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United States v. Lane Labs-USA Inc.

October 21, 2005

UNITED STATES OF AMERICA
v.
LANE LABS-USA INC., A CORPORATION; ANDREW J. LANE, AN INDIVIDUAL, APPELLANTS



Appeal from the United States District Court for the District of New Jersey. (D.C. Civil No. 99-cv-05782). District Judge: Honorable William G. Bassler.

The opinion of the court was delivered by: Rendell, Circuit Judge

PRECEDENTIAL

Argued June 30, 2005

Before: RENDELL, BARRY and BECKER, Circuit Judges.

OPINION

In this case, we are called upon to decide whether a district court has the power under the Federal Food, Drug and Cosmetic Act, 21 U.S.C.§ §§ 301, et. seq. ("FDCA"), to order a defendant found to be in violation of the Act to pay restitution to consumers. Because a district court's equitable powers in such a situation are broad, we hold that an order of restitution is properly within the jurisdiction of the court.

I.

On August 11, 1994, Appellant Andrew Lane formed Lane Labs ("Labs") to manufacture and supply health products. Andrew Lane is the president, director, and sole shareholder of Labs. Labs sells its products in several different ways: directly to consumers, through its CompassioNet Division, and through third-party distributors. Three products are the subject of this action: (1) BeneFin, sold in powder or tablet form as a dietary supplement and containing shark cartilage; (2) SkinAnswer, a skin cream containing glycoalkaloid; and (3) MGN-3, a dietary fiber produced by the hydrolysis of rice bran with the enzymatic extract of Shiitake mushroom, and whose main ingredient is arabinoxylan.

At a convention in 1997, the Food and Drug Administration ("FDA") first observed Labs distributing materials promoting BeneFin to treat cancer. The FDA informed Labs through letters and telephone conversations that such conduct violates the FDCA. The FDA also inspected Cartilage Consultants, Inc. ("CCI"), a company founded by Dr. I. William Lane, Ph.D., Andrew Lane's father. Dr. Lane has been researching shark cartilage and its effects since 1983. He has produced copious writings on his studies and the benefits of shark cartilage and its possible effects on cancer. Through this inspection, the FDA discovered that Dr. Lane actively promoted BeneFin and SkinAnswer as potential treatments for cancer and that he was a "paid consultant" to Labs. Labs, in turn, used its association with Dr. Lane in the marketing of its products. For instance, in a letter to health professionals, Labs touted Dr. Lane as "the world's foremost authority on shark cartilage [who] has directed the development of BeneFin Shark Cartilage." (Lab Marketing Materials at A1190.) In addition, on the SkinAnswer packaging itself, Labs placed both Dr. Lane's photograph and his endorsement of the product.

Appellants marketed their products in several different ways. They sent monthly catalogs of their products to a mailing list they maintained. They also advertised in magazines and maintained several websites. They operated a network of companies, including their CompassioNet Division, which acted as a sales agent for the products. Appellants used CCI and paid researcher spokesmen, such as Dr. Lane and Mamdooh Ghoneum, Ph.D, to promote the products. Other sources also offered information about the types of products sold by Labs. Dr. Lane's books and writings are available for sale through several avenues, such as Amazon.com. Health newsletters, such as Alternatives, included claims for the products and the television show "60 Minutes" aired a story featuring Dr. Lane about shark cartilage as a cancer therapy.

Investigations revealed that Appellants specifically promoted the products to treat diseases. Employees answering calls to Appellants' toll-free telephone number referred callers to an employee of CCI, who then promoted the products as cancer and HIV treatments. Appellants sent mass mailings to customers, including order forms and articles promoting the products as disease treatments, some of which were written by Drs. Lane and Ghoneum. In addition, Appellants bought in bulk independent newsletters with claims about the products, such as Alternatives, and included them in their mailings. Appellants also maintained several websites with metatags concerning cancer, Dr. Lane's research, and claims of disease treatment.*fn1 Appellants also promoted BeneFin as the product that was featured on "60 Minutes" and developed by Dr. Lane.

In September 1997, the FDA sent a warning letter to Labs, explaining that the marketing claims for BeneFin and SkinAnswer rendered them unapproved and misbranded drugs. Andrew Lane wrote a response letter, claiming that the FDA's warning had been based on Dr. Lane's promotional materials and that Dr. Lane was independent of Labs even though he was a "research consultant to my company." In 1998, Appellants asserted that Dr. Lane had previously worked with Labs, but was no longer employed or consulting for Labs. Discovery then showed that Dr. Lane was continuing to receive large consulting fees from Labs. The FDA issued multiple warnings to Labs. On September 22, 1999, the Department of Justice sent a notice informing Labs of its intent to bring suit against Labs and its president, Andrew Lane, to enjoin its continuous violations of the FDCA through the sale and promotion of the products as treatments and cures for cancer and other diseases. The Federal Trade Commission ("FTC") and the FDA both commenced actions against defendants.

FTC Action

The FTC filed a complaint against Labs, Andrew Lane, Cartilage Consultants, Inc. and Dr. Lane, contending that they inappropriately advertised and promoted BeneFin and SkinAnswer as effective in the prevention, treatment, and cure of cancer. The FTC specifically sought monetary relief to redress injury to consumers resulting from defendants' violations of the Federal Trade Commission Act, including the refund of monies paid and the disgorgement of ill-gotten monies. Labs and Andrew Lane entered into a Consent Decree with the FTC and judgment was entered against Labs (but not Andrew Lane) in the amount of $1 million. A permanent injunction was also ordered, prohibiting defendants from representing that BeneFin or any other shark cartilage product "prevents, treats or cures cancer unless, at the time the representation is made, defendants possess and rely upon competent and reliable scientific evidence that substantiates the representation."

FDA Action

On December 10, 1999, the FDA filed a Complaint for Permanent Injunction, alleging that Labs' promotional claims brought their products under 21 U.S.C. § 321(g)(1)(B)'s definition of "drugs" and that they were "new drugs" within the meaning of § 321(p) being distributed without requisite FDA approval in violation of 21 U.S.C. § 331(d) and § 355(a). It also alleged that the products were misbranded within the meaning of § 353(f)(1) because they lacked adequate directions for use and were being distributed and held for sale in violation of § 331(a) and (k). The Complaint sought a permanent injunction to prevent Labs from committing further violations and also requested that the Court "grant such other and further relief as it deems just and proper." (Compl. at A113-121.)

In June of 2002, the FDA moved for summary judgment and amended the Complaint to seek both a permanent injunction and equitable relief in the form of restitution for purchasers of the products since September 22, 1999 (the date FDA notified Labs of its intention to file the present action) and disgorgement of profits, if such profits were not exhausted through restitution.

District Court's Disposition

On July 12, 2004, the District Court granted the government's motion for summary judgment, issued a permanent injunction against the future sales of the products until a new drug application was approved for them, and ordered restitution to all purchasers of the products since September 22, 1999. The District Court's Order also provided for unannounced FDA inspections of Lane Labs at Labs' expense, and granted the FDA discretion to force Labs to undertake certain corrective actions. The Court concluded that all three products were drugs because Labs intended to market them for use in the treatment or cure of disease as evidenced by their promotion of them for cancer, HIV, and AIDS. The Court further held that the products were unapproved new and misbranded drugs. The Court found that Labs' violations had been recurring, noted that Appellants did not appear to recognize the wrongful nature of their conduct, and had not voluntarily ceased the challenged practices.

II.

The District Court had jurisdiction over this matter pursuant to 28 U.S.C. § 1331, as it arose under the FDCA. It had jurisdiction to restrain the violations pursuant to 21 U.S.C. § 332. We have jurisdiction under 28 U.S.C. § 1291 over this appeal from the District Court's order granting summary judgment to the FDA, enjoining defendants from engaging in certain activities, and directing defendants to pay restitution.

III.

Appellants contend that the District Court did not have the authority to order restitution under the FDCA.*fn2 This is a question of law, which we review de novo. Pierce v. Underwood, 487 U.S. 552, 558 (1988). Appellants urge that restitution cannot be awarded in this case because the FDCA does not expressly provide for such a remedy and ...


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