Managing Legal Risk in an Innovative Business

Business leaders often resist engaging their lawyers for several reasons. More than simply the adverse impact of lawyers’ billing practices (being “on the clock" or firms receiving exorbitant, surprise invoices) or the prospect of slogging through tiresome, jargon-laden writing, it’s because lawyers are often perceived as disinterested in rendering timely advice that both manages business risk while realistically engaging market opportunities. Without saying as much, senior leadership—pressured by the innovation-demands of market leadership—can regard their lawyers as “good idea killers" who—in the name of competence and risk-aversion—sell fear with obfuscation, while competing with the “real" demands of business. These realities, it seems to me, hold especially in the dietary supplement business: a highly regulated industry in which the primary barriers to entry arise from legal and regulatory challenges.

While God is in the details (as the earlier idiom reminds us) from one perspective, the basic contours of dietary supplement law and regulation are simple enough. Federal law defines what a “dietary supplement" is, and there are a few requirements for bringing a dietary supplement to market:

1. the finished product or constituent ingredients can’t present an unreasonable risk of illness or injury;

2. a new dietary ingredient (NDI) notification may be required, under certain circumstances;

3. the technical elements of the product label must comply with the regulations;

4. the product’s labeling claims (packaging, marketing materials, website, etc.) must be truthful and not misleading, must be adequately substantiated and must not be disease claims, and certain claims are subject to pre-market notification; and,

5. dietary supplement manufacturers, packagers, labelers and holders (except retailers) are subject to cGMPs (current good manufacturing practices), and their facilities must be registered with FDA.

On the other hand, this body of legal requirements imposes a significant burden, primarily because so much remains uncertain. Permit some examples:

1. In July 2011, FDA stated that a synthetic copy of an herb or botanical extract didn’t qualify as a dietary ingredient because substance was never “part of" the botanical. Does FDA’s statement matter? If so, how? What’s the business impact? What should industry leaders do, then, when developing products that contain synthetic herbs or botanicals? Does the same rationale apply to all other synthetics (e.g., vitamins or minerals)?

2. For years, FDA routinely found the majority of NDI notifications were filed with an inadequate basis to determine whether the ingredient was more likely to be safe than not. In other words, the NDI fillings were shot down. After FDA issued guidance on how and when to make a proper NDI notification, has anything changed and if so, what? And what is the business impact? Was it a “game changer" or did it represent merely a slight tweak on product development or business outlook? A third example: the laws with respect to product claims function create various adverse incentives.

3. Getting “adequate substantiation" for claims often is confusingly difficult and is always slower than the market allows. How then, do firms innovate, or merely “follow closely and quickly," for that matter? Strict compliance often creates uncompetitive product positioning, especially in a market fraught with claim law violations. What concerns should predominate when attempting to ensure product safety and truthful advertising and labeling claims? Many market-captivating dietary supplement-labeling claims vacillate between docile structure/function claims and aggressive (and technically, illegal) disease claims. How should firms decide where to land on this continuum? What about premarket notification? Does FDA care? Should you? If so, how much? What happens if you don’t?

Indeed, most dietary supplement firms occasionally are subjected to various forms of discipline: from regulators (an FDA warning letter, facility inspection, voluntary product recall or inspection/hold/detention or refusal on imported products; and similar such actions at the state-level: an inspection, stop-sale or embargo or a recall), from public-interest groups (private lawsuits and PR campaigns related to ingredients or products perceived to be unsafe), from plaintiff’s lawyers (primarily for class-action lawsuits in products’ liability or related to advertising or business practices). But in this environment, what matters the most? For large firms? Small firms? Medium-sized firms?

4. Many dietary supplement firms source their ingredients overseas, often from India or China. While compliance with dietary supplement cGMPs is important, since most dietary supplement firms are small and medium-sized firms, what elements of compliance really matter? In other words, the regulatory subpart (21 C.F.R. § 111) is something like 17,000 words, what are the most important features? Put another way, how do you allocate operational resources amid the possibility of regulatory enforcement or products’ liability risk?

5. Oftentimes, the import process (for acquiring dietary ingredients overseas) itself is “taken as given" for dietary supplement firms. In other words, firms assume risks unaware (as the Importer of Record, for example), delegate important responsibilities (e.g., to brokers or logistics providers), sign form agreements or purchase orders, acquire insurance policies trusting the representations about coverage (when it’s a form policy without manuscripting), or possess weak controls for managing the suppliers. What can be done to improve this situation? What are top ways to manage these risks realistically (cost-effectively, quickly, and without undue burden) for the innovator?

For dietary supplement firms, success in this environment requires something other than an onslaught of legal information, textbook jargon or stifling nuance. Rather, what is required is candid business judgment guided by responsible engagement with legal and market realities to deliver as much available certainty as possible.

Get the answers to the questions Rick D. Quinn, Esq., principal, FDAImports.com LLC; and partner, Benjamin L. England & Associates LLC, pose in this article in the SupplySide West education session, “FDA Compliance in the 'Real' World: Cutting Through the Noise to what Really Matters" on Tuesday, Oct. 7, at 11:00 a.m. at Mandalay Bay, Las Vegas. Quinn will discuss managing regulatory compliance and legal risk in the context of a growing business with new products.

Rick D. Quinn, Esq. is principal, FDAImports.com LLC; and partner, Benjamin L. England & Associates LLC.