Supreme court rules that suit for fraud on federal agency is preempted.

The U.S. Supreme Court has ruled unanimously that under federal law, suits claiming that fraud on a federal agency resulted in injury to consumers cannot be brought in state courts. (Buckman Co. v. Plaintiffs' Legal Committee, No. 98-1768, 2001 WL 167647 (U.S. Feb. 21, 2001).)

The Court found that "fraud on the FDA" claims are by implication preempted by federal regulations--specifically, the Food, Drug, and Cosmetics Act (FDCA), as modified by the Medical Device Amendments (MDA) of 1976.

About 5,000 people involved in a class action--claiming injuries from bone screws implanted in their spines--brought the suit. The screws were manufactured by AcroMed Corp., but the plaintiffs sued Buckman Co., a consulting firm that secured approval for the orthopedic screws from the FDA.

The agency rejected Buckman's first two applications for approval. In the third, the company said the screws were like bone screws already marketed for arm and leg use, and thus fell under an exception for devices that are "substantially equivalent" to devices already on the market when the MDA was enacted. The FDA approved the screws.

The plaintiffs alleged that Buckman fraudulently represented to the FDA how the screws would be used. They argued that if the company had been truthful, the agency would not have approved the devices, and thus the plaintiffs would not have been injured. They sought damages under state law.

The Court ruled that state court lawsuits are preempted by federal regulations. "Policing fraud against federal agencies is hardly `a field which the states have traditionally occupied,'" wrote Chief Justice William Rehnquist in the opinion, citing the traditional standard for reviewing state causes of action. Therefore, the Court held, the plaintiffs' suit does not warrant a presumption against preemption.

"To the contrary," Rehnquist wrote, "the relationship between a federal agency and the entity it regulates is inherently federal in character because the relationship originates from, is governed by, and terminates according to federal law." The state law claims of fraud on the FDA conflict with, and therefore by implication are preempted by, federal law, he said.

"The FDA is empowered to investigate suspected fraud," Rehnquist wrote, and the agency can use that power.

In a previous Supreme Court case, the justices ruled that the FDA's express preemption provision does not preclude state law personal injury suits, including those based on violation of federal standards. (Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996).) But Medtronic did not squarely address implied preemption, wrote Rehnquist. "It is clear that the Medtronic claims arose from the manufacturer's alleged failure to use reasonable care in the production of the product, not solely from the violation of FDCA requirements. In the present case, however, the fraud claims exist solely by virtue of the FDCA disclosure requirements."

While Medtronic could be interpreted to allow some state law claims that relate to federal safety requirements, it does not say that any violation of the FDCA will support a state claim. In Buckman, "the existence of these federal enactments is a critical element in their case," wrote Rehnquist.

ATLA submitted an amicus brief for the plaintiffs, stating that tort liability for harm to a third person caused by a misrepresentation is a traditional state law cause of action. The association said liability for damages is not inconsistent with the federal regulatory scheme and, in fact, advances Congress's purpose in enacting the MDA to increase protection of the public from dangerous devices.

"The decision could leave consumers out in the cold without any remedy," said Jeffrey White, associate general counsel for ATLA, because it means that only the FDA, not individuals, can sue companies that allegedly defrauded the government to get a medical device approved. Nevertheless, he said, the ruling is likely to have limited effect because most fraud claims are connected to a product defect. In those cases, as in Medtronic, plaintiffs can still pursue products liability claims.

Arnold Levin of Philadelphia, who represented the plaintiff class, said the ruling may have unintended consequences for the medical device industry.

"What may very well happen is a number of what the industry considers to be tort `reform' statutes may be invalid," he said. "For example, in New Jersey, you can't sue for punitive damages unless there's a fraud on the FDA," since once a product is approved, you can't sue for damages. With the fraud claim preempted, he said, an attorney could argue that traditional punitive damages should be available.