Litigation Law Alert: What Companies Need to Know as FDA Warning Letters Allege "Misleading Ads" for "Lap-Band" Surgeries - and California Regulators Take Notice

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Recently, the U.S. Food and Drug Administration ("FDA") for the first time issued warning letters to marketers of gastric weight loss band devices in California. The FDA is concerned that the companies' ads violate federal regulations by potentially downplaying the risks and complications of specific weight reduction surgeries.

Regulators in California's Department of Insurance, likely among other state regulators, took notice of the FDA's warning letters. The fact is, California consumer enforcement actions appear to be on the rise in recent years. These investigations and lawsuits commonly allege claims of false and deceptive advertising by companies that sell their products in California, and are pursued under California's unfair competition and false advertising laws (referred to as the "UCL"i and "FAL"ii ). These state consumer protection enforcement actions are in many ways just as threatening, time-consuming and costly to a workforce and product line as federal inquiries. Because state enforcement proceedings may not be at the fore of a company's compliance initiative, it is helpful for companies to have some preliminary understanding of the mechanics involved with them.

What California Regulatory Concerns Flow from Federal Enforcement Action?

State enforcement actions can and do arise out of federal enforcement activity that is as preliminary -- and as limited -- as the service of a warning letter. Experience tells us that even if a company dispels a federal regulator's concern by offering the right documentation, the proverbial "bell has been rung" from a state enforcement perspective. Federally regulated product manufacturers that sell products in California should take notice of federal enforcement events because California enforcers are watching -- and they don't necessarily focus on the reality that a federal inquiry never proceeded beyond the letter writing phase.

FAQs of Companies Faced with State Enforcement Action

Below are answers to questions that frequently arise when a company not previously subject to state regulatory action receives an administrative enforcement subpoena:

Q: Are administrative subpoenas and letters requesting ad information effective against my company when no lawsuit has been filed?
A: Yes. California Government Code Section 11181(e) gives prosecutors authority to issue administrative subpoenas to investigate unlawful or fraudulent business practices without filing a lawsuit.iii A company must respond to administrative subpoenas and letters requesting the bases upon which advertising claims were made.iv

Q: Do county district attorneys really have the authority to investigate and bring an enforcement action against my company in the name of the "People of California"?
A: Yes.v The bigger question is whether the settlement of a case between a county prosecutor and a company binds the whole state and prevents the Attorney General's Office from later suing the company over the same issue. Experienced outside counsel may help companies evaluate this concern, if it arises.

Q: Can a county prosecutor discover advertising and company financial information that's not limited to her or his county?
A: Yes. The UCL and FAL are "equitable in nature" and therefore take into account broad matters including the number of violations, the "nature and seriousness of the misconduct," and the "persistence of the misconduct." Prosecutors in a lawsuit can also discover evidence of a company's financial condition to evaluate potential penalties for "misconduct."vi

Q: If the state is complaining about one advertisement in one newspaper, does that count as one potential violation or more?
A: It counts as more than one violation, and the state may argue (unreasonably) that it counts for almost as many violations as the newspaper has subscribers.

Q: What are the "remedies" available to the government?
A: Injunctive relief enjoining the company from engaging in deceptive or false advertising or unfair or unlawful business practices is the primary UCL/FAL remedy. Civil penalties also must be awarded if violations are found, in an amount of up to $2,500 per violation. The civil penalties are cumulative, meaning that one act violating both the UCL ($2,500) and the FAL ($2,500) could result in a $5,000 penalty. While the court is not required to award restitution if a violation is found, prosecutors may pursue restitution, aiming to return consumers' money that was obtained through unfair or unlawful practices. The government may also pursue other amounts, like attorneys' fees, in certain cases.

Q: How do these cases normally resolve?
A: The overwhelming majority of these cases settle short of a trial. Many resolve by way of a consent judgment and settlement agreement.

Q: Do companies really pay $2,500 per violation?
A: A $2,500 per violation penalty would be very rare, if not a first. Because these laws are equitable in nature, "aggravating factors" like the seriousness of the misconduct may be mitigated by other evidence, such as the company's attempts to comply with the law, the company's level of cooperation with regulators or prosecutors or evidence that reasonably explains why the company engaged in the conduct at issue. Further, the fact that most companies are willing to resolve matters short of trial is usually another factor that justifies a downward departure from potential penalty amounts. Moreover, there are constitutional limits on the amount of civil penalties that can be awarded.

How Do State Enforcement Actions Progress? How Can a Company Reduce the Risks Presented by Enforcement Issues?

No one has a crystal ball, but among the first items a company will be asked to produce in response to an administrative subpoena are company policies related to document retention, literature or studies that offer substantiation of the exact claims made about the product in advertising, and all copies of ads run on the Internet, radio, television and billboards, or in the mail, newspapers or brochures in California. Remember that although a webmaster may be located outside of California, Internet advertisements aimed at sales in California are viewed as fair game in these enforcement actions.

With these observations in mind, keep accessible your company's current document retention policy and ensure that documents related to advertising are organized and maintained consistent with the policy. Your company should also prepare itself for the likelihood that state enforcers will seek electronic documents related to advertisements.

Advertising-related materials that should be maintained and easily accessible include documents related to marketing clearances or approvals by regulatory agencies, drafts and finals of labels and advertisements related to all products, studies and literature that substantiate the exact claims made about products in advertising, and sales data related to products advertised in California. Having these documents readily accessible does not just help your company comply with a subpoena; it can afford your company additional time to review materials and appreciate their best application to an investigation (especially in defense or mitigation).

Take All Agency Inquiries Seriously and Respond Timely and Professionally

Administrative subpoenas that initiate consumer protection enforcement investigations may seem unfamiliar and perhaps less formal, but ignoring them could lead to additional problems and encourage the filing of litigation. Investigations may take years before they resolve. Non-responsiveness never results in the matter "just going away." Responsiveness and professionalism in your communications with an enforcement officer may make the investigative process resolve itself more quickly and more favorably.

Finally, your company is not required to retain experienced counsel to respond to a subpoena or letter inquiry on its behalf, but doing so is sometimes a good idea. Among other things, experienced counsel can preserve valid objections to the subpoena, advise on issues of confidentiality and privilege, or highlight favorable law or facts that would defeat an accusation or undercut penalties if a judge were to consider those issues.vii As a bonus, experienced counsel may be familiar with the team leading the agency's investigation and its method of investigation and resolution strategies.

For more questions or more information regarding the content of this alert, contact Thomas Woods or your Stoel Rives attorney.
 


i Cal. Bus. & Prof. Code § 17200, et seq.
iiCal. Bus. & Prof. Code § 17500, et seq.
iiiArnett v. Dal Cielo, 14 Cal. 4th 4, 8 (1996).
ivCal. Bus. & Prof. Code § 17508(b).
vCal. Bus. & Prof Code §§ 17204, 17535, 17536.
viCal. Bus & Prof. Code §§ 17206(b), 17536(b); People v. Superior Court, 35 Cal. App. 3d 710, 713 (1973).
viiCal. Bus. & Prof. Code §§ 17206, 17536.

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Thomas A. Woods
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