We’ve often discussed the power of preemption defenses to section 75-1.1 claims. Preemption is also a crucial issue in pharmaceutical and medical device litigation, as the federal Food, Drug & Cosmetic Act (FDCA) has been held to preempt a wide variety of products-liability and consumer-protection claims. Consumer-protection statutes like section 75-1.1 play an increasing role in drug and device marketing litigation, as well.

FDCA preemption most often arises in personal injury lawsuits involving drugs and medical devices. A recent opinion by Chief Judge Martin Reidinger of the United States District Court for the Western District of North Carolina demonstrates that preemption can be a potent defense in commercial disputes between competing drug and device businesses, too. The decision also offers insight on how the timing or volume of product sales can impact a claim for unfair or deceptive trade practices.

Competition Heats Up in an Untapped Medicine Market

The case we are discussing today is about a medication called L-Cysteine, which is used for pre-term or low-weight newborns and people with severe liver disease. Sandoz, Inc. made an L-Cysteine medication that was approved for sale in Canada, but not in the United States.

In 2014, there were no FDA-approved L-Cysteine medications in the U.S. This led the FDA to declare a drug shortage. Even though Sandoz’s product was not FDA-approved, in 2016, the FDA allowed Sandoz to sell its L-Cysteine drug in the U.S. to combat the shortage. To do this, the FDA sent Sandoz a memorandum of discretion, in which it said that it would not bring an enforcement action if Sandoz sold its L-Cysteine medicine in the U.S.

The FDA’s decision had several strings attached, chief among them a requirement that Sandoz distribute a “Dear Healthcare Provider” letter explaining the L-Cysteine shortage and the lack of any FDA-approved L-Cysteine medicines. The FDA reviewed and approved this letter before Sandoz began selling its product in the U.S.

In 2017, Exela Pharma Sciences, LLC began trying to develop an L-Cysteine product with low aluminum levels. Aluminum contamination is a common problem with L-Cysteine medications and can lead to serious complications. The FDA approved Exela’s L-Cysteine product in April 2019. Exela’s product has a much lower aluminum content than Sandoz’s L-Cysteine medicine. By the end of May 2019, Exela had manufactured enough of its FDA-approved L-Cysteine product to meet the entire U.S. market demand.

In late June 2019, the FDA approved a six-month extension for Sandoz to continue selling its L-Cysteine product. Importantly, that extension required Sandoz to continue sending the “Dear Healthcare Provider” letter that said, among other things, that there were no FDA-approved L-Cysteine products in the U.S. This statement was inaccurate, as the FDA had approved Exela’s product several months earlier.

Shortly after its product received FDA approval, Exela began trying to force Sandoz’s product out of the U.S. market. It asked the FDA to declare an end to the L-Cysteine shortage and revoke Sandoz’s permission to sell the product. Exela also asked Sandoz and its parent company, Novartis, to stop selling the product in the U.S.

In September 2019, the FDA declared an end to the L-Cysteine shortage and asked Sandoz to stop importing its product. Sandoz was still allowed to sell its existing U.S. inventory. Exela claims that after its drug was approved by the FDA, some healthcare providers were purchasing up to a year’s supply of Sandoz’s product. In October 2019, the FDA ordered Sandoz to stop selling its product immediately. Sandoz complied.

Exela sued Sandoz in early November 2019, seeking a temporary restraining order requiring Sandoz to recall and remove all of its L-Cysteine medicine from the U.S. market. Exela also asserted claims for unfair or deceptive trade practices in violation of section 75-1.1, tortious interference, and false advertising and unfair competition in violation of the Lanham Act.

Preemption Principles

After the court denied Exela’s request for a temporary restraining order, Sandoz moved to dismiss the entire case, claiming that the case was preempted and barred by the FDCA.

There is no private right of action under the FDCA. Only the federal government—most often through FDA enforcement actions or criminal prosecutions—has the authority to enforce the FDCA’s provisions and implementing regulations. Thus, private parties cannot assert direct, federal claims for violation of the FDCA.

Over the last twenty years, the U.S. Supreme Court has issued several significant decisions explaining how the FDCA and its related regulations preempt state-law claims concerning pharmaceuticals and medical devices. Chief Judge Reidinger distilled several key principles from these decisions.

• First, the FDCA preempts state-law claims that are expressly premised on violations of the FDCA. If, for example, a plaintiff seeks to assert a per se section 75-1.1 claim based on an alleged violation of the FDCA or its related regulations, that claim is likely preempted.
• Second, state-law claims that depend on the FDCA or its regulations “as a critical element” are likely preempted, as well.
• Finally, claims that necessarily second-guess or take aim at FDA decisions are strong candidates for preemption.

FDCA Preempts Claims that Second-Guess the FDA’s Decision to Allow a Drug on the Market

Chief Judge Reidinger then applied these preemption principles to the different types of conduct that Exela claimed ran afoul of section 75-1.1’s prohibition on unfair or deceptive trade practices.

First, Exela argued that Sandoz’s U.S. sales, including their timing and volume, were unfair or deceptive. Exela claimed that Sandoz sold an “illegal” or “unsafe” product that was not FDA-approved, “stuffed distribution channels” and “oversupplied” its customers after Exela’s L-Cysteine medicine received FDA approval, used its “market power and reach” to “block” customers from buying Exela’s product, and unfairly sought an extension of the FDA’s permission to sell its product after the FDA approved Exela’s drug.

Chief Judge Reidinger concluded that these claims, in essence, were second-guessing the FDA’s judgment to allow Sandoz to sell its product during a drug shortage. If allowed, Exela’s claims would force Sandoz into a Hobson’s choice: leave a market in which the FDA said that it could operate, or face tort liability for the simple act of selling its product. After all, Sandoz “imported, marketed, and sold a product that it was permitted by the FDA to import, market, and sell, and in quantities that did not exceed that permission.” The court concluded that claims premised on the fact of those sales were preempted.

Second, Exela claimed that Sandoz should have warned its customers that its product had a much higher aluminum content than the level that the FDA required Exela’s product to meet for permanent approval. Exela urged that Sandoz should have told its customers “the difference in aluminum content between the two products.” The court observed that these warning-based claims simply disputed the FDA’s decision to allow Sandoz to sell its product with approved warnings. Thus, preemption barred Exela’s warning-based claims.

Sending Customers an FDA-Approved Letter with an Inaccurate Statement? Also Preempted

Exela’s most promising section 75-1.1 theory centered on Sandoz’s distribution of its “Dear Healthcare Provider” letter. In June 2019, the FDA approved an extension of the memorandum of discretion that allowed Sandoz to continue selling its product. That extension required Sandoz to use the same “Dear Healthcare Provider” letter, which explained the drug shortage and said (now falsely) that there were no FDA-approved L-Cysteine products in the U.S.

Under Mensing, preemption usually bars liability theories that require a party to seek assistance or action from the FDA. Put another way, if a claim is premised on a party’s failure to ask the FDA to do something, that claim is likely preempted.

Again, the FDA reviewed and approved Sandoz’s “Dear Healthcare Provider” letter and required Sandoz to send that letter in order to sell its product. Sandoz could not unilaterally change the letter without FDA approval.

Ultimately, the court viewed Exela’s claim as attacking Sandoz because it did not “ask the FDA for permission to update the Dear Healthcare Provider letter after the FDA approved” Exela’s product. To escape liability under Exela’s theory, Sandoz would have had to ask the FDA either to review its prior judgment about the contents of the “Dear Healthcare Provider” letter or to approve a different letter altogether. Cast in this light, the claim was preempted under Mensing.

Section 75-1.1’s Applicability to the Volume and Timing of Product Sales, Failing to Make Product Comparisons

Beyond its preemption points, the court’s decision touched on two section 75-1.1 issues—the timing and quantity of product sales, and product warnings and marketing—that may have applicability beyond the drug-and-device sphere.

First, the court rejected Exela’s contention that the timing and volume of Sandoz’s sales could, standing alone, amount to an unfair or deceptive trade practice. Exela alleged that after Exela’s drug received FDA approval, Sandoz flooded the market with its product because it knew that the FDA would soon revoke its permission to sell in the U.S. This conduct allegedly thwarted Exela’s effort to capture market share once it started selling its drug.

The court rejected this theory, concluding that “[t]he volume of the sales, and the timing of those sales, as permitted by the FDA, are not suitable bases for a” section 75-1.1 claim. Even more broadly applicable was the court’s proclamation that “an incumbent market competitor’s sale of its inventory does not become an unfair or deceptive act simply because those sales come at the expense of a smaller market competitor.”

The court’s discussion of Exela’s warning-based claims also offered a tidbit that could apply to a broad spectrum of section 75-1.1 cases. Again, Exela claimed that Sandoz should have told consumers about how the aluminum content in its drug compared to Exela’s, as well as the aluminum-content figure that the FDA required Exela to meet for permanent FDA approval.

In addition to finding this claim preempted, the court found “no basis to conclude” that “a merchant’s failure to inform its customers as to how its product compares unfavorably to a competitor’s product constitutes a deceptive trade practice.”

Preclusion (Preemption by Another Name?) Bars the Lanham Act Claim

Exela also asserted a claim for false and misleading advertisements under the Lanham Act, a common companion to section 75-1.1 claims involving trademarks or marketing activities. Both the Lanham Act and the FDCA are federal statutes, so preemption doctrines, which derive from the supremacy of federal law over state law, cannot bar Lanham Act claims. Nonetheless, a similar theme—that sources of law other than the FDCA should not be applied to disputes implicating the FDA’s decision-making—colored the court’s consideration of Exela’s Lanham Act claim.

In Pom Wonderful, LLC v. Coca-Cola Co., the Supreme Court recognized that claims under the Lanham Act and the FDCA can coexist, but that the FDCA may “preclude” a Lanham Act claim that “turns on the content” of something that the FDA preapproved. Exela’s Lanham Act claim was based primarily on the “Dear Healthcare Provider” letter and Sandoz’s product warnings, both of which were preapproved by the FDA before it allowed Sandoz to sell its product in the U.S. For this reason, Chief Judge Reidinger decided that the FDCA “precluded” Exela’s Lanham Act claim.

Takeaway

Although FDCA preemption is most commonly deployed in products-liability cases involving personal injury or death, the Exela Pharma case shows that preemption can be a potent weapon in commercial litigation, as well. Anytime a section 75-1.1 claim involves a highly regulated industry, consider raising preemption as a defense, even if the case does not match the typical preemption fact pattern.

Author: Steven Scoggan