Archive for the ‘General’ Category



International Tax Compliance Update: IRS to Issue ”John Doe” Summonses Seeking Information Regarding U.S. Taxpayers with Undisclosed Offshore Bank Accounts

Wednesday, November 13th, 2013

On November 7, 2013, United States District Judge Kimba M. Wood of the Southern District of New York, granted authorization to the IRS to issue John Doe summonses to Bank of New York Mellon and Citibank requiring those banks to produce records and information pertaining to US taxpayers holding accounts at Zurcher Kantonalbank and its affiliates (ZKB) in Switzerland. 

Thereafter, on November 12, 2013, U.S. District Judge Richard M. Berman, also of the Southern District of New York, granted permission for the IRS to issue John Doe summonses to Bank of New York Mellon, Citibank, JP Morgan Chase, HSBC, and Bank of America requiring those banks to produce records and information relating to accounts held by US persons at The Bank of NT Butterfield & Son, Limited, and its affiliates (Butterfield) in a number of foreign jurisdictions including the Bahamas, Barbados, the Cayman Islands, and Switzerland.  The Department of Justice’s news release on these orders is available here.

The judicial orders and the summonses that will follow represent the latest effort by the United States to root out and hold accountable US taxpayers holding accounts and financial assets abroad in an attempt to avoid US taxation.  Recently, for instance, three employees of ZKB were indicted for conspiring with US taxpayers to hide over $400 million in Swiss bank accounts.  Additionally, the United States, working together with Swiss bank regulators, has reached an agreement with certain Swiss banks encouraging those banks to disclose their US account holders in exchange for non-prosecution guarantees.  Further, Congress has enacted the Foreign Account Tax Compliance Act (FATCA), which is designed to punish foreign banks, via a withholding tax mechanism imposed on payments made to those banks from US sources, which refuse to provide information regarding their US account holders.  For more information about FATCA and the Treasury Department’s struggles to implement the law, please see our prior blog discussions herehere, and here

The issuance of John Doe summonses is a tactic the IRS has utilized previously.  For instance, last April, the IRS issued a John Doe summons to Wells Fargo seeking information concerning US persons with accounts at First Caribbean International Bank. 

The IRS will issue John Doe summons in instances where it is unsure of the precise identity of the inpiduals about whom it is seeking information.  Because the scope of a John Doe summons is necessarily broad, John Doe summonses allow the IRS to recover vast amounts of information from the banks on which they are served.  The IRS serves summonses on US banks seeking information about accountholders of foreign banks because US banks often act as correspondent banks for the foreign banks.  Under these arrangements, a US bank will hold accounts for the benefit of a foreign bank that is seeking to do business in US dollars but that otherwise does not have a US presence.  Service of the summons on the US correspondent bank is simpler and more efficient than attempting to retrieve information directly from the foreign bank.

The IRS’s efforts to crack down on offshore tax evasion have led to severe consequences for non-compliant US taxpayers.  For instance, the IRS’ focus on identifying non-compliant account holders with UBS have led to criminal convictions and the imposition of severe monetary penalties, as highlighted herehere, and here.  Further, the United States has pursued the banks and the bankers that have assisted non-compliant US taxpayers in hiding their assets, as highlighted herehere, and here.  Given the tough stance the IRS has taken on this issue, cooperation between foreign banks and the IRS regarding the production of information about US accountholders is likely to only grow in the future.  Such cooperation, in turn, will likely increase the risk that more non-compliant US accountholders are identified and prosecuted.

It is important to keep in mind that there is no prohibition against US persons holding foreign bank accounts.  However, US persons holding foreign accounts generally must disclose these interests to the IRS in any year in which the balance of the account exceeds $10,000.00, by making a Foreign Bank Account Report (FBAR).  Separate reporting requirements exist for other foreign assets held by US persons, such as stock in foreign corporations or interests in offshore trusts.  Further, US persons are taxed on their worldwide income, regardless of the source of the income.  Interest earned on foreign bank accounts, distributions from offshore trusts, and pidends paid by foreign corporations are all subject to US tax and must be reported on the US person’s annual tax return.  Failure to report the existence of overseas accounts or financial interests when required can lead to significant monetary penalties and, potentially, criminal prosecution.  For more information regarding the FBAR requirements, see our previous blog entries herehere, and here.

The IRS has re-opened the Offshore Voluntary Disclosure Program (OVDP), which permits taxpayers with undisclosed foreign income or assets from previous tax years to make a full disclosure of their previously undisclosed interests and income in exchange for generally lower penalties and a guarantee from the IRS that it will not recommend the disclosing taxpayer’s case to the Justice Department for criminal prosecution.  Read more about the most recent OVDP here.

The most recent efforts by the IRS to learn the identity of non-compliant US accountholders at ZKB and Butterfield is especially pertinent considering the limitations of the OVDP.  Specifically, once the IRS or the Department of Justice becomes aware of a taxpayer’s non-compliance through the use of a John Doe summons or similar investigatory mechanism that taxpayer becomes ineligible for participation in the OVDP.  That prohibition does not apply, however, in situations where a non-compliant taxpayer merely holds an account at a bank that is the subject of a John Doe summons””the government must learn of the specific taxpayer’s non-compliance on its own before the door to the OVDP is shut.

Given the generally beneficial nature of the OVDP, it would be wise for non-compliant US taxpayers holding accounts with ZKB or Butterfield to immediately explore their options regarding the OVDP.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who are seeking to avail themselves of the OVDP.  We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at  contact@fuerstlaw.com.

Announcing the Fuerst Ittleman David & Joseph Mini-Blog

Friday, June 7th, 2013

This week, Fuerst Ittleman David & Joseph is launching a Mini Blog, which will be submitted to its readers on a weekly basis. Unlike its usual Blog, which will continue to be updated here, the Mini Blog will allow FIDJ to communicate with its readers in a short and to-the-point style, delivering critical news updates with just enough commentary to explain why the updates are critical. We believe that this Mini Blog will be a valuable resource for our readers, and will allow subscribers to stay up to date on issues affecting all of our practice areas, including Tax & Tax Litigation, Food Drug & Cosmetic Law, Complex Litigation, Customs Import & Trade Law, White Collar Criminal Defense, Anti-Money Laundering, Healthcare Law, and Wealth & Estate Planning. Additionally, subscribers may sign up to receive only the content relevant to their interests on a subject-by-subject basis. As always, please feel free to reach out to us with comments regarding our content or suggestions regarding how we may better keep you up to date.

Click here to sign up.

Here is a sampling of what you can expect to receive in our Mini Blog:

Food and Drug:

On May 28, 2013, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued guidelines for voluntary “serving facts statements” that alcoholic beverage manufacturers may include on their packaging. A copy of TTB’s press release can be read here. The serving facts statements are similar to the nutrition panels currently found on non-alcoholic foods and beverages. According to the rule, serving facts statements will include: 1) the serving size; 2) the number of servings per container; 3) the number of calories; and 4) the number of grams of carbohydrates, protein, and fat preserving. In addition, serving fact statements may also include the percentage of alcohol by volume and a statement of the fluid ounces of pure ethyl alcohol per serving. TTB is providing the interim guidance on the use of voluntary serving facts statements on labels and in advertisements pending the completion of rulemaking on the matter. A copy of the TTB Ruling can be read here.

Healthcare:

A new bill in the U.S. House of Representatives, the Medicare Audit Improvement Act of 2013, seeks to amend title XVIII of the Social Security Act to improve operations of recovery auditors under the Medicare integrity program and to increase transparency and accuracy in audits conducted by contractors. A few proposals include limiting the amount of additional document requests, imposing financial penalties on auditors whose payment denials are overturned on appeal and publishing auditor denials and appeals outcomes.

In related news, the Department of Health and Human Services c/o the Centers for Medicare and Medicaid Services  (“CMS”) is proposing to increase the maximum reward for reporting Medicare fraud from “10 percent of the overpayments recovered in the case or $1,000, whichever is less, to 15 percent of the final amount collected applied to the first $66,000,000”¦” In case you don’t have a calculator handy, that’s a change from $1,000 to a potential maximum windfall of $9,900,000. It’s safe to assume that the number of whistleblower reports of alleged Medicare fraud are going to skyrocket. As the saying goes, you miss 100% of the shots you don’t take.

As decided by the United States Court of Appeals for the Eleventh Circuit, HIPAA preempts Florida’s broad medical records disclosure law pertaining to a decedent’s medical records. In Opis Management Resources, LLC v. Secretary of Florida Agency for Health Care Administration, No. 12-12593 (11th Cir. Apr. l 9, 2013), the 11th Circuit Court of Appeals ruled that Florida’s broad medical records disclosure law did not sufficiently protect the privacy of a decedent’s medical records. The Court noted that Florida allows for “sweeping disclosures, making a deceased resident’s protected health information available to a spouse or other enumerated party upon request, without any need for authorization, for any conceivable reason, and without regard to the authority of the individual making the request to act in a deceased resident’s stead.” In contrast, HIPAA only permits the disclosure of a decedent’s protected health information to a “personal representative” or other identified persons “who were involved in the individual’s care or payment for health care prior to the individual’s death” to the extent the disclosed information is “relevant to such person’s involvement”.

Tax:

On May 29, 2013, the New York Times reported that the Swiss Government will allow Swiss Banks to provide information to the U.S. Government in exchange for assurances that Swiss banks would only be subject to fines and not be indicted in an American criminal case. Per the New York Times,

The New York Times article reports that: But [Ms. Widemer-Schlumpf (Switzerland’s finance minister)] said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement”¦. Ms. Widmer-Schlumpf said the government would work with Parliament to quickly pass a new law that would allow Swiss banks to accept the terms of the United States offer, but said the onus would be on individual banks to decide whether to participate.

This appears to be the beginning of the end of Swiss bank secrecy. If the Swiss relent to the U.S., the European Union will be next in line to obtain the same concession.

Anti-Money Laundering:

Our thoughts on the United States government’s attack on Mt. Gox can be read here, and Bitcoin continues to remain a hot topic all across the internet; see here, here, and here. Another virtual currency, Liberty Reserve, has also made a splash since being shut down by the Feds last week in what many have described as the largest money laundering scheme of all time; see here for details of the takedown, as well as the following articles describing the initial bits of fallout from the Liberty Reserve takedown: online anonymity, anti-money laundering compliance,Barclays Bank involvement, and the not guilty pleas entered by Liberty Reserve’s proprietors on Thursday. We will keep our eyes on these two cases as the fallout continues.

Denis Kleinfeld, Esq. to Lecture at Upcoming AAA-CPA Fall Meeting and Education Conference

Wednesday, September 19th, 2012

Denis Klienfeld, Esq., of counsel to Fuerst Ittleman David & Joseph, will present his “Field Guide to Asset Protection” at the Fall Meeting and Education Conference of the American Association of Attorneys-Certified Public Accountants (AAA-CPA)in Palm Beach Gardens, Florida from November 7-11, 2012. Mr. Kleinfelds presentation will explore the critical wealth preservation issues that lawyers and CPAs need to understand when representing their clients. Some of the issues Mr. Kleinfeld will explore include fraud vs. fraudulent conveyances, solvency calculations, contempt and defenses, and professional liability.

Mr. Kleinfeld advises U.S. and international businesspersons, investors, professionals, families, and individuals in asset protection and wealth preservation, U.S. and international estate planning, income tax analysis and planning, tax compliance, business transactions, asset and personal migration, and investment planning, structuring and implantation. He also provides guidance and due diligence services for clients presented with various business and investment opportunities.

For more information regarding the AAA-CPA Fall Meeting, Mr. Kleinfelds presentation, or Mr. Kleinfelds practice, please feel free  to contact us at 305-350-5690 or contact@fuerstlaw.com.

Centers for Medicare and Medicaid Services Urged To Issue Final Rule on Physician Gift and Disclosure Regulations

Monday, April 23rd, 2012

On April 4, 2012, Senators Charles Grassley (R-IA) and Herb Kohl (D-WI), authors of the Physician Payments Sunshine Act (“Sunshine Act”), wrote a letter to the Centers for Medicare and Medicaid Services (“CMS”) pushing CMS to issue its statutorily mandated final rule implementing the Sunshine Act provisions of the Patient Protection and Affordable Care Act (“PPACA”). As we previously reported, section 6002 of the PPACA is also known as the Sunshine Act because it is based on the previously proposed, but never enacted, Physician Payment Sunshine Act.

In their letter, Senators Grassley and Kohl said they were “disappointed” that CMS missed the October 1, 2011 statutory deadline for implementing the Sunshine Act. They requested that CMS issue the final rule on implementation no later than June of this year so that partial data collection for 2012 can begin. Furthermore, Senators Grassley and Kohl “strongly urge[d] CMS to work closely with stakeholders to finalize these rules so that they comprise a feasible approach to providing valuable data that patients deserve.”

Clear Definitions and Guidelines

As we previously reported, the Sunshine Act requires drug and device manufacturers to report certain “payments or other transfer of value” made to physicians. The Sunshine Act also requires CMS to design an “Internet website” where the public can search and view such “payments or other transfer of value” made to physicians by drug and medical device manufacturers. In the letter, the Senators encouraged CMS to be clear and to narrowly define precise payment categories so as to allow all stakeholders to work under the same assumptions. Additionally, they ask CMS to consider removing the proposed “other” payment category “so that it does not obscure the true nature of some payments.”

The Senators also urged clarity with regard to indirect research payments. Specifically, they urged CMS to more clearly define instances when indirect research payments and indirect research payments to third parties are reportable, and how and in which context such payments will be reported on CMSs website that will publically available. According to the Senators, this clarity will be very important if physicians will be contacted directly by pharmaceutical companies and reported publicly, physician participation in research activities could be hindered.

Accurate Data/Errors

The Senators also urged CMS to update the website with the correct information as soon as CMS is made aware of errors in the reported data. The Senators stated that CMS should include mechanisms by which the agency can update errors on a quarterly basis because prolonged errors could cause confusion among the public, physicians, and manufacturers.

In an effort to reduce inaccurate payments and disputes, the Senators asked CMS to consider requiring manufacturers to share the data they plan to report to CMS directly to covered physicians before reporting the data to CMS. When disputes do arise, the Senators agree that CMS must develop a mechanism to which the disputes can be reported as smoothly as possible; but insist that CMS not become the default dispute arbiter between manufacturers and physicians.

Other Issues

In addition to the clarity and accuracy of the data, the Senators also addressed concerns with the website that will be designed to report the payments to physicians and outreach to physicians. Specifically, the Senators insist that the website be designed in a “user friendly” manner and the data should be in an “easy-to-use” format with terms and names that are recognizable to patients. The website should also define the terms of value and provide context so that the public best understands what these payments are for and in what capacity they were made. The Senators also encouraged CMS to work directly with stakeholders to best determine how to release the publicly available data on the website.

The Senators also encouraged CMS to increase its outreach to physicians and other covered recipients about the Sunshine Act. This is important because many physicians and other covered recipients are unaware of the Sunshine Act and how it affects them. A recent survey of 500 compliance officers and physicians in the March 1, 2012 issue of “Inside CMS” reported that 47% had not heard of the Sunshine Act.

Implementation Questions

In addition to their general comments, the Senators request that CMS answer the following questions by April 18, 2012:

  1. Can CMS commit to completing a final rule by this summer so that data collection can begin in 2012?
  2. Since CMS missed the initial required Congressional deadline, has CMS increased the resources or personnel assigned to the implementation of the Sunshine Act, including a dedicated information technology lead?
  3. Will CMS commit to issuing an RFP to begin designing the website?
  4. Does CMS have a dedicated working group assigned to implementation of the Sunshine Act, and what technical expertise and program areas are represented?
  5. Does CMS have a public education and outreach plan to raise awareness of the new law with the provider community and with health care consumers?
  6. Has CMS allocated dedicated implementation funds for the Physicians Payment Sunshine Act?

The public comment period for the proposed rules closed in February. CMS is now reviewing and considering the comments as it promulgates the final rules. We will continue to monitor the Sunshine Act and final rules. For more on payment disclosures and reporting requirements under the Sunshine Act, please contact us at contact@fuerstlaw.com or (305) 350-5690.

Park Doctrine Insurance Offered to Cover Responsible Corporate Officer Liability

Thursday, March 22nd, 2012

The FDA has made clear that prosecuting individuals for strict liability misdemeanors under the Park Doctrine, also known as the “Responsible Corporate Officer Doctrine” (“RCO”), is a priority amid the clamor for the FDA to get “tough” on persons and companies in regulated industries, such as food and drug. The Park Doctrine allows a corporate official to be convicted of a misdemeanor based entirely on his or her position and responsibility in a corporation. There is no requirement that a person had any criminal intent or acted personally in any wrongdoing, or for that matter, was even aware of a violation. We have previously blogged about the re-discovery of the Park Doctrine by the FDA, here and here.

Now, given the heightened risk of Park Doctrine prosecutions by the government, Allied Insurance Company commenced issuing its “RCO Policy,” designed to provide coverage for control group executives for defense costs during an investigation or misdemeanor criminal proceeding, including potential losses resulting from debarment or exclusion from contracting with federal programs as a result of a misdemeanor conviction. Debarments or exclusions would result in substantial loss of income and livelihood for an RCO executive convicted of a misdemeanor under the Park Doctrine. However, the policies do not provide coverage for offenses for which the executive exhibited criminal intent, such as intent to defraud.

Under most current Directors & Officers (D&O) indemnity policies, coverage is provided for defense costs until there is a finding of criminal liability against the insured.  Under the Park Doctrine, such criminal liability can occur without the insured being shown to have intended or even been aware of the existence of the criminal violation. Under such a scenario, the insurer can deny coverage for the executive at the most critical stages of a criminal investigation, thereby leaving the executive to fend for him or herself in funding a defense, to his or her financial ruin.  This is tantamount to having no D&O coverage at all. It is often at the investigation stage where an adequately funded defense is most critical in order to stave off indictment.  Preventing indictment in the first place is paramount since post-indictment approximately 95 % of federal criminal cases result in a criminal conviction, either by plea or verdict.  It appears that this new RCO Policy could go a long way toward ensuring an adequately funded defense and avoiding the worst case scenario for executives.

The recent emphasis on Park Doctrine prosecutions by the Department of Justice and FDA, with the idea of increasing the deterrent effect of criminal prosecutions for violation of our nations food and drug laws, has elevated the potential liability of executives in regulated industries. The market is responding to these liability concerns by offering products insuring against these risks, although it remains to be seen whether the necessary premiums for such coverage will be acceptable to insurance customers.  Perhaps the best medicine is prevention”heightened recurrent training, invigorated compliance programs and revised policies and procedures to prevent violations in the first place.

Fuerst Ittleman PL is experienced in providing legal services to FDA regulated entities to address the prevention of violations and mitigation of potential Park Doctrine liability.  In this heightened enforcement environment, an ounce of prevention is worth more than a pound of cure.

Sackett v. EPA Highlights The Ongoing Debate Over What Actions Are “Final Agency Actions”

Tuesday, January 31st, 2012

On January 9, 2012, the Supreme Court heard oral argument in the case of Sackett v. United States Environmental Protection Agency. Although the facts of the case concern issues governed by the Clean Water Act (“CWA”), this case is important to all administrative law practitioners because of its potential to more clearly define the line between “final agency action,” which is generally subject to judicial review, and non-final agency actions which are not. Such a clarification will not only serve as a guide in future litigation against federal administrative agencies, but may also dramatically change how such agencies engage in “informal” communications with those subject to their jurisdiction. A copy of the oral argument transcript can be read here.

  1. Background

The Sacketts fight with the EPA centers on a small 0.63 acre property located near Priest Lake, Idaho and an EPA compliance order prohibiting its development. In May of 2007, the Sacketts began to fill in the property with dirt and rocks in preparation for construction of a three-bedroom home. However, in November of that year, the EPA issued a Compliance Order that ordered construction to be halted claiming that the Sacketts land was a wetland, was subject to EPA jurisdiction under the CWA, and that the construction could not continue without first obtaining a permit from the Army Corp of Engineers. The Compliance Order also required the Sacketts to remove all fill material, restore the property to its original condition, and replant the property with wetland vegetation no later than April 30, 2008. Additionally, the Compliance Order threatened civil penalties as high a $32,500 per day for each day the Sacketts did not comply with the Order. A copy of the EPAs news release announcing the issuance of the Compliance Order can be read here.

  1. What is a Compliance Order?

Under the CWA, after the EPA identifies a violation, the agency has three options: 1) the EPA may assess an administrative penalty, in response to which “the alleged violator is entitled to a reasonable opportunity to be heard and to present evidence, the public is entitled to comment, and any assessed penalty is subject to immediate judicial review;” 2) the agency can initiate a civil enforcement action in federal district court; or 3) the EPA can issue, as it did in this case, an administrative compliance order. See Sackett v. United States Environmental Protection Agency, 622 F.3d 1139, 1142 (9th Cir. 2010); see generally 33 U.S.C. § 1319. As explained by the Ninth Circuit, “a compliance order is a document served on [a] violator, setting forth the nature of the violation and specifying a time for compliance with the [CWA].” Sackett, 622 F.3d at 1142.

In order for a compliance order to be enforced, the agency must bring an enforcement action against the individual in federal court. However, pre-enforcement, the CWA does not give the alleged violator any right to a hearing in front of the agency to challenge its issuance, nor does it allow for the alleged violator to sue the agency in court. Instead, an alleged violators only way to challenge a compliance order is to do nothing, face potential mounting fines, wait for the EPA to sue for enforcement of the compliance order, and then argue the jurisdictional merits of the EPAs authority. It is this lack of a pre-enforcement challenge to EPAs authority which is at the heart of the Sacketts Supreme Court case.

  1. Final Agency Action and Review Under the Administrative Procedure Act

Section 10(c) of the Administrative Procedure Act (“APA”), codified at 5 U.S.C. § 704, provides that “final agency action for which there is no other adequate remedy in a court [is] subject to judicial review” under the APA. The APA applies to all final agency actions except to the extent that an enabling statute precludes review. See 5 U.S.C. § 701. However, the statute provides that the judicial review provisions of the APA may not be superseded by subsequent statutes unless such statutes expressly provide so. See 5 U.S.C. § 559. Additionally, the Supreme Court has found that there is a presumption favoring judicial review of administrative actions. Abbott Laboratories v. Gardner, 387 U.S. 136, 140 (1967) overruled on other grounds by Califano v. Sanders, 430 U.S. 99 (1977). However, this presumption is overcome “whenever the congressional intent to preclude judicial review is fairly discernible in the statutory scheme.” Block v. Cmty. Nutrition Inst., 467 U.S. 340, 351 (1984).

“The cases dealing with judicial review of administrative actions have interpreted the Ëœfinality element in a pragmatic way.” Abbott Laboratories, 387 U.S. at 149. As first announced in Abbott Laboratories, an agency action will be considered final and a pre-enforcement challenge will be allowed:

Where the legal issue presented is fit for judicial resolution, and where a regulation requires an immediate and significant change in the plaintiffs conduct of their affairs with serious penalties attached to noncompliance, access to the courts under the [APA] and the Declaratory Judgment Act must be permitted, absent a statutory bar or some other unusual circumstance. . . .

Abbott Laboratories, 387 U.S. at 153.

In Bennett v. Spear, 520 U.S. 154, 177-178 (1997), the Court articulated a two part test to determine whether an agency action qualifies as “final” and thus generally subject to judicial review under the APA. As stated by the Court:

As a general matter, two conditions must be satisfied for agency action to be “final”:

First, the action must mark the Ëœconsummation of the agencys decision-making process “ it must not be of a merely tentative or interlocutory nature.

And second, the action must be one by which Ëœrights or obligations have been determined, or from which Ëœlegal consequences will flow.

Bennett, 520 U.S. at 177-178 (emphasis added).

When assessing whether an agency action qualifies as “final,” the Court looks to numerous factors including: 1) whether the administrative order provides the definitive statement of the agencys position; 2) whether the administrative order has a “direct and immediate effect on the day-to-day business of the complaining parties;” 3) whether agency expects immediate compliance with the terms of the order such that the order has “the status of law;” 4) whether the suit challenging the agency action presents a “legal issue fit for judicial review;” and 5) whether the suit challenging the administrative order is calculated to speed enforcement.” See Brief of the American Farm Bureau Federation et al. as Amici Curiae Supporting Petitioners, Sackett v. Environmental Protection Agency, 14-15 (No. 10-1062) (2012) (quoting FTC v. Standard Oil Co. of California, 449 U.S. 232, 239 (1980)).

  1. The Case Below

In this case, in response to the compliance order issued by the EPA, the Sacketts sought an administrative hearing to challenge the EPAs findings that the property is subject to the CWA. However, this request was denied by the EPA. The Sacketts then filed their suit before the United States District Court for the District of Idaho seeking injunctive and declaratory relief arguing: 1) the compliance order was arbitrary and capricious under the APA, 5 U.S.C. § 706(2)(A); 2) the order violated the Sacketts due process rights because it was issued without a hearing; and 3) the standard for issuance of a compliance order under the CWA was unconstitutionally vague. Sackett, 622 F.3d at 1141.

Both the District Court and the Ninth Circuit dismissed the Sacketts pre-enforcement suit challenging the EPAs issuance of the compliance order for lack of subject-matter jurisdiction. In its opinion, the Ninth Circuit ruled that, based upon the structure and objectives of the statutory scheme as well as the legislative history of the CWA, the CWA precluded judicial review of pre-enforcement actions under the APA. Sackett, 622 F.3d at 1143-1147.

The Ninth Circuit additionally held that, although due process is violated when the “practical effect of coercive penalties for noncompliance is to foreclose all access to the courts so that compliance is sufficiently onerous and coercive penalties sufficiently potent that a constitutionally intolerable choice might be presented,” the statutory preclusion of pre-enforcement review of compliance orders does not rise to such a level for two reasons. First, the CWA provides for a permitting process, the denial of which is immediately reviewable in federal district court under the APA. The Ninth Circuit found that the jurisdiction issues raised by the Sacketts could be litigated in that forum. As such, “rather than completely foreclosing the Sacketts ability to . . . challenge CWA jurisdiction, the CWA channels judicial review through the affirmative permitting process.” Sackett, 622 F.3d at 1146. Second, the Ninth Circuit held that, although the violation of the CWA and of a issued compliance order may amount to [$37,500] each per day, the civil penalty is a matter of judicial, not agency, discretion. Thus, “any penalty ultimately assessed against the Sacketts would therefore reflect a discretionary, judicially determined penalty, taking into account a wide range of . . . equitable factors, and imposed only after the Sacketts have had a full and fair opportunity to present their case in a judicial forum.” Id. at 1147.

However, what is noticeably absent from the Ninth Circuits opinion is a discussion of the preliminary issue that has become a focal point of the briefs and oral argument before the Supreme Court: whether the compliance order is considered “final agency action” sufficient to trigger review under the APA.

  1. The Parties Positions Regarding Final Agency Action Before the Supreme Court
    1. The Merit Briefs

In accepting certiorari, the Supreme Court asked the parties to address two questions: 1) Whether the Sacketts may “seek pre-enforcement judicial review of the Administrative Compliance Order pursuant to the Administrative Procedure Act 5 U.S.C. § 704;” and 2) if not, does the Sacketts “inability to seek pre-enforcement judicial review of the Administrative Compliance Order violate their rights under the Due Process Clause?” See Brief for the Petitioners, Sackett v. United States Environmental Protection Agency, at i (No. 10-1062). In order to fully answer these questions, the issue of whether the Administrative Compliance Order constitutes “final agency action” is of critical importance.

In their Initial Brief, the Sacketts, most likely because the Ninth Circuit ignored the issue of whether the compliance order was a “final agency action,” only briefly outline their position as to why the EPAs compliance order qualifies as “final agency action.” First, the Sacketts argue that the compliance order “represents the consummation of the EPAs decision-making process” for three reasons: 1) “there are no further steps for the agency to take with respect to jurisdiction, or with respect to the orders issuance;” 2) “the order does not initiate any administrative process, nor is there any administrative process whereby the Sacketts can seek review of the order;” and 3) the CWA provides that the compliance order is immediately enforceable in court by the agency. See Brief for the Petitioners, at 55. Second, the Sacketts argue that the compliance order satisfies the second step of the Bennett test because failure to comply with the compliance order itself is both actionable and punishable by civil penalties. Thus, according to the Sacketts, independent “legal consequences flow from the compliance order.” Id.

In response, the Government dedicated several pages of its brief to counter the Sacketts claims that the compliance order is a “final agency action” subject to judicial review and argued that the compliance order fails both prongs of the Bennett test. First, the Government argued that the compliance order fails step one of Bennett because it does not mark the consummation of the agencys decision-making process. According to the Government, the order invited the Sacketts to contact the EPA informally regarding the terms and requirements of the order itself as well as any factual allegations that the Sacketts believed to be false. Additionally, the compliance order invited the Sacketts to propose alternatives to the remediation plan proposed. Thus, “because EPA indicated that allegations and conclusions underlying the order were subject to revision based on petitioners might provide, and that the prescribed corrective measures were subject to negotiation, the compliance order cannot properly be viewed as representing the agencys final conclusions.” Brief for the Respondent, Sackett v. United States Environmental Protection Agency, 24-25 (No. 10-1062).

The Government also argued that the compliance order failed step two of Bennett because compliance orders merely “express the agencys views of what the law requires” and any factual determinations made within the compliance order would be given no deference by a court in an enforcement action. Brief for the Respondent, at 28. The Government also argued that any potential legal consequences faced by the issuance of a compliance order are not “sufficiently concrete or substantial to render the order Ëœfinal agency action.” Id. at 29. Here, the Governments argument mirrors the Ninth Circuits logic that because the penalties associated with the failure to comply are subject to judicial, not agency discretion, and because an after-the-fact permit process exists which provides for judicial review wherein a potential violator can challenge EPA jurisdiction, the legal consequences are not such that pre-enforcement review is essential. Id. at 29-31.

The Sacketts countered the Governments arguments in their Reply Brief arguing that Bennett is satisfied for several reasons. First, the language of the CWA itself only permits a compliance order to be issued after the EPA has made findings that the CWA has been violated. Reply Brief for the Petitioners, Sackett v. United States Environmental Protection Agency, 13 (No. 10-1062).  Further, the CWA “makes clear that the issuance of the compliance order is one of two equal enforcement options that EPA may take once it Ëœfinds that the statute has been violated.” Id. at 16 (emphasis in original). Thus, “the compliance order is not a prelude to enforcement[,] [r]ather, the compliance order is enforcement.” Id. (emphasis in original). Next, the Sacketts cited numerous circuit court decisions which have found that agency actions can be deemed “final” even though the actions themselves provide for informal consultation between the agency and an effected party. Id. at 15-16. Finally, the Sacketts argued that because the compliance order subjects them to additional penalties for non-compliance and creates additional requirements that must be satisfied before obtaining an after-the-fact permit, the compliance order creates additional legal obligations sufficient to be considered final.

    1. The Governments Policy Rationale for Arguing that Compliance Orders are Non-Final Agency Action and Thus Not Entitled to the Presumption of Reviewability

In addition to arguing in its brief that the compliance order failed to meet the Bennett test, the Government also presented several policy-based arguments as to why compliance orders should not be viewed as “final agency actions.”

The Government argues that compliance orders: 1) inform parties regulated by the administrative agency of requirements imposed by law, and 2) warn parties that the failure to comply with such laws may result in future enforcement actions. See Brief of Respondents, at 14. Contrary to the claims of the Sacketts, the Governments position is that no additional obligations are imposed on parties issued compliance orders. Rather, such orders “set forth the EPAs views as to the steps particular persons must take to achieve prospective compliance with the CWA itself.” Id. at 17.

            Additionally, the Government argues that compliance orders, as well as similar devices used by other agencies, serve an important purpose of “obviate[ing] the need for judicial intervention, either by inducing voluntary implementation of the measures specified therein, or by triggering a process of consultation between the agency and the alleged violator that produces a mutually acceptable alternative resolution.” Id. at 13. The Government further argues that communications such as compliance orders or warning letters provide a benefit similar to that found in settings where administrative exhaustion is required because agencies are given the “opportunity to correct their own mistakes and to refine their views without the need for judicial intervention.” Id. at 22.

The Governments position is that compliance orders are neither entitled to pre-enforcement review nor unlawful merely because they present the “Hobsons choice” of complying with an agency with questionable jurisdiction demands or do nothing and wait to challenge the agencys jurisdiction in an agency brought enforcement order the face of mounting penalties. Id. at 22. Instead, the Government argues that “from the regulated partys perspective, such communications give recipients an opportunity to conform their conduct to the agencies guidance before being subjected to an enforcement action.” Id.

            Given the broad purposes of environmental regulation in general and the CWA in particular, compliance orders allow the agency to achieve a quicker resolution to situations of ongoing environmental damages. The Government believes that if pre-enforcement judicial review is allowed for these communications their effectiveness at achieving voluntary compliance would be substantially weakened and resources of the administrative agency would be drained in litigating cases of minor offenders. Thus, by preventing pre-enforcement judicial review and by allowing agencies to “interact[] with regulated entities outside of more formal administrative-adjudication or judicial-enforcement settings, agencies can conserve resources and prioritize their enforcement efforts to respond to the most sever violations.” Id. at 22.

    1. The Courts Questioning of the Governments Position at Oral Argument

At oral argument, the Justices focused on whether, based on Abbott Laboratories and the presumption of reviewability, challenges to the jurisdiction of an agency issuance of a compliance order require pre-enforcement review. In their questioning, the Justices appeared to clearly distinguish between warning letters, which have long been considered non-final agency action and not entitled to judicial review, and the compliance orders issued by the EPA. In particular, the Justices appeared interested in the language of the compliance order itself and the back and forth between the agency and the alleged violator before and after the issuance of a compliance order. Additionally, the Justices focused on the “Hobsons choice” of either voluntarily complying with an order that the issuing agency may not have the jurisdiction to issue or to not comply, face mounting fines, and wait to assert a jurisdictional challenge at some undetermined time as the agency so chooses to bring an enforcement action. Transcript of Oral Argument, at 42-53, Sackett v. Environmental Protection Agency, (No. 10-1062).

During oral argument, Justice Breyers main concern as to whether the compliance order could be considered non-final turned on the language in the order suggesting that alleged violators should contact the EPA in informal discussions regarding the terms and requirements of the order itself as well as any factual allegations that the Sacketts believed to be false. In particular, Justice Breyer appeared concerned with whether such post-issuance communications actually result in the agency changing its position:

Justice Breyer: Is there anything youve got by “ I mean, Im “ Youve got me now into the area, we are applying the APA and the question is Abbott Labs and is it final. Well, here there doesnt seem anything more for the agency to do, and here the person who the order is directed against is being hurt a lot. So the only thing I “ left in my mind here is the order itself does say: Come in and talk to us about this. Which may suggest it isnt final. So do you have any information on that point? That is, have you looked up or has the APA told you that really when we issue these things, people come in and modify them at X percent of the time.

Id. at 45 ln. 9-21. In response the Government argued that although only 3 percent of all compliance orders ever lead to enforcement actions being taken, the Government did not have any statistics as to whether this was because of informal communications between the alleged violator and the agency or whether it was merely because alleged violators have chosen to voluntarily comply. Id. at 46.

However, when pressed by Justice Kagan as to whether post-issuance communications normally result in modifications, the Government conceded that it was unlikely:

Justice Kagan: Mr. Stewart, you suggested that, that some communication occurs before this compliance order [is issued]. And my guess would be that most of the back and forth between the agency and the person does happen before the compliance order rather than after.

And the notion that the person can come in after the compliance order and say you were wrong, well they can, but they can do that with respect to any administrative action. So, am I wrong about that? That really the back and forth here takes place before the compliance order issues rather than after?

Mr. Stewart: I think you are right as a matter of typical agency practice that there would be an invitation well before the compliance order was issued to come in and give your side of the story, and you are probably right that if we got to the point where a compliance order was issued, then the likelihood that further communications would sway the agency substantially might be reduced. So I would take your point there “

Id. at 46 ln 15-25 “ 47 ln. 1-10.

Of particular note was the exchange between Justice Scalia and the Government regarding the jurisdictional challenges to compliance orders. During the Governments argument Justice Scalia posed the question of whether a person can “usually obtain a declaratory judgment if prosecution is threatened and you think that there is no basis for it, and you cant “ you are not “ youre not compelled to just stand there and wait for the prosecutor to, to drop the hammer?” Id. at 48.  In response, the Government argued that, although declaratory judgment actions are available in such situations, because the Governments position is that compliance orders are “informal warnings,” extending a right to a declaratory judgment to compliance orders “would cause a huge upheaval in the practices of many agencies. . . .” Id. at 49.

However, the Justices appeared to reject this rationale and further pressed the issue of whether a compliance order should be considered “final agency action” with Justice Breyer commenting: “You are talking about a huge upheaval. My honest impression is that it is the Government here that is fighting 75 years of practice because “ because the issue is the Abbott Labs issue of finality. And of course a warning isnt reviewable. But this seems to meet the test where that fails.” Id. at 49 ln. 19-23.

  1. Analysis and Conclusion

Based upon the totality of information before the Court, the arguments made by the Sacketts that compliance orders are “final agency action” entitled to pre-enforcement review appears to be strong. The Court pressed the Government on the issue of whether post-issuance discussions between alleged violators and the agency actually effect a change of the agencys position. Additionally, the Government conceded in both its brief and at oral argument that the failure of alleged violators of the CWA to follow the remediation plan outlined in a compliance order potentially subjects the violator to additional penalties above and beyond the penalties for violating the CWA itself.

Moreover, it appears that the Governments strongest argument that compliance orders are not entitled to pre-enforcement review is the “huge upheaval” such a ruling would level on the day-to-day operations of administrative agencies. As explained above, the Government has argued that a decision which classifies compliance orders as “final” could result in increased litigation and decreased voluntary compliance with the result being a more litigious and less effective administrative state.

However, even if the Court does agree with the Sacketts and finds that compliance order are in fact “final” thus entitling recipients to pre-enforcement judicial review, the practical consequences will not likely be as harsh as the Government fears. First, the Court in oral argument appears to have reaffirmed that less formal communications such as warning letters are properly considered non-final agency action to which no pre-enforcement review is required. Other agencies successfully use warning letters to achieve the same goals of voluntary compliance and administrative efficiency. Additionally, despite the actual and incidental consequences which commonly plague recipients who must defend themselves against such letters, the Court consistently denies pre-enforcement review for such agency actions. Furthermore, the Sacketts have not challenged any such less formal actions.

Additionally, the CWA provides for other forms of enforcement for violations, such as a civil enforcement action without the issuance of a compliance order. Thus, should the Supreme Court find that compliance orders are “final,” the most likely “upheaval” would be the seismic shift towards the increased use by agencies of warning letters followed by civil enforcement actions in cases of noncompliance.

Moreover, as explained above, judicial review of a “final agency action” pursuant to the APA can always be expressly superseded by an agencys enabling statute. As such, should the Supreme Court decide favorably for the Sacketts, and mark a trend towards easier access to judicial review of agency actions, there is no reason to think that federal administrative agencies would not lobby Congress for statutory reforms to expressly preclude judicial review of compliance orders.

The debate as to what exactly is “final agency action” has been ongoing for decades. However, until such a time that the Court is willing to take a more concrete and expansive view of what qualifies under Abbott Laboratories and Bennett as “final agency action,” particularly a view based on the real life and practical consequences of the issuance of warning letters, administrative law practitioners, and their clients, will continue to be faced with a Hobsons choice and uncertainty when responding to such non-final actions. In the end, the Courts ultimate decision as to whether a compliance order is considered “final agency action” which entitles recipients to pre-enforcement judicial review may be more of a moral victory for administrative law attorneys and less of a game-changer in litigation against federal agencies.

Patient Protection and Affordable Care Act Challenges Often Turn On Interpretation of the Court’s Commerce Clause Jurisprudence

Tuesday, September 20th, 2011

On September 13, 2011, the United States District Court for the Middle District of Pennsylvania issued its decision finding that the individual mandate provision of the Patient Protection and Affordable Care Act (PPACA) exceeded Congresss authority under the Commerce Clause and therefore is unconstitutional. As discussed in a recent Forbes article, this decision is merely one in a long line of District and Circuit opinions on the constitutionality of the PPACA. Ultimately, the individual mandate provision the PPACAs constitutionality will turn on the interpretation of two bedrocks of Commerce Clause precedent, Wickard v. Filburn, 317 U.S. 111 (1942) and Gonzales v. Raich, 545 U.S. 1 (2005). A copy of the Forbes article can be read here.

Generally speaking, Congresss power under the Commerce Clause extends to three broad categories. First, Congress may regulate the channels of interstate commerce. Second, Congress may regulate and protect the instrumentalities of interstate commerce. Finally, Congress may regulate activities that have a substantial effect on interstate commerce. See United States v. Lopez, 514 U.S. 549, 558 (1995). It is within this third category that Congresss Commerce Clause authority is pressed to its “outer limits” and is often the subject of judicial challenge. See Id. at 557. Such is the case with the PPACA.

In Wickard, the Supreme Court held that Congress could regulate the production of home grown wheat meant solely for personal use under its Commerce Clause power. In so holding, the Court found that although Filburns activities were entirely local, such activities, when taken in the aggregate, had a substantial effect on the national market for wheat. In the annals of Commerce Clause jurisprudence, Wickard v. Filburn represents the high-water mark for Congressional power.

More than 60 years later,    in Gonzales v. Raich, the Supreme Court upheld Congresss authority under the Commerce Clause to prohibit the possession of home-grown marijuana intended solely for personal use, even when such possession was allowed by state law. Similar to the Courts rationale in Wickard, the Raich Court found that the production of marijuana substantially affects supply and demand in the national market; therefore the regulation was “squarely within Congress commerce power.” The Court went on to hold that “Congress can regulate purely intrastate activity that is not itself Ëœcommercial . . . if it concludes that failure to regulate that class of activity would undercut the regulation of the interstate market in that commodity.” Raich, at 18. Both Raich and Wickard stand for an expansive and broad reading of Congresss power under the Commerce Clause.

In finding that the PPACAs individual mandate was unconstitutional, Judge Conner distinguished the mandate from the economic regulations at issue in Wickard and Raich. The Court found that unlike the laws at issue in Wickard  and Raich, which allowed people to not engage in regulated conduct and thereby stay beyond the reach of the statute, PPACAs mandate requires people to become active participants in the health insurance market regardless of whether heath services will be used. As explained by Judge Conner:

Congress can reach the personal production of wheat “ a clear activity affecting the interstate market “ in an effort to stabilize the wheat market. Congress cannot, however, in order to stabilize that market, force the purchase of wheat by individuals who decide to forego wheat or wheat products, even if Congress legitimately determines that an individuals decision not to purchase wheat or wheat products inhibits the governments ability to regulate or stabilize the wheat market. Similarly, Congress may lawfully regulate the interstate market for health insurance and health services, but Congress cannot require individuals who choose not to purchase health insurance or individuals who are not currently seeking or receiving services in the health care market to purchase health insurance in order to stabilize the health insurance market. Congress cannot mandate or regulate in anticipation of conduct that may or may not occur.

Bachman v. U.S. Department of Health and Human Service, et. al., at 36.

The Court went on to find that an uninsured individuals conduct has no effect on conduct Congress sought to regulate under the Commerce Clause until such time that: 1) the individual obtains health care services; and 2) the individual does not pay for the services received. The Court stated that “the mere status of being without health insurance, in and of itself, has absolutely no impact on interstate commerce . . . at least not any more so than the status of being without any particular good or service.” Id. at 38. As a result, “current Commerce Clause precedent does not permit Congress to reach a pre-transaction stage in anticipation of participation in a market. . . .”Id. at 40.

Ultimately, it is likely that the final decision as to the constitutionality of the individual mandate of the PPACA will be made by the Supreme Court. Such a decision has the potential to reshape Congresss power to regulate individuals and businesses under the Commerce Clause regardless of its outcome. Fuerst Ittleman will continue to monitor the litigation challenging the PPACA and its effects on Commerce Clause jurisprudence. For more information, please contact us at contact@fuerstlaw.com.

USDA Proposes Mandatory Livestock Tracking System

Wednesday, August 17th, 2011

On August 9, 2011, the U.S. Department of Agricultures (USDA) Animal and Plant Health Inspection Service (APHIS) issued a proposed rule to establish a mandatory livestock tracking system in order to improve the traceability of U.S. livestock. The proposed rule would require farmers and ranchers to affix unique identification numbers to animals transported interstate. The rule seeks to establish an effective, transparent animal disease traceability system without additional burden on farmers and ranchers. The tracking system would allow federal officials to quickly isolate diseased animals in the event of an outbreak.

In 2004, the USDA began developing a framework for animal disease traceability through the implementation of the National Animal Identification System (NAIS). NAIS is a voluntary registration system established to trace the source of an animal disease within 48 hours. However, in 2009, the USDA estimated that only 36 percent of farmers and ranchers participated in the NAIS. In order to improve traceability, APHIS launched a series of efforts to assess the acceptance of an animal disease traceability system which lead to the development of the proposed rule.   

The proposed rule requires that livestock moved interstate be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates, unless exempt. Official forms of identification include tattoos, metal eartags, or brands with certain exceptions. The proposed rule also allows for States and tribes to develop alternative forms of identification. Livestock subject to the identification requirements include cattle, bison, sheep, goats, swine, horses, captive cervids, and poultry.

The USDA is confident that the new system will be able to trace the source of an animal disease within a few days of an outbreak. Advocates say the implementation of the new mandatory system would be a significant improvement compared to USDA bovine tuberculosis investigations averaging 150-days to trace the source of an outbreak.  

The USDA is currently seeking public comment on the proposed rule for a mandatory livestock tracking system. The deadline for submission is November 9, 2011. Fuerst Ittleman will continue to monitor the development of the USDA APHISs new proposed rule. For more information, please contact us at contact@fuerstlaw.com.

Johnson & Johnson Seeks Settlement in for Allegations of Off-Label Promotion of Risperdal

Wednesday, August 17th, 2011

In 2004, the U.S. Department of Justice (DOJ) Office of the Inspector General (OIG) began investigating Janssen Pharmaceutica Inc. (Janssen), a subsidiary of Johnson & Johnson (J&J), concerning the marketing practices for Risperdal, an antipsychotic prescription drug. Janssen allegedly promoted Risperdal for unapproved off-label uses, a misdemeanor criminal offense. Pursuant to the Federal Food, Drug, and Cosmetic Act (FD&C Act) manufacturers are prohibited from directly marketing a drug for a use other than the U.S. Food and Drug Administration (FDA) approved indication. 21 U.S.C. §§301-97. The FDA approved Risperdal for the treatment of schizophrenia in adults and adolescents. Allegations suggest that Janssen also promoted Risperdal for the treatment of dementia and anxiety disorders. See our previous report here for more information regarding misdemeanor criminal charges resulting from off-label promotion.

On August, 9, 2011, in a quarterly report filed with the Securities and Exchange Commission (SEC), J&J announced efforts to resolve the criminal penalties related to Risperdal marketing. J&J stated that an agreement had been reached with the DOJ regarding the key issues; however, the settlement has yet to be finalized. J&J adjusted its financial statements for the second quarter of 2011 to reflect the financial component of the proposed criminal settlement. 

In addition, J&J announced the settlement of a tolling agreement with approximately 40 states. The tolling agreement allows for the delay of the statute of limitations in order to provide J&J an opportunity negotiate civil claims with states before a state is forced to file a complaint to preserve their rights. J&J states litigation is likely if negotiated resolutions cannot be reached in regards to the civil litigation relating to the allegations of off-label promotion of Risperdal. Pursuant to the False Claims Act, companies who knowingly represent a false approval are subject to civil penalties. 31 U.S.C. § 3729

J&J claims that the resolution of the criminal and civil matters is not expected to have a material adverse effect on the Companys financial position, although the resolution in any reporting period could have a material impact on the Companys results of operations and cash flows for that period.

For more information regarding the drug approval process or for any questions regarding how your company can maintain regulatory compliance, please contact us at contact@fuerstlaw.com.

FDA Issues Guidance Clarifying When Changes or Modifications to an Existing 510(k) Require New PMA Submission

Thursday, July 28th, 2011

On July 26, 2011, the U.S. Food and Drug Administration (FDA) issued draft guidance that clarifies when changes or modifications to a previously cleared 510(k) device necessitate a new premarket submission. In order to introduce a medical device into the interstate market, the FDA must either approve a premarket application (PMA) or clear a 510(k) premarket notification. Lower-risk devices are often submitted through the 510(k) premarket notification process, whereby the FDA “clears” the device for sale if it is found to be substantially equivalent to a previously cleared predicate device. The FDA announced that an additional 510(k) notification is required in instances where a change or modification to a cleared device would “significantly affect the products safety or effectiveness” or “constitute a major change to the intended use of the device.”

The new draft guidance outlines when an additional 510(k) notification is required for compliance with FDA regulations. The guidance suggests that manufacturers should compare the modified device to the most recently cleared version of the device to determine whether the modification could significantly affect its safety or effectiveness. In addition, manufacturers should assess individual changes to a device to determine whether, if at all, any of those changes constitutes a major change to the products safety, effectiveness, or intended use. A manufacturer should clearly document whether it believes the change does or does not require submission of an additional 510(k) notification, as well as the reason for that decision.

Furthermore, the FDA provides specific guidance to help manufacturers determine whether to submit an additional 510(k) notification for changes or modifications to the manufacturing process, product labeling, technology or engineering, or material type. This guidance also instructs manufacturers to weigh whether bench testing or simulations are sufficient to assess the safety or effectiveness of a modified device. Absent clear evidence of safety or effectiveness from these types of testing, the FDA suggests that manufacturers conduct clinical data using human subjects to validate the safety of these products.

This guidance document is part of the FDAs Plan of Action for Implementation of 510(k) and Science Recommendations, a series of action items launched earlier this year intended to “enhance predictability, consistency, and transparency of the FDAs premarket review programs.” For more information about the FDAs Plan of Action, see our previous post here.

Fuerst Ittleman is well-equipped to assist members of FDA-regulated industry navigate the laws and regulations applicable to medical devices. For more information about the current regulatory framework surrounding medical devices, please contact us at contact@fuerstlaw.com.