation on the part of the company or the courts.

Budacki: As an observer of medical device firms, it is apparent that some firms file patent suits simply as a way to tie up their competitor's business for awhile.

If a smaller company files a patent infringement suit against a larger company, will some large companies try to wait it out, knowing that a small company might not have the resources to see the suit through to its end?

Magratten: It does happen. IP litigation can be very complex. It can go on for a long time, and it can be very expensive. The size and resources of the opponent are factors to be considered at the mediation table.

Howard: Size and resources are factors we consider when deciding what companies we will take on in court. Manufacturers also have to consider their business relationships with other companies. A lot of the medical device companies are linked. With a large company like General Electric, both considerations might be factors. The company might be a great customer, but also a competitor that has far greater resources. When you attempt to take a major company into a lawsuit, those factors have an impact on your tactics and strategies in terms of how you negotiate.

If a company is smart, it steers clear of the really big players in many respects. That is why medical device companies are split into small niches. Our company looks for niches where it can become a significant player and gain access to a significant amount of intellectual property. That allows us to make the best products we can without tripping over other companies. We really do have a niche. Intellectual property considerations are why companies start in niches. Then the small companies get bigger, perhaps there is consolidation, and later they become part of the giants.

Is it easier to negotiate settlements when competing companies can arrange some kind of alliance or partnership?

Howard: There is some benefit to doing that. It gives a company more options. Oftentimes, when companies are trying to reach a settlement, cash isn't always what they want. Companies might want to swap technology or have freedom to market their products. Considering a partnership gives companies more options for a negotiated settlement.

Magratten: I would echo that. Any good mediator will first try to explore alternatives to a zero-sum game if there is a business solution out there. That is where you can come up with creative alternatives to proceeding with litigation.

Marketing 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. In this way the process dictates the methods used, not vice versa. Companies demonstrate the importance of a process and its relevance to employees by documenting their policies and procedures and training employees in what they expect. There are always going to be some employees who may not toe the line, but it is necessary for companies to set boundaries, much like you would for an adolescent, on what the company wants and expects from them.

What occurs, however, is that companies simply do a round of training or send their employees to an FDA-type meeting. The companies then think the employees will just continually follow the practices and procedures they learn at the seminar. In companies of all sizes, problems seem to occur when employees don't know their boundaries or the processes their companies want them to follow.

How hard is it for a company to rein in overzealous salespeople and watch over the statements that are made about its products?

Howard: Company culture is the real key. But also, it may in some ways be getting easier because of the volume of regulation in this area. From the financial and accounting disclosure requirements of the Sarbanes-Oxley Act to industry codes of conduct such as those set by the Pharmaceutical Research and Manufacturers of America (Washington, DC), as well as FDA regulations, it seems as though we are headed toward a regulated, structured process. This also applies to careless communications, such as those in internal e-mails.

Communication is becoming part of the employee orientation process. But also, due to the enormity of these issues, we are now structuring entire programs that include follow-ups throughout the years. Keeping compliance procedures top of mind is the most difficult thing. If an employee has just one orientation, the person will likely forget what they are taught. But because the task of complying with standards and regulations is so big, it is becoming an entire, ongoing program.

Employees realize now that, for a variety of reasons, they are not free to act in any manner they choose. But again, it is difficult for employees to have only one input and then have to remember, nine months later, late in the afternoon when they are tired, to act a certain way. But when they know they are part of a broader program that must comply with regulations of different kinds, they start to change their behavior.

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. We don't have a perfect solution other than to beef up our training and education of those distributors. With some of the compliance issues, in some regions of the world, it is more difficult to get them to buy into our programs and conform to certain types of behaviors. That is an area where medical device manufacturers struggle. With distributors in smaller countries, we audit them and look at general integrity. That becomes harder the further the distributor is from the core company.

Budacki: It is necessary to have a process. 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. This is an excellent control point that can complement a control process.

In larger corporations, the control process often includes a cross-functional review of literature and information. Web site marketing and advertising pieces are often put together by marketing folks or technical writers. These materials are often not compiled in the context of a regulatory review, compliance review, legal review, and risk management review. Technical writers may not have all the needed insight to pick up on things that might not be appropriate to say in marketing or promotional materials from a liability, legal, or regulatory perspective.

By putting a process into place that calls for a cross-functional review of marketing, sales, advertising, and Web site literature, manufacturers get the biggest bang for their buck.

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.

The industry largely has chosen to ignore this advice because it is finding that direct-to-patient marketing works well. That is the decision that the industry has made, but it may result in a shift in the legal standard by which manufacturers' warnings will be judged. No longer will a company's message be judged by how it is perceived by the average physician. It will now be judged by how it is perceived by the average person on the street, which is a more difficult standard to meet.

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 very little understanding about a product and its inherent risks.

Howard: At Medrad, we are still focusing our product promotions on the medical profession, and not the consumers. But it is something that we will be facing as we go forward.

Does the recent controversy involving Guidant and its failure to disclose product failures even to the professional community weaken the learned intermediary defense?

Magratten: The learned intermediary doctrine is not a silver-bullet defense. It refers to the standard of care in issuing warnings. Learned intermediary states that the court's perspective will be that of the physician. If a company is not giving the treating physician relevant information, that opens the door to liability.

Internal Controls

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

Budacki: There are a couple of things that can be done. I'll use Medrad as an example. In the past year, the company has organized a compliance organization, and compliance doesn't mean just compliance with FDA requirements. It is compliance with internal programs, quality, safety, product promotional activities, along with the company's code of conduct, with Sarbanes-Oxley initiatives, all the way down to compliance with the defined product development process.

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.

From the financial risk and insurance standpoint, we have been working closely with Medmarc (Chantilly, VA) for several years. Tim has done a great job working with them. If issues do come up, we try to address them promptly. Addressing incidents as promptly and forthrightly as possible is a way of mitigating financial risk. Learning from mistakes and adjusting and improving systems in response to these incidents are also important steps to take.

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: There is no doubt in my mind that the more money a company spends on Budacki, the less money it will have to spend on Magratten.

Litigation is all about telling a good story, and if a manufacturer writes a good story at the beginning, it has a much easier job communicating that story to the jury.

This brings me back to my basic theme: jurors are willing to forgive manufacturers that they perceive to be comprised of human beings who make mistakes from time to time—as long as those mistakes are dealt with properly. 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 way over the jurors' heads. The jurors don't get it. They are confused by the corporation. 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.

Everybody in the medtech industry acknowledges that there is no medical device for which there is no risk. Do juries start with an opposing set of assumptions that are difficult for medical technology companies to overcome?

Magratten: That is true to a degree. You have to remember the context in which litigation frequently arises. Litigation begins with someone who has been injured, and someone is trying to draw an association between the injury and a company's product. Jurors will be naturally sympathetic to the injured plaintiff, so the manufacturer at trial is disadvantaged from the beginning. It must tell its story and show that it has developed its products in a proper way.

A key aspect is getting the jury to understand the rigors of FDA regulation and what the manufacturer has to do to satisfy FDA requirements. Once they understand that, they can appreciate that medical devices by their nature carry certain risks that cannot be eliminated. The risks are there, and the issue becomes whether the manufacturer dealt with those risks appropriately.

Issues such as the Vioxx case or Guidant's recent problems put pressure on Congress to revise laws. And then Congress puts pressure on FDA to change its policies to exert more pressure on the manufacturers. How do companies respond to that?

Howard: In general, we would like to see some relief on the litigation side in terms of the settlements. Establishing lower dollar awards for product liability claims would encourage fewer frivolous lawsuits. All the device companies would be united on that. It is expensive in this country to defend a company against even a frivolous lawsuit. And a company can potentially be bullied into a settlement on a matter that doesn't merit a settlement because of the cost of defense.

The United States doesn't have regulations in place to discourage these lawsuits. Most medtech manufacturers in this country sell all over the world, and this is the only nation where this type of litigious situation exists. There is almost no product liability action anywhere but in the United States, yet worldwide we sell the same products and take the same quality manufacturing steps. That is a frustrating situation for medtech manufacturers.

Budacki: When a device company is brought into litigation, its executives are usually surprised. And that is because most of them operate under a big misconception: they think compliance shields them from litigation. They have instituted all of the required FDA programs—the quality system, the validation controls, a bona fide product development and device history system of recordkeeping. In virtually every case in which I have been an expert witness, the companies have been in compliance with FDA requirements. But there is a disconnect in the companies between FDA compliance and liability prevention, and frequently engineers and executives don't understand that compliance is not risk prevention. Engineers who develop products are focused on making the products work, making them reliable, and being able to make and develop them at an economical price. They mistakenly believe they will avoid lawsuits simply by complying with regulations, and that is not the case. Therefore, it is necessary to train them in the other areas where liability and litigation can develop, as well as ways it can be prevented.

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.

Here again, the manufacturer has a disadvantage. Every client that I have known has wanted to parade all its various aspects of regulatory compliance in front of the jury, which is fine, but it is going to put the jury to sleep. 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.

Companies occasionally go awry by following a regulatory standard for risk assessment like a punch list. And then they hope that punch list will protect them. But at the end of the day, risk assessment requires making judgment calls about safety. Companies have to judge the safety of the product, and that is where things get a little screwy. Companies don't necessarily want to do that, and frequently they don't do their homework.

In any risk or hazard assessment, it is necessary to conduct a worldwide literature search before beginning the risk evaluation. Manufacturers have to know what is going on with their competitors and what else is out there in the world in regard to product safety and innovation that may be used against them. As companies develop and become leaders in niche markets, they're expected to know all that is knowable about the potential hazards and risks of their devices.

If you do all of those things, then insurance is simply a backstop. It is the belt-and-suspenders approach. Medrad has been with its product liability insurer, Medmarc, for about a dozen years now. I don't believe that Medmarc has ever paid any claim in excess of Medrad's deductible or self-insured retention. That is a quite an accomplishment. In fact, during the review process for the Malcolm Baldrige National Quality Award, that was an accomplishment the evaluators highlighted: a good product safety track record.

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.

It is a mistake for a manufacturer simply to go to the low-cost provider. If a company is a specialty manufacturer, such as a medical device manufacturer, it needs to find an insurer that has years of experience in that particular industry. The insurer needs to have managed the type of litigation the company is likely to face. There is no substitute for that type of experience.

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%.

At the same time, both state and federal courts have become much more aggressive in pushing alternative dispute resolution. It is not uncommon now for judges and courts to require the parties to first exhaust all options—mediation, nonbinding arbitration, settlement conferences—before bringing in the jury. And that approach has been very successful in reducing caseloads.

Worst-Case Scenario

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

Magratten: I wish we could go back to the days of Mission Impossible, when the message would self-destruct after five seconds. For litigators, e-mails are a treasure trove. E-mail communications give a real view into the soul of the witness because they are often not edited. There are misspellings in e-mails, and they give the reader a glimpse into what was truly on that person's mind. Unfortunately for the defense, people tend to speak much more freely and without a great deal of thought when they communicate by e-mail. This is especially true when there is a crisis.

People need to understand that e-mails often live on and can be distributed far beyond the audience they intend. The more time a company spends training its employees on the importance of good corporate communications, the better off it will be. Frankly, jurors don't care very much about corporate manuals or employee handbooks. What captures the jury's attention is that one e-mail written in haste and blown up on a big screen. And that is the message the jurors take into the deliberation room.

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?

Budacki: To be awarded punitive damages, a plaintiff must have overwhelming evidence of some misdeed or misbehavior on the company's part. Putting in place compliance systems and codes of conduct that can be checked and audited, as well as establishing boundaries for your personnel in the field, can eliminate the potential for punitive damages. Unless the company really did something terrible and tried to cover it up, like an Enron situation, product liability cases have a tendency not to involve punitive damages. With the guidance of regulatory requirements, medical device companies are trying to do the right things. They are trying to develop quality products, and putting systems in place helps support that.

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

It may be less of a concern now than it was five years ago, however. 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.

Historically, the Supreme Court has been reluctant to get into the business of regulating punitive damage awards from any quantitative perspective. That changed in 2003 with a decision called State Farm v. Campbell. The Supreme Court for the first time began talking about appropriate multipliers for determining which punitive damage awards would not offend constitutional principles. That decision has been called a sea change in punitive damages jurisprudence. This decision gives trial courts more concrete guidance in rendering punitive damage awards. The case says that a single-digit multiplier between the actual damage award and the punitive damage award may pass constitutional muster, but some of the wild awards we were seeing in the late 1990s and around the turn of the century probably will no longer pass constitutional scrutiny.

The traditional figure is triple the actual damages for punitive damages, but even that can be many millions of dollars.

Magratten: I'm not sure how much magic there is to tripling the damages. You can find cases that talk about doubling, tripling, quadrupling. There have been decisions in which punitive damages have been 500 times the actual damages award. But the Supreme Court is sending the message that really a low single-digit multiplier is appropriate, or at least would pass constitutional muster.

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.

If insurance does not cover punitive damages, is a company's best strategy to take care of litigation up front?

Budacki: I believe so. In a courtroom, companies are telling a story. If they tell a story of all the positive things they did to prevent people from doing inappropriate things, they reduce the amount of overwhelming evidence that can be used by a plaintiff's attorney to prove that punitive damages are warranted to punish the company.

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. That is the best way.

A company's whole approach to risk mitigation should be a reflection of the culture of the company. Most medical device companies, even our tough competitors, are really trying hard to make quality products for the customer. But manufacturers have to translate that into a program. That is not to say that if a company gets into a tight spot that it should just fall back on its programs and assess them ad nauseum. However, set programs are the reason Medrad's president and I can sign off on our Sarbanes-Oxley attestation. That says we have a system in place.

FDA wants a system. System, system, system, process, process, process. That is the best way. 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.

There are incidents that come up here or there in which a company can't even do error analysis. At the broadest level, there have to be programs to minimize those instances. And that minimizes the financial exposure of the company. Most of this discussion has been focused on product liability, but the issues surrounding IP are even bigger. And the approach is the same. Companies must have a system, a process, an organized manner of revealing IP early in the process. When a company is developing a product or a technology, it must be diligent about following it through. And it should work on improving the communications of the engineers, which, again, is process, process, process.

Is an emphasis on process a major part of the Baldrige award criteria?

Howard: That is the killer question you are asked when being evaluated for Baldrige: How do you know? How do you know that by applying a certain process you are reducing the chance of financial exposure? Well, you know because you have put it in place. The only way to know is to put a process in place and then be able to measure it. Then you take those measurements, examine what they can teach you, and feed improvements back into the system. Having these so-called closed-loop systems is Baldrige in a nutshell.

It is the same thing with compliance and ethics. Compliance programs are how you know the system is functioning properly. The world is reasonably rational. Sometimes the compliance programs can get a little bureaucratic in the short-term, especially when new legislation is put in place and companies aren't yet clear on the limits of the regulations. But these programs are all good. They contribute to the quality of the products, and they reduce the incidents in favor of the consumer, who in our case is the patient.

Magratten: Here 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.

I take it you don't feel that you are in danger of being out of work?

Magratten: No. There is still plenty of litigation around. Product liability litigation overall is not quite as prevalent as it was 10 or 20 years ago. Plaintiffs' lawyers are moving away from single-plaintiff cases toward more class-action litigation. That is where the money is. More product liability litigation is being concentrated in class actions, but overall there is still plenty of litigation.

Tim, what are you going to do to put Brooks out of work?

Budacki: In my almost 30 years of consulting with medical device firms, I've identified some very simple things companies can do to further demonstrate to the courts the steps they take to minimize risk.

Look at the number of companies that issue quality statements as required under ISO and quality-system standards. Look how carefully worded they are. But they rarely make a statement about product safety or patient safety or both. They simply talk to how they are going to comply with regulatory requirements.

I have seen plaintiffs' attorneys use those statements against companies. They might ask a company's chief executive how he conveys what he wants and expects in relation to product safety. Then he will read to the plaintiff or redirect the attention toward the quality statement, but that quality statement will say very little about patient or product safety. So one of the things companies can do is to make sure that quality statements include provisions for product and patient safety.

Also, 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. When I conduct training to this effect, I always use the "Houston, we have a problem" e-mail as an example. Things like this are done more frequently than you can imagine. Document management and retention becomes a key issue for companies, and they are not aware of how these issues can hurt them.

Magratten: This is a good suggestion for any manufacturer, particularly those getting into a new product line: assemble the company's litigation team before litigation actually hits. The plaintiff's side has the luxury of time in terms of doing its research and getting up to speed on a particular product and company before filing suit. Once litigation papers arrive on an executive's desk, the company often has only 20 days to file a response. Then the suit is off and running. And for some manufacturers, that is the first time that they have ever thought about hiring an outside litigation firm or an outside expert. So already at the beginning of the case, they are on their heels, trying to catch up.

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.

Budacki: Companies will spend enormous amounts of money and time simply educating their defense lawyers about how the product works. If the company can do that up front, it is extremely helpful.

So you won't be out of work no matter what, Brooks.

Magratten: I like to think that.

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