A recent decision by the Tenth Circuit Court of Appeals may create new risks of liability for marketers of dietary supplements and medical devices. In a decision issued on February 22, 2006, the court ruled that, in appropriate cases, courts may order disgorgement as an equitable remedy for violations of the federal Food, Drug and Cosmetic Act. The FDCA is the primary federal law that regulates the sale of foods, drugs, medical devices, and cosmetics in the United States.

U.S. v. RX Depot, Inc., arose out of the government’s settlement with a reimporter of prescription drugs originally manufactured in the United States. Defendants RX Depot, Inc., RX of Canada, LLC, Carl Moore, and David Peoples ran a program which allowed U.S. consumers to order U.S. prescription drugs from Canadian pharmacies at reduced prices, and collected commissions on the sales. As part of the settlement with the government, defendants admitted to violating the FDCA and agreed to a permanent injunction barring them from resuming their activities. The settlement left it to the courts to decide whether an additional equitable remedy would be appropriate.

The district court ruled in the defendants’ favor, finding that disgorgement was not available under the FDCA as a matter of law. The Tenth Circuit disagreed, ruling that disgorgement “is permitted under the FDCA in appropriate cases.” In reaching this decision, the appellate court rejected the defendants’ argument that the FDCA provisions permit the government to only halt ongoing violations or to punish past violations. In light of the fact that the chief purpose of the FDCA is to “protect the public health,” the court concluded that “public health is protected not only by halting current violations of the Act, but also by deterring future violations. Disgorgement, which deprives wrongdoers of their ill-gotten gains, deters violations of the law by making illegal activity unprofitable. . . . Therefore, disgorgement furthers the purposes of the FDCA.” The Tenth Circuit sent the case back to the district court for a determination of whether disgorgement is appropriate under the facts of this particular case.

Although this case arose out of the marketing of prescription drugs, the same remedies could be applied to the marketing of dietary supplements and medical devices in violation of the FDCA. In the past, when the FDA has had concerns over the marketing of supplements or medical devices, it has often issued warning letters and/or merely required the marketers to discontinue sales of the product. By adding disgorgement to the arsenal of weapons available to enforce violations of the FDCA, this case is likely to spur increased enforcement activity.

Significance: This case makes it clear that the government’s efforts in enforcing the FDCA may go far beyond injunctive relief to reach profits of the allegedly illegal activity, especially in egregious cases.