The Legal Implications And
Costs Of Counterfeit Products
To A Pharmaceutical
Presented By:
Alan Minsk
Partner and Chair,
Food and Drug Practice Team
Richard E. Gardner, III
Arnall Golden Gregory LLP
Atlanta, Georgia
[email protected]
404.873.8690 (phone)
404.873.8691 (fax)
[email protected]
404.873.8148 (phone)
404.873.8149 (fax)
Presented to:
Arlington, VA
December 7, 2004
Prevalence Of Counterfeiting
The World Health Organization estimates
that drug counterfeiting affects 5-8% of all
drugs, representing $9.6-$15.4 billion to the
U.S. pharmaceutical market alone
FDA estimates that approximately 10% of
the drugs in worldwide distribution are
However, FDA states that most of the
counterfeit drugs are being sold in
developing countries
Prevalence Of Counterfeiting
Most common counterfeited drugs are those
with the largest sales (and those drugs with
high profit margins and drugs that are easier
to counterfeit)
FDA states that, in recent years,
counterfeiting has moved to finished
pharmaceuticals as opposed to the
counterfeiting of bulk drug ingredients
Internet sales are growing concern
Prevalence Of Counterfeiting
Manufacturers doing business outside the
United States (particularly developing
countries) must be aware that the sale of
counterfeit drugs in those countries could
lead to legal action being taken against the
company in the developing country with
legal systems different from those found
Sale of counterfeit drugs outside the U.S.
can also expose the company to liability in
the United States where the company is
based here
Risks That
Counterfeiting Presents
• Risks that counterfeit products present to
the drug manufacturers/distributors
1. Good Will/Reputation
2. Economic
3. Legal
Risks That
Counterfeiting Presents
• Once a counterfeit drug enters the
market and consumers unknowingly
purchase the counterfeit product, the
customers’ perception of the product will
likely be harmed
 i.e., the product is not as safe or effective
as advertised
Risks That
Counterfeiting Presents
• Doctors who formerly prescribed the drug
will likely hear from patients about the
drug’s quality (or lack thereof) and not
prescribe the drug as frequently or at all
• Distributors may also be influenced by the
drug’s negative reputation and may not be
willing to purchase the drug for fear that
its sales will decrease in the near future
Risks That
Counterfeiting Presents
• Counterfeit products will decrease the
legitimate manufacturers’ sales through
direct competition
• Counterfeit products may force the
legitimate manufacturer to lower the price
for its drugs
Risks That
Counterfeiting Presents
• If a counterfeit product damages the
legitimate drug’s reputation, demand for
the legitimate drug will decrease
• In addition to sales, other costs of
counterfeiting include potential legal
costs, (e.g., liability, regulatory) cost of
workers’ time resolving the counterfeit
issues and responding to governmental
and consumer inquiries
Risks That
Counterfeiting Presents
• Two major potential effects of counterfeit
 Increase the likelihood of government
 Increase the likelihood of a common law
tort suit filed against the manufacturer or
• The occurrence of a tort suit may bring
increased FDA scrutiny (and vice versa)
Risks That
Counterfeiting Presents
• Even if the suit relates to a counterfeit
product, any press regarding the suit may
damage the reputation of the legitimate
drug, and will cost the legitimate
manufacturer or distributor time and money
Tort Suit Basics
• Common causes of action may be based
on (in very general terms):
1. Negligence – a plaintiff would seek to
establish that a company breached its
duty to ensure that counterfeit products
did not reach the end consumer
2. Breach of Warranty – a plaintiff would
seek to establish that a product it
bought was not fit for its intended
purpose (based on its labeling)
Tort Suit Basics
3. Strict Liability – under this legal theory,
the manufacturer’s care is not relevant;
a plaintiff must only prove that the
product contained a manufacturer
defect when sold
4. The violation of the Federal Food,
Drug, and Cosmetic Act (the FDC Act)
or a FDA regulation may be used to
demonstrate that a company was
negligent (negligent per se theory),
although one may not bring a private
cause of action under the FDC Act
Tort Suit Basics
• A company may have at least two basic
problems in defending itself if a
consumer buys a counterfeit drug and
alleges harm
1. Company would have to prove that
the product purchased by the
consumer was a counterfeit (could be
difficult and expensive process unless
the company and the downstream
distributors have strong control over
the tracking of the drugs)
Tort Suit Basics
2. Company would also have to show that
it did not know, or had no reason to
know, that counterfeit drugs products
were being sold or, if it did know, it was
doing everything it could to stop the
further sale of counterfeit products
Tort Suit Basics
Tort suits will often be filed in state courts
If a counterfeit product’s distribution was
widespread, a company may face suits in
several states, each with its own sets of rules
and laws
1. Some laws may be more favorable to
consumers; some may be more favorable to the
2. In any case, the more jurisdictions, the more
difficult it will be to coordinate the cases and
keep costs manageable
3. Diverts money from other projects
Increased FDA Scrutiny
• Stemming from the sale of counterfeit
1. The sale of counterfeit drugs may lead
to the legitimate company reporting an
increased number of adverse drug
2. Increased reporting of adverse drug
experiences may lead to FDA taking an
increased interest in the company and
an inspection (and may also lead tort
lawyers to begin investigating and
suing company)
Basics Of The FDA Law
To Stop Counterfeiting
The FDC Act defines a counterfeit drug as:
A drug which, or the container or labeling of
which, without authorization, bears the
trademark, trade name, or other identifying
mark, imprint, or device or any likeness thereof,
of a drug manufacturer, processor, packer, or
distributor, other than the person or persons
who in fact manufactured such drug and
thereby falsely purports or is represented to be
the product…
– 21 U.S.C. § 321(g)(2)
A company may only sell new drug products
that FDA has approved or determined to be
safe and effective
Shipping an unapproved new drug, such as a
counterfeit drug, is a violation of the FDC Act
Shipping a drug without a doctor’s prescription
when one is required also violates the law
Shipping a drug with a label or labeling that
is false or misleading, such as a counterfeit
drug, is a violation of the FDC Act
 Misbranding (e.g., lack of adequate
directions for use, inadequate warnings,
inaccurate contact information)
Shipping a drug that is adulterated is also a
violation of the FDC Act
 Adulteration (e.g., not complying with
current Good Manufacturing Practices or
potency and strength not of approved
Instances of counterfeiting are more likely
to result in criminal investigations (as
opposed to other alleged violations of the
FDC Act) because, by nature,
counterfeiting will involve the “knowing” or
“intentional” violation of law
A criminal investigation and sanctions are
much more likely to send a message to
potential counterfeiters than any form of
private legal action
 Another reason to get FDA and other
government officials involved if you see a
potential problem of counterfeiting
involving your product
FDA’s Recent Initiative
FDA’s recent initiatives to combat drug
counterfeiting will be discussed in detail by
other speakers
Overview – FDA formed a working group
and has released a report containing
recommendations and plans to combat
the counterfeit drug market
FDA plans to work and educate other
federal and state enforcement agencies
and officials, as well as consumers
FDA has also made it clear that it will take
more aggressive action against companies
importing drugs from foreign countries
FDA’s Recent Initiative
In a “Questions and Answers” paper issued
with the interim report, FDA stated:
Importation of drugs from foreign countries
creates a portal of entry for counterfeit drugs to
enter the U.S. distribution system.
Counterfeiters could take advantage of this
entryway by substituting counterfeit drugs for
authentic drugs and sell them to U.S.
wholesalers or other unsuspecting entities.
Importation also provides an avenue for
adulterated, unapproved, and outdated drugs
into the U.S. distribution system.
More To Do
FDA acknowledges that “[n]one of the
security, enforcement, education
compliance, inspection, regulatory, or other
actions being considered can guarantee
that counterfeiting will not occur in the US”
In addition, the agency has made no final
decisions on any specific anti-counterfeiting
And Don’t Forget About . . .
Drug Enforcement Administration – if the
products are controlled substances
Department of Justice/U.S. Attorneys
State enforcement
U.S. Customs & Border Protection
Plaintiffs’ lawyers
Where Problems Can Arise
Lack of internal quality control
Lack of internal security measures
Use of third parties in the manufacture
and distribution process
Where Problems Can Arise
Failure to monitor adequately product’s
distribution channels and possible
diversion or counterfeiting trends
In many states, becoming an authorized
distributor of pharmaceuticals or other
healthcare products is as simple as filling
out a form and paying a small fee at the
county clerk’s office
It has been reported that some drugs
may change hands among small
secondary distributors six to ten times
before reaching the hands of the
dispensing pharmacist
Case Example
On December 5, 2003, the U.S.
Department of Justice announced that a
Florida man was charged with selling to a
licensed wholesaler bottles containing a
counterfeit version of the prescription drug
Lipitor, manufactured by Pfizer
The wholesaler then sold the drugs to
another distributor, who in turn sold the
drugs to yet another distributor who then
sold the drug in wholesale and retail
Case Example
A forensic analysis of the tablets revealed
that some of the tablets were not
manufactured or distributed by Pfizer
The criminal complaint alleged that the
bottles contained a mixture of counterfeit
Lipitor and illegally diverted Lipitor
Case Example
Pfizer has said its products may now be
bought only from Pfizer or from authorized
Products may be sold only to pharmacies,
hospitals, physicians or other distributors in
the United States who are properly licensed
by the states in which they operate, or to
other Pfizer-authorized wholesalers
Case Example
Pfizer said its new initiatives will help prevent
distributors from purchasing its products on the
secondary market, which has been a primary
avenue for counterfeits to enter the U.S.
distribution system
The company said it will also periodically audit
purchases and sales of Pfizer medicines by its
wholesalers and will require that they put in
place a comprehensive plan to ensure the safety
of the nation’s drug supply
It is estimated that 200,000 tablets were counterfeited and mislabeled, resulting in a $55 million
Another Example
Serono’s Serostim for the treatment of
AIDS wasting
Serono was apparently not aware of the
In this case, the victim sought damages
from Serono, alleging the company was
negligent in taking sufficient action to
protect its product from the threat of
Although the plaintiff purportedly won only
a small award, the precedent if not a good
one for manufacturers in terms of liability
Legal Options
Against Counterfeiters
Possible Private Actions
Assuming that company X has reason to
believe that company Y is participating in
the sale of counterfeit drugs and FDA (or
other federal/state agencies have not
taken action), a company may:
1. Seek to stop the offending action by
asking a court to issue an order
restraining company Y from taking the
offending action (an analogy would be
the enforcement of a trademark or
Legal Options
Against Counterfeiters
2. One difficulty will be that a company must
have sufficient evidence to convince a
judge to issue the order
 Usually must show a likelihood to
succeed on the merits of the suit and
that irreparable harm will occur if the
court does not stop the action
Legal Options
Against Counterfeiters
3. If the counterfeiting is being assisted
by any person under contract with
company X, the company should be
able to seek relief from a court under
its contract (depending on how the
contract is drafted, an action based
on the contract may form an easier
basis to convince a court to intervene)
To Minimize Risks
Have a good working relationship with FDA
Government has wide and powerful
abilities to demand documents,
perform inspections, seize product,
and conduct interviews
To Minimize Risks
Demonstrate the company’s ability to
control and identify its products through the
Consider implementing FDA’s proposed
technologies to either authenticate or
track and trace approved drugs (e.g.,
unit-of-use packaging at the time of
manufacture, tamper-evident packaging,
electronic database of drugs to verify the
authenticity of the drug), although it may
not be cheap
To Minimize Risks
Authentication technologies assure that a
drug is indeed the approved new drug
and not a counterfeit
Track and trace technologies follow a
drug from its manufacture to the
To Minimize Risks
Review current standard operating
procedures (SOPs) to ensure that the SOPs
are addressing possible counterfeiting
 Ensure that you have written procedures
for the possible triggering events for an
investigation of counterfeiting
 Ensure that once a triggering event occurs,
you investigate and document the event to
a conclusion
To Minimize Risks
Consider following the National Association
of Boards of Pharmacy Model Rules
Consider Drug Enforcement Administration
requirements (e.g., security, storage)
To Minimize Risks
Work to ensure that contracts executed in
the distribution of your drug requires all
downstream handlers of the drug to
account for all the product
Ensure that all contracts contain
indemnification language holding your
company harmless for counterfeiting that
occurs after the product has left your
To Minimize Risks
Keep detailed documentation on the
tracing of your products through the
marketplace, in case you ever get into the
situation where you must prove that a
drug was a counterfeit
To Minimize Risks
Coordinate the control of your expiration
dating system – and the destruction of
drugs past these dates – with your anticounterfeiting SOPs
Perform routine (and sometimes
unannounced) audits of some distributors
This right should be explicit in your
contracts with distributors
Where Are We Headed?
It is too early to predict which specific
initiatives of enforcement FDA will pursue
to fight the distribution of counterfeit drugs
However, the agency clearly considers the
issue to be a high priority because of the
public health implications
Where Are We Headed?
Drug companies should also take the threat
of counterfeiting seriously due to the
potential risks that could result
Collaboration between FDA and the drug
industry is essential in implementing
successful controls
Where Are We Headed?
In January 2004, a U.S. Congressional
Committee asked five drugmakers to
provide information on their efforts to fight
counterfeiting and diversion of prescription
The letter said:
We are interested in any ongoing efforts or
plans by your company to prevent
counterfeiting and diversion of your drugs, and
to prevent any involvement of your products
with illicit Internet sites and foreign
For More Information
• For more information about FDA’s
initiatives, please review the information on
FDA’s Website at
• We wrote an article about FDA’s initiatives.
If you would like a courtesy, i.e. free, copy,
please give me your card or email us at
[email protected], or
[email protected] Now, how many
lawyers will give you something for free?!

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