3 Ways Marketing Claims Can Destroy Healthcare Companies: FTC, Plaintiff Trolls, & State Regulatory Agencies

Here’s why you need legal review of any information your healthcare company puts out on the Web: advertising claims can not only hurt, they can destroy your healthcare company.

Sally’s Healthcare Company Debut

Trapped by her day job, Sally began visioning a healthcare startup that would offer:

• Medical spa services;
• A privately labeled line of dietary supplements, branded after a medical doctor who would collaborate with the medical spa
• Cosmetics, also known as cosmeceuticals (alongside the nutraceuticals), also privately labeled and branded with the face of the medi-spa physician;
• Other healthcare products and consumer electronics focused on health and wellness, and possibly a medical device geared toward obliterating fat and eliminating wrinkles;
• Fitness classes, training from an expert in exercise physiology, massage therapy, and onsite chiropractic and acupuncture.
• Telehealth and telemedicine advice from the various non-licensed and licensed healthcare professionals, including the fitness gurus.

Sally sought advice from three different business lawyers she knew as well as a regulatory consultant in HIPAA—who kept trying to sell her a certificate on HIPAA compliance and some expensive software—and when she got conflicting advice, she finally sought legal advice from a law firm knowledgeable in healthcare law, FDA law, and legal rules governing advertising and marketing.

Sally had succeeded in several other startups—none of them healthcare ventures—and knew that finding the right attorney and legal team was critical to avoiding legal and regulatory sand traps.  Still, she was unprepared for the complexity of she was envisioned and how many regulatory lines her proposed business potentially crossed.

Within a short time, Sally learned about some key legal and regulatory healthcare issues that posed challenges to her business model:

• Prohibitions against unlicensed and corporate practice of medicine, particularly in states with strong corporate practice of medicine doctrines;
• The landscape around fee-splitting and kickbacks, both on the state level as well as federal prohibitions more applicable to Medicare-covered services.
• The FDA regulatory environment governing dietary supplements, and, cosmetics; and the line between structure/function claims that FDA allowed for dietary supplement, and disease claims, which were prohibited for both the dietary supplements and cosmetics lines.  Also the dangers of touting one of her topical or consumable products to cure diseases such as diabetes.

Armed with this knowledge, Sally set out to market.  However, she had a limited legal budget and did not get to vet all of the marketing claims she planned to make with the law firm’s FTC expert.

Is it a Consumer Healthcare Product or a Medical Device?

Like many healthcare entrepreneurs, Sally was enthusiastic about a particular product that she thought would revolutionize the consumer experience in fitness, health and wellness.

It was a device that used galvanic skin response (GSR) to gather information about the person’s overall health, and was connected to software gave the user specific recommendations about the best dietary supplements and cosmetics for the user’s health situation.

What Sally didn’t know was whether this incredibly “smart” device would be classified by FDA as a medical device, and thus be subject to a large and onerous body of medical device regulation, or, might slip under the radar as a general wellness device.

One thing Sally learned is that a lot depended on the marketing claims she would be making for the product; because among other things, those claims would provide FDA evidence of her “intended use” for the product.  If FDA determined that the intended use was diagnose or treat disease, then that would make the product a medical device.

Sally had tried the product herself and did a host of things for her; after six months of regular use, her acne cleared, she lost weight, she was no longer at risk for diabetes, she had less fatigue and had even cured the insomnia that had been plaguing her since college.

In fact, she no longer had panic attacks.  She believed the product worked at a molecular level (or was it at a cellular level, or maybe in the quantum spaces inside the molecule?  The brilliant, idiosyncratic inventor-scientist had described the theory in broad, inspirational strokes and of course, she had secured from him a license to use the technology at a favorable royalty.  Then again, she wasn’t really sure about the licensing agreement … to save money, she got it off the Internet.  After all, some other lawyer had written it for some other client, so it must be right, right?)

Still, Sally had a burning FDA question.  Was this an exempt device; or, was it one supported by a “substantially equivalent,” “predicate device” that had already been cleared by a 510(k) submission to FDA?

Could she make an end-run around the FDA medical device process simply by having her lawyers “water down” the language, and say something like, “this device doesn’t diagnose disease, but it merely expresses your body’s preferences for foods that if taken in excess can potentially result in diabetes?”

Would disclaimers and qualifying language save her product from classification as a medical device, yet still allow her to leave in more aggressive claims?

What were the limits of prior FDA clearance for similar GSR devices?

How the federal Government, State agencies, and just plain lawyers can get you shut down

Sally went to her healthcare and FDA lawyer and learned that there were multiple existential, legal threats to her health and wellness business.

First, state agencies such as the Attorney General or District Attorney could investigate her company and bring an enforcement action based on any variety of legal theories.  For example, healthcare fraud is a popular category that generates many enforcement actions in the health and wellness industry.  Then there is deceptive advertising, a mirror on the State level of FTC rules on the federal level.

Second, private plaintiffs can take these government actions and a predicate for litigation.  One of the popular legal theories in California is unfair business competition.  Some lawyers love a good fight – particularly if there’s money involved.  Perhaps every customer of Sally’s was mispromised, overpromised, oversold … perhaps there was an “unfair” business practice.  Perhaps each should be refunded their $24.99 and it turns out there were a million customers, which with straight algebra yields a class action demand for about $25 million, on compensatory damages alone.

Third are the FTC issues.

There are also FDA issues.  If Sally has a medical device, then unless “exempt” the product can only be marketed subject to what is known as a 510(k) submission.  If you don’t have a 510k, FDA will shut you down.  The 510(k) submission can be extensive, and among things will require performance standards showing that the product works as intended.

General Wellness Devices

FDA recently promulgated guidance allowing manufacturers and distributors to put “general wellness” products on the market (see our prior posts).

For example, most fitness trackers are noninvasive, and simply just used for general information.

At the end of the day, FDA has enforcement discretion.

Biofeedback Devices

One of the types of products that come up a lot in our healthcare and FDA law practice are biofeedback devices.

These are actually defined in applicable regulations:

(a) Identification. A biofeedback device is an instrument that provides a visual or auditory signal corresponding to the status of one or more of a patient’s physiological parameters (e.g., brain alpha wave activity, muscle activity, skin temperature, etc.) so that the patient can control voluntarily these physiological parameters.

Key here is that the manufacturer and distributor cannot make claims beyond those just articulated in the regulation.  They cannot make therapeutic claims, for example.

There are many “scanners” on the market which purport to produce some kind of meaningful report about the body’s overall health.

This is a very risky area with active regulatory enforcement.

Both 21 CFR 882.5050 (biofeedback device) and 21 CFR 882.1540 (GSR measurement device) contemplate regulation as Class 2 devices (the biofeedback device regulation provides that the device is exempt when it is a “prescription battery powered device that is indicated for relaxation training and muscle reeducation and prescription use, subject to 882.9;” however, other uses will be Class 2).

In other words, a product whose intended use suggests a biofeedback or GSR measurement device, unless it meets the exempt criteria, would likely require (at the least) 510(k) clearance to get to market.

If this seems like a lot of legalese all of a sudden, remember again that medical devices are subject to regulation and that the rules said out what can and cannot be said about a given product.

One way to understand how companies get in trouble with FDA is to read applicable FDA Warning Letters.  In one Warning Letter about a biofeedback device, FDA warned about marketing the device for intended uses including treating or curing of named diseases; and warned about going beyond the narrow language of the 510(k), which was simply “the measurement of galvanic skin response (GSR).”  Among other things, FDA cited purporting to measure “biological preference and biological aversion … biocommunication … stimuli your body responds most favorably to….”  FDA determined that the company in question was promoting its product for “diagnosing a disease or condition, predicting biological responses to a wide range of virtual stimula including drugs and untritional supplements, or determining whether someone responds to a specific allergen….”

These kind of warning letters make it challenging to avoid 510(k) (or possibly even) the more stringent premarket approval (PMA) requirements and to slot Sally’s product into a “low-risk general product” or into the category of fitness trackers (some of which take advantage of the FDA guidance on mobile medical apps).

Among other things, Sally’s healthcare and FDA law firm should look to:

• intended use and the claims being made for the product;
• whether these likely make the product a regulated “medical device” and if so whether the device is exempt or in 510(k) or PMA territory; and
• whether the claims can be substantiated.  (Note: we cannot address whether you have substantiation in a preliminary review and call, but we can emphasize its importance.)

This is because the existing warning letters suggest strong caution about bringing any similar product to market without 510(k) clearance, and, the importance of marketing in accordance with the clearance and not beyond it.

Substantiation Matters to FDA and FTC

Even if a company successfully resolves its claims issues in light of medical device rules, substantiation is still a requirement.

All claims must be substantiated (for FDA & FTC), even if the claims are implied and not express.

One of the biggest risks is that if FTC finds that claims are unsubstantiated, it will impose huge penalties on the company, potentially even driving the company into non-operation.

Conclusion

If you have a consumer product that might be a medical device, get legal advice from a medical device lawyer who understands FDA rules and FTC enforcement risk.  Don’t go out into the market unprotected and simply “hoping” that everything will be all right.  We have seen companies ignore FDA and FTC enforcement risk to the tune of million-dollar judgments.  You will not mourn a 4-figure or 5-figure retainer, but being saddled with a 6-figure or 7-figure or even 8-figure regulatory penalty make “sticker shock” seems like a euphemism.  Contact our FDA and FTC lawyers today to evaluate your regulatory risk and make risk mitigation recommendations.