KELLER AND HECKMAN ALERT

KELLER AND HECKMAN ALERT
Nov 11, 2005
Appeals Court Upholds Remedy of Consumer Restitution in FDA Dietary Supplements Enforcement Action
Although the case has received little press attention, the U.S. Court of Appeals for the Third Circuit recently
upheld a District Court's decision to order Lane Labs to issue refunds to all purchasers of three dietary supplement
products allegedly marketed unlawfully. United States v. Lane Labs-USA, Case No. 04-3592 (3rd Cir.) (October 21,
2005). The authority of the government to seek restitution as a remedy for violations of the Federal Food Drug and
Cosmetic Act (FDCA) has been in dispute, since there is no explicit statutory authority for that relief.
Nevertheless, the Third Circuit concluded that "[t]hough the FDCA does not specifically authorize restitution, such
specificity is not required where the government properly invokes a court's equitable jurisdiction under this
statute." Lane Labs, slip op. at 11. In connection with an earlier decision from the Sixth Circuit Court of Appeals
(and subject to a decision yet to come in a pending case in the Tenth Circuit), the Third Circuit's action may
embolden FDA to pursue restitution as an available remedy in enforcement actions involving dietary supplements
and other products that FDA regulates. The remainder of this article discusses the Lane Labs case and its potential
implications in more detail.
▪ Factual Background and Procedural History
Beginning in the mid-1990s, Lane Labs marketed three would-be dietary supplements directly to consumers
through its CompassioNet division: 1) BeneFin, a product in pill or powder form that contained shark cartilage; 2)
MGN-3, in capsule form, a polysaccharide fiber made from rice bran and enzymatic extract of Shiitake mushroom;
and 3) SkinAnswer, a skin cream applied topically that contained an extract of sand brier. Lane Labs obtained all
the products from overseas manufacturers.
Lane Labs heavily promoted these products through two persons: William Lane, Ph.D. (the father of Lane Labs'
president, Andrew Lane) and Mamdooh Ghoneum, Ph.D. Dr. Lane, ostensibly only a paid consultant to Lane Labs,
touted the benefits of all three products mentioned above in articles and pamphlets easily available over the
Internet. He claimed shark cartilage, and BeneFin in particular, was effective in treating cancer. He claimed
MGN-3 was a safe and effective treatment for cancer and HIV, and he asserted that SkinAnswer was a safe and
effective treatment for skin cancer. Along with information about ordering BeneFin, Lane Labs often sent potential
customers an article by Dr. Lane in which he stated that "the use of shark cartilage in the complementary
treatment of non-responsive solid cancer tumors has been widely used worldwide." Dr. Ghoneum, an associate
professor of otolaryngology, is a leading researcher of MGN-3 and author of many articles discussing MGN-3 as a
possible effective treatment for cancer, HIV, and AIDS. Dr. Ghoneum also had a financial arrangement with Lane
Labs based, in part, on product sales.
In addition to promotion through Drs. Lane and Ghoneum, Lane Labs distributed to potential customers an article
from an alternative medicine newsletter promoting MGN-3 as a non-toxic treatment for cancer and for HIV and
AIDS, and promoting SkinAnswer as a "skin cancer cream." Finally, Lane Labs' compassionet.com website was
embedded with metatags such as "alternative cancer therapies," "cancer treatment," "skin cancer," "non-toxic
cancer therapy," "thyroid cancer," "brain tumors," "testicular cancer," "cancer patients," "lung cancer," "squamous
cell carcinoma," "melanoma," "Dr. Lane," and "Sharks Don't Get Cancer."
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In 1997, FDA issued a Warning Letter to Lane Labs about what FDA viewed as the company's unlawful promotions of
BeneFin, MGN-3, and SkinAnswer. Another letter followed in September 1999. In December 1999, FDA, through the
Department of Justice (DoJ), brought suit against Lane Labs, seeking a permanent injunction to prevent the
company from committing further violations of the FDCA, as well as restitution to consumers and disgorgement of
profits. FDA moved for summary judgment in 2002. Oral argument on the summary judgment motion was heard in
November 2003, and special briefings were later filed with respect to the issues of restitution. On July 9, 2004, the
District Court granted the government's summary judgment motion, issuing a permanent injunction and ordering
restitution to all purchasers of the products.1
▪ District Court Decision
The District Court found overwhelming evidence that Lane Labs' claims crossed the boundary of any permissible
structure-function claims for dietary supplements under the Dietary Supplement Health and Education Act of 1994.
Rather, the Court found that claims that these dietary supplements could mitigate or cure specific diseases were
in violation of FDCA § 403(r)(6) and that they were intended to diagnose, mitigate, or prevent specific diseases,
thereby placing them with the category of "drugs" under FDCA § 201(g)(1)(B). The Court rejected Lane Labs'
argument that, subjectively, it did not mean for the products to be used for treating or curing disease; by any
objective measure, which is what mattered legally, the products were so intended. The Court concluded that
because Lane Labs had not obtained FDA approval for BeneFin, MGN-3, or SkinAnswer, and because the products
did not bear adequate labeling for use, they constituted unapproved new drugs and misbranded drugs under FDCA
§§ 201(p), 505(a), and 502(f)(1), and that Lane Labs was liable for marketing them in violation of FDCA §§ 301(a)
and 505.
In its Order, the Court permanently enjoined Lane Labs from marketing these three products and placed severe
restrictions on the company's marketing of any other products with the same ingredients. The Court also required
Lane Labs to make restitution to consumers who purchased the three products. The company argued that the
Court had no power to order restitution under the FDCA. However, after analyzing the case law, the Court
concluded that absent a clear statement from Congress to the contrary, it would not presume that the FDCA was
intended to limit the federal courts' broad equitable powers, including the remedy of restitution. Lane Labs
appealed.
▪ Appellate Court Decision
The only issue on appeal was the authority of the District Court to order restitution to consumers.2 The Court
reviewed the jurisprudence on the judiciary's equitable jurisdiction and concluded that a District Court may order
restitution (1) "unless there is a clear statutory limitation" on that authority and (2) where restitution "furthers the
purposes of the statute." Lane Labs, slip op. at 16. The jurisdictional provision at issue states that District Courts
"shall have jurisdiction, for cause shown, to restrain violations of" the statute. FDCA § 302(a).
By examining the language of the FDCA and similar provisions in other statutes, the Appeals Court concluded that
there was no "clear statutory limitation" on the FDCA's broad grant of power to District Courts to "restrain
violations." FDA's failure for many years to have pursued restitution as a remedy did not suggest that "Congress
[had] stripped district courts of their equitable power to award it." Lane Labs, slip op. at 18.
In addition, while the primary purpose of the FDCA is to protect public health, "Congress intended the statute to
protect the financial interests of consumers as well. . .." Lane Labs, slip op. at 20. As a result, the Court found:
Restitution that reimburses consumers who paid for unapproved drugs, and may have been defrauded or deceived
about their effectiveness, restores aggrieved parties to the same economic position they enjoyed before the Act
was violated. This strengthens the financial protection offered to the public by the FDCA and enhances consumer
confidence in the drug market. Whether or not Congress specifically contemplated restitution under the FDCA, the
ability to order this remedy is within the broad equitable power granted to the district courts to further the
economic protection purposes of the statute. [Lane Labs, slip op. at 26.]
The Third Circuit acknowledged that the issue was "arguably a close call," but concluded that "[t]hough the FDCA
does not specifically authorize restitution, such specificity is not required where the government properly invokes
a court's equitable jurisdiction under this statute" and that "the authority given is broad enough to encompass all
equitable remedies that would further the purposes of the Act." Lane Labs, slip op. at 11 and 17. As a result, the
District Court's order of restitution was affirmed.
▪ Potential Impact
The Lane Labs appeal is certainly a victory for FDA. This decision supports the Agency's view of the availability of
such remedies from an earlier case in the Sixth Circuit, U.S. v. Universal Management Services., Inc.3 That
decision also upheld a judicial order of consumer restitution and concluded that disgorgement of profits was
another available, albeit implicit, remedy under the FDCA (although it was not applied in that case). Armed with
what it claimed was judicial blessing from Universal Management, FDA negotiated substantial monetary
settlements in three consent decrees with pharmaceutical manufacturers relating to violations of current good
manufacturing practices (cGMPs).4
The debate over the availability of equitable remedies under the FDCA is not finished. In a case not discussed in
the Third Circuit's Lane Labs opinion, a District Court in Oklahoma concluded in November, 2004, that the FDCA
does not authorize the disgorgement of profits and denied the government's request for that sanction.5 That ruling
has been appealed to the U.S. Court of Appeals for the Tenth Circuit, which has not yet heard oral argument.6
However, much of the same reasoning used by the Rx Depot District Court was presented in Lane Labs and
rejected.
The Lane Labs decision may make FDA feel more empowered to ask courts to order restitution or other equitable
relief in future enforcement actions. It remains to be seen whether it will become a routine practice or one
reserved for particularly egregious situations (e.g., continued violations despite repeated efforts by FDA to obtain
compliance).
***
For further information about this case or FDA's the regulation of dietary supplements in general, please contact
Frederick A. Stearns at 202-434-4288 or via e-mail at [email protected].
1U.S. v. Lane Labs, Civ. No. 99-5782 (D. N.J.) (July 9, 2004).
2Lane Labs and the government reached a settlement with respect to other issues of the case and agreed on
consumer restitution of $8 million in the event that the Third Circuit upheld the District Court's order.
3U.S. v. Universal Management Services., Inc., 191 F.3d 750, 760-62 (6th Cir. 1999).
4See United States v. Abbots Labs, Civ. No. 99-7135 (N.D. Ill., Nov. 2, 1999) ($100 million); United States
Wyeth-Ayerst Labs, Civ. No. 00-359 (E.D. Tenn., Oct. 4, 2000) ($30 million); and United States v. Schering-Plough
Corp., Civ. No. 02-2397 (D.N.J., May 20, 2002) ($500 million).
5U.S. v. Rx Depot, Inc., et al., Case No. 03-CV-0616-EA (M) (N. D. Okla.) (November 4, 2004). In that case, the
government charged Rx Depot with importing unapproved drugs in violation of several provisions of the FDCA and
sought a permanent injunction, along with an order forcing the company to surrender all "ill-gotten" profits from
its activities. The court granted FDA's request for the permanent injunction but denied the request for
disgorgement.
6U.S. v. Rx Depot, Inc., et al., Case No. 05-5003 (10th Cir.) (filed January 7, 2005).