WARNING: GMP Problems No Excuse for Caraco’s Lack of WARN Act Layoff Notifications

January 4, 2016

By James C. Shehan

The worlds of FDA regulatory law and employment law rarely intersect, so when we came across a recent case in which they did, we thought it worthy of commentary.  In that case, a federal appeals court held that GMP troubles leading to a mass seizure were not an “unforeseeable business circumstance” that could excuse an employer from complying with the Worker Adjustment and Retraining Notification (WARN) Act’s requirement that employees be notified at least 60 days prior to a mass layoff.  The court’s opinion also provides a rare judicial analysis of the reasonableness of management’s response to serious drug GMP issues. 

Last year, the United States Court of Appeals for the Sixth Circuit handed down a decision in Calloway v. Caraco Pharmaceutical Laboratories, Ltd.,  800 F. 3d 244 (Aug. 26, 2015), affirming a lower court decision in favor of a class of plaintiffs consisting of employees at Caraco’s two Michigan generic drug manufacturing plants who were laid off beginning June 26, 2009.  The Caraco facilities had a lengthy history of cGMP woes laid out in detail by the court – warning letters in 2000 and 2002, followed by 483s in 2005, 2006, 2007, 2008 (two) and 2009, as well as another warning letter issued on October 31, 2008.  There was a recall of one product manufactured at the facility in 2008 and recalls of 29 products in 2009.  Correspondence between Caraco and FDA showed a steadily escalating level of seriousness in FDA’s characterizations of the problems at the plant.  In addition, Caraco hired two outside GMP consultant firms in 2008.  One of the consultants warned Caraco that it was “at risk” of FDA enforcement actions such as seizures or injunctions and the other said that an enforcement action by FDA were “likely.”  While the company repeatedly told FDA that it was addressing the GMP problems and that it recognized the seriousness of the violations, the company ignored one consultant’s advice to destroy cross contaminated products, immediately recall other products, delay moving into a new facility, and not start production of newly approved products.  In addition, in an email to the CEO, a Caraco vice president characterized the view that an enforcement action was likely as “alarmist.”  

Six weeks after issuing the eighteen item 2009 483, FDA seized products at the two Caraco Michigan facilities.  Caraco ceased manufacturing at those facilities and with no prior notice began a mass layoff of both hourly and salaried employees at those facilities.  Two and a half years later, one of those employees filed a class action in Michigan federal court, alleging a WARN Act violation.

Among other things, the WARN Act requires employers to give a 60-day notice to affected employees before a facility closing or mass layoff.  Caraco and the plaintiffs agreed that Caraco is an employer within the meaning of the Act, that the class members are affected employees and that the layoff was caused by the FDA seizure.  The sole contested issue was the applicability of an exception to the Act’s 60-day notice requirement – such notice is not required if the layoffs are “caused by business circumstances that were not reasonably foreseeable.” 

Department of Labor regulations expound on this requirement – “[a]n important indicator of a business circumstance that is not reasonably foreseeable is that the circumstance is caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control.”  20 C.F.R. § 639.9(b)(1).  The regulations also stipulate that a government-ordered closing of a site that occurs without prior notice may be an unforeseeable business circumstance.  Id.  On the other hand, the regulations state that “[t]he test for determining when business circumstances are not reasonably foreseeable focuses on an employer’s business judgment” and require that an employer “exercise such commercially reasonable business judgment as would a similarly situated employer.”  20 C.F.R. § 639.9(b)(2). 

In defending its position that the seizures were not reasonable foreseeable, Caraco argued that between 2007 and 2009, FDA issued 1,390 warning letters but conducted only 22 seizures, that FDA had not seized products after its first two warning letters, and the 2008 warning letter contained the same boilerplate language as the earlier two letters concerning possible enforcement action.  Caraco also argued that the impossibility of predicting the timing of a seizure made issuance of a layoff notification impractical. 

The appellate court rejected these points and instead found that the district court was correct in finding the FDA seizures to be “reasonably foreseeable.”  The Court stated that Caraco knew as early as July 2008 that enforcement action could result from GMP deficiencies.  The court noted the increasingly critical nature of the 483s, the multiple recalls and that Caraco’s GMP consultants had told it that an enforcement action was likely.  The Court also pointed out that Caraco’s GMP issues were public, appearing in a company January 2009 press release and a February 2009 SEC filing.  Regarding Caraco’s point that a seizure was statistically unlikely, the Court said that “such evidence could just as easily be interpreted to show that enforcement actions were rare not because they were empty threats but because other employers who were issued warning letters promptly corrected their deficiencies or in some other way were not similarly situated to Caraco when the FDA seized its products.”

In rebuffing Caraco’s assertion that it was reasonable to believe that its cooperation and good relationship with FDA made a seizure was unlikely, the Court said that Caraco was not, in fact, sufficiently cooperative, citing a longstanding problem with tablet size variation that it had failed to correct, the multiple recalls, and an April 14-17 outside consultant audit that showed a lack of improvement since the 2008 warning letter.  The Court also stated that a “reasonable drug manufacturer should have known that a positive working relationship with the FDA would not be enough to insulate it from the possibility of regulatory action.”

Significantly, the Court also rejected Caraco’s argument that it believed that it was making progress in addressing its GMP issues.  The Court found that it was “reasonable for the district court to conclude that Caraco gave no indication of making changes in its business practices in the wake of the FDA’s 2008 warning letter.  Although Caraco did take some action in response to the warning letters and Form 483s, the district court did not err in determining that these actions fell short of the kind of significant change that a reasonable employer should have known was necessary to forestall an enforcement action.”

In the wake of this case, it seems reasonable for any company facing serious GMP problems to add one more item to its to-do list: consider whether it should provide a 60-day WARN Act notice to employees before making any layoffs or closures due to those GMP issues.       

Avid readers may be aware that these Caraco facilities also played a role in Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, a Supreme Court  decision in which the Court held that a patent use code  qualifies as “patent information” submitted under FDC Act §§ 505(b) and (c) and may be the subject of a counterclaim to correct or delete patent information (see our posts here, here and here).  

Categories: Enforcement