Compounder’s claims of FDA approval/legality were literally false and material

Allergan USA, Inc. v. Prescribers Choice, Inc., No. 17-cv-01550-DOC-JDE,
2019 WL 650424 (C.D. Cal. Jan. 11, 2019)
Allergan “markets a portfolio of leading medical brands and
products.” Prescriber’s Choice and Sincerus have common ownership and work
together: “Sincerus produces drugs; Prescriber’s Choice markets Sincerus’s
drugs and makes them available to physicians.” Sincerus registered with the FDA
as an “outsourcing facility” under Section 503B of the FDCA in March 2016. “Through
the FDCA and its exemptions, Congress allows outsourcing facilities to produce
certain bulk drugs when the FDA determines there is a drug shortage or a
clinical need.” The presence of either obviates the need for an individual prescription
before the drug is produced. Sincerus formulated, compounded, distributed, and
sold drugs from 700 different drug formulations, and Prescriber’s Choice marketed
Sincerus’s to 3,000 customers in 30 states.

Compounding involves combining ingredients to create a bespoke drug, which can
occur when, for example, a patient who has an allergy to a certain dye and
needs a medication to be made without it. 
It’s not illegal, but there are supposed to be restrictions on it. The varied
drugs Sincerus and Prescriber’s Choice sold were intended to treat many conditions;
only one drug appears on FDA’s drug shortage list. At the relevant time, the FDA
hadn’t found a “clinical need” for outsourcing facilities to use any bulk drug
substances, which would have let them be used under the Section 503B statutory
exemption. Basically, and without trying to get the details right, Allergan
argued that Sincerus was going beyond what the law allowed for a Section 503B
facility, and falsely advertising legality.
Defendants promoted their business and drugs by representing
to their customers that they comply with the law, that it is legal for Sincerus
to compound in large quantities, and that the business meets federal regulatory
guidelines. Customers—“including those who asked for reassurance or had
questions about FDA compliance”—were told that “[t]o demonstrate compliance,
Prescriber’s Choice and Sincerus FL tasked one of the top international law
firms, Ropes & Gray, to analyze whether the business model comports with
FDA regulations,” and “[t]he resulting written memorandum concludes that if
your practice follows the model outlined, you are compliant.” Other claims were
that that the Sincerus drugs are “prepared in the FDA facility, Sincerus, so
you have the supreme reassurance that the quality of the medication is made
under CGMP manufacturing standards with federal oversight.” Another rep told a
customer that defendants “have had over 400 independent healthcare attorneys
from many states review our whole platform and they all recommend our
platform.” An internal e-mail said “I of course did explain to [the customer]
that everything comes from our 503B facility and is FDA approved.”
Defendants also claimed that “[t]he unique combination of
active and inactive ingredients has been selected to produce an outcome that is
clinically superior and materially different to that which is commercially
available.” The truth or falsity of this was a disputed fact.
“The FDA does not ‘accredit’ or ‘approve’ Section 503B
outsourcing facilities or pharmaceutical ingredients, although the FDA does register
and inspect such facilities,” including those of Sincerus, which hasn’t had an
FDA objection.
Sales reps made statements about compliance with the law “because
they knew that compliance with the law was an important issue to customers when
they make a decision.” FDA-approved ingredients are also important because “dermatologists
are seeking safe medication.” Prescriber’s Choice’s National Director told the
sales team that Sincerus’s status as a “503B FDA Facility” would provide “even
more assurance to patients due to the fact that they are generally familiar
with the FDA.”
Allergan commissioned a survey of 202 dermatologists which
revealed that 25 percent of physicians “worry about the legality and
tediousness of in-office physician dispensing”; 27 percent of the respondents
agreed with the statement “I worry about the legality of in-office dispensing”;
18% of the respondents said that “state regulation/restriction concerns” was a
challenge with recommending or prescribing Prescriber’s Choice’s products; and
24 percent of dermatologists who had been visited by a Prescriber’s Choice
sales representative indicated that they had received “Guidance with
governmental regulations” from Prescriber’s Choice.
Allergan argued that “mass manufacturing and marketing
unapproved new drugs” violated California’s Sherman Law, which incorporates the
FDCA’s requirements (thus rendering defendants’ conduct a violation of California’s
UCL under the “unlawful” prong and providing Allergan with a private cause of
action). Defendants use bulk drug substances to produce their drugs, but only
one of these drugs is on the FDA’s drug shortage list, and they also made drugs
nominated for inclusion—but not yet included—on the clinical need list. (They
also allegedly made drugs that weren’t even in this category.) FDA’s exercise
of its enforcement discretion was not enough, Allergan argued, to convert this
into legal conduct.
Sincerus argued that the FDA is encouraging 503B compounders
to use substances on the FDA’s nomination list until the FDA finishes its
clinical need list. The FDA issued an Interim Policy in January 2017, asking industry
participants to nominate bulk substances for consideration under Section 503B
and then creating three categories to determine which bulk drugs the FDA would
allow for compounding while it worked on the multi-year process of preparing
the clinical need list. Category 1 is nominations for the clinical need list;
Category 3 comprises nominated substances that require more information, and
defendants allegedly made substances from both categories. Defendants argued
that because Sincerus holds a California Outsourcing Facility license and the FDA
eventually placed all the relevant bulk drugs in Category 1, there could be no
violation of California law.
The court wouldn’t rely on FDA’s exercise of its discretion
to deem Sincerus’s actions legal, but nor would it ignore the Interim Policy, which
seemed to encourage use of Category 1. 
However, to the extent that Sincerus failed to comply with the Interim Policy,
it would violate federal and thus state law. The undisputed facts showed that
Sincerus began compounding and distributing drugs before they appeared on the
FDA’s Category 1 list, which violated the law. It wasn’t clear that they were
still making drugs in violation of Section 503B and the Interim Policy, creating
a dispute of fact for the jury to resolve.
Lanham Act/California FAL/fraudulent prong of the UCL: Allergan
argued that defendants made literally false statements about the lawfulness of
their business:
• Statements about legal compliance
because Defendants do not comply with Section 503B’s requirements.
• Statements about FDA “approval”
because the FDA does not approve any of Sincerus’s drugs nor approve or accredit
businesses or drug ingredients.
• Statements that Sincerus is an
FDA lab merely because Sincerus is a registered 503B outsourcing facility,
accomplished by “sending certain information to the FDA through an electronic
registration system”; and
• Statements that “hundreds of
lawyers” including the law firm Ropes & Gray LLP have opined that defendants’
business is lawful because defendants were not able to name any lawyers who
made this conclusion and the Ropes & Gray memorandum assumed compliance.
Allergan also argued that it was false to claim clinical/patient
outcome superiority for their drugs without any basis for so claiming.
Defendants argued that no one could have been fooled because
their customers were “a sophisticated group of licensed and board-certified
dermatologists, not one of whom would believe that Defendants are operated by
the FDA.”  They argued that “FDA
approval” wasn’t false because every active ingredient was for a FDA-approved drug
acquired from a FDA-registered source and each formula is submitted to the FDA
for biannual review. They argued that their practices were reviewed by “countless
medical practices (and their lawyers)” but that they did not “take a roll call”
of their customers’ lawyers. For superiority, they argued that compounding
clearly can improve patient outcome and that these weren’t falsifiable statements
[classic legal strategy: both puffery and true!]. Finally, they argued that Allergan’s
survey showed that most dermatologists didn’t care about these issues.
The court found that some of the challenged statements weren’t
literally false. E.g., Sincerus was a 503B facility and 503B drugs don’t need
an ANDA and can be compounded in large quantities. However, there’s a difference
between describing the 503B exception and “representing to customers compliance
with that exception or general FDA approval,” and Sincerus had been out of
compliance. Moreover, even compliance wasn’t “FDA approval.” “It is literally
false for a company to represent that a compounder is ‘FDA approved’ during
this period of regulatory evaluation, especially when the compounder is not even
complying with FDA’s interim guidance.” 
FDA inspection isn’t approval either.
Despite Sincerus’s violation of the law, sales consultants represented
that the medications “are FDA approved” and touted compliance, which just wasn’t
true at least before July 2018 and maybe after. Further, FDA approval of
ingredients didn’t change the analysis. 
If FDA approval of ingredients were enough, there’d be no need for the
FDA interim process determining whether such drugs should fall under the 503B
exemption as a clinical necessity.
However, there was a factual dispute on the literal falsity
of statements about drug superiority, “where the drugs may allow a patient
relief where she cannot tolerate a more traditional prescription.”
Because of the literal falsity, the court used a rebuttable
presumption of actual deception. Even without that, there was no factual issue
on materiality: it was clear that compliance with the law was important to
customers, who linked it to quality in numerous ways (as did sales reps).  Allergan’s survey didn’t show lack of
materiality—to the contrary, it showed that dermatologists were very attentive
to the perceived legality of Sincerus’s operations.
Sincerus counterclaimed about Allergan’s reps’ disparagement
of Sincerus: an allegedly official policy to “spread doubt” about Prescriber’s
Choice and Sincerus.  “[S]preading doubt
about the legality of a company that is not complying with the FDA Interim
Policy cannot give rise to a valid claim under the Lanham Act.” However, there
was enough evidence that Allergan sales representatives went beyond that,
working alongside competitors to “shut Prescriber’s Choice out of St. Louis.” Though
it was close, a reasonable jury could determine that Allergan violated the UCL
and Lanham Act.

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