Greg Doherty of Poms & Associates

Guest Post: Greg Doherty of Poms & Associates Insurance 

Deals in the supplement space are heating up.  That’s why it’s important to remember to pay attention to details like Extended Reporting Provision (“ERP”) or “tail” coverage options available in insurance policies that can protect the business going forward in the event of claims.

Liability insurance for supplement raw materials suppliers, contract manufacturers and retailers is offered on a “claims made” basis almost exclusively. When a dietary supplement company is acquired, the Seller–and the Buyer– need to be aware of the uniqueness of how the claims made coverage must be structured around the transaction, so as to protect both of them after the deal closes.

Central to understanding this subject is the coverage trigger for claims made insurance. A policy has to be in effect when the claim is made against the supplement company, not necessarily when the claim actually occurred. Often there is a long delay between when a claim happens and when a lawsuit is filed. With claims made coverage if no claims made policy is in force when the claim comes in, there is no coverage, regardless of when it occurred.

 Many M&A deals are “assets only” acquisitions these days, reinforcing the importance of covering the Seller, who is left with past liabilities as part of the transaction.. That means the Seller retains the liabilities—including future claims that come in from something that happened when he DID own the company, This is usually backed up by an indemnity agreement from Seller to Buyer in the agreement of sale.

The first inclination of the Seller is to cancel his liability policy on the closing date because ostensibly he doesn’t need it anymore. Not so with a claims made policy. If Seller does that and does not exercise the Extended Reporting Provision (“ERP”) or “tail” coverage option in his policy, he will have no policy if a claim comes in, and thus no coverage.

Let’s use an example an injury that happened pre-close but is not made until six months after close. Remembering that it is the making of the claim that triggers the coverage, NOT when the injury occurred, at if the ERP coverage is NOT purchased by Seller:

 -At the time the claim is made, the Seller will have no insurance coverage , and

-Neither will Buyer as their policy is going to effectively bar any claims that happened before the acquisition.

So in the absence of ERP coverage, neither party will have any insurance coverage for the claim. This is also why savvy Buyers will often require the Seller to purchase ERP coverage as part of the overall transaction, the fear being that if Seller is long gone and without coverage, the courts will assign him liability anyhow, in spite of the contractual agreement in the sale document that the claim should be paid by Seller.

ERP coverage for Sellers in a M&A deal should not be overlooked by either Seller or Buyer.

The three little guys on Rice Krispies boxes are in trouble for claiming that their cereal supports the immune systems of children. The Federal Trade Commission announced on June 3 that Kellogg Co. had  agreed to pull back on health claims for the puffy cereal.

In a statement, commission chairman Jon Leibowitz said, “We expect more from a great American company than making dubious claims – not once, but twice – that its cereals improve children’s health. Next time, Kellogg needs to stop and think twice about the claims it’s making before rolling out a new ad campaign, so parents can make the best choices for their children.”

In a joint statement, Leibowitz and commissioner Julie  Brill used stronger language: “As a trusted, long-established company with a presence in millions of American homes, Kellogg must not shirk its responsibility to do the right thing when it advertises the food we feed our children.”

Kellog had a run-in with the FTC over its Frosted Mini-Wheats that resulted in the company’s admission that health claims made for the cereal were false and a settlement order in February 2009. Kellogg agreed not to claim “benefits to cognitive health, process, or function provided by any cereal or any morning food or snack food unless the claims were true and substantiated,” according to the statement on the Rice Krispies order.

Leibowitz and Brill said in their joint statement that even as Kellogg was pulling back on the Mini-Wheats claims, it must have been moving forward with health claims on the Krispies cereals.

“The company clearly has the means and ability to carefully test its children’s food products to determine if the products in fact provide health benefits for kids,” the commissioners said. “We are also confident that Kellogg has the wherewithal to carefully develop truthful and nonmisleading advertising about such health benefits.”

Kellogg responded with a statement saying that it stands behind the validity of product claims and research. “So we agreed to an order that covers those claims,” their statement said.

The expanded order now prohibits Kellogg from “making claims about any health benefit of any food unless the claims are backed by scientific evidence and not misleading.”

This is familiar ground for makers of nutritional supplements, but not so much for a manufacturer whose advertising icons include three guys in hats and a cuckoo bird. (Cocoa Puffs had the claim, too.) Kellogg, and General Mills whose Cheerios heart-health claims drew a warning letter from the Federal Drug Administration, are now learning what it’s like when you emblazon words like “immunity” and “antioxidants” on product packaging.

Nearly all of the herbal dietary supplements tested in a Congressional investigation contained trace amounts of lead and other contaminants, and some supplement sellers made illegal claims that their products can cure cancer and other diseases, investigators found.

So begins an article in the New York Times on a Government Accounting Office report released May 26 that questions the safety of supplements. Could plaintiff attorneys be thumbing through the pages looking for defendants?

Very little in the report is news to the industry. A number of supplements  have trace amounts of ingredients that could be harmful in large doses. And questionable health claims are commonplace.

A government study carries weight in the mind of jurors considering product defect claims: Did a supplement make plaintiff sick? Did it contribute to health problems? Did the manufacturer take adequate steps to ensure the safety and quality of its product? This  is the stuff of litigation.

The report has led to the usual suggestions: better disclosure of ingredients on labels; better inspections of manufacturing plants; better enforcement of rules on product claims; and FDA power for recalls. None could prevent tainted products from being marketed and sold, so what legislation cannot do, litigation might.

Peter Quinter of Becker & Poliakoff

Guest Post from The Customs and International Trade Law Blog

The U.S. Food and Drug Administration recently issued several warning letters to prominent food and drink companies regarding false claims displayed on their food and drink products, including those marketed to children.  Some food products brazenly claim to increase a person’s immune system, reduce the chance of getting a cold, or even cure cancer.  Are they really believable?

The Obama Administration has taken a more aggressive posture to attempt to reduce the obesity of Americans, especially children.  There is a direct connection between what we eat and our health.  Remember the saying ”You are what you eat”?   Dr. Margaret Hamburg, the new FDA Commissioner, announced in a March 3, 2010 letter to food companies:

I have made improving the scientific accuracy and usefulness of food labeling one of my priorities…It is clear to me as a working mother that the use of front of pack nutrition symbols and other claims can be helpful to busyy shoppers who are often pressed for time in making their food selections.

In a typical Warning Letter to one of the worlds’ largest food companies, Nestle, in a December 4, 2009, the FDA complained about Juicy Juice All Natural 100% Juice Grape products.  The FDA alleged that the product was misbranded because the lables were misleading in that the label was designed to imply that the producct is 100% grape juice when it truly was not.

The FDA regulations regarding food, including drinks, are complex.  True and accurate health claims are allowed on certain food products under specific circumstances, according to the FDA guidance.  Hopefully, the food industry will be more responsible, and if not, I encourage Commissioner Hamburg to pursue civil penalties against companies and the corporate officers of those companies who deceive the public. 

A discussion about health claims on food products and how to respond to FDA Warning Letters will take place on June 3, 2010 in Miami, at a seminar entitled “Importing Food Products in Compliance with FDA and U.S. Customs Rules“. 

In solidarity with FDA Commissioner Hamburg, I am a working Dad, and I don’t like to be lied to either!

Thanks Peter!  -Ed.

As more iPhone apps are released for medical purposes such as diagnosis and treatment of symptoms, Electronic Medical Records (EMR), and other health-related purposes, Apple‘s mobile device is garnering more attention from the FDA.

Don Witters of the FDA Center for Devices and Radiological Health (CDRH) said the agency’s goal is to achieve safe, secure, and reliable deployments of wireless technology in health care.  As a result, the FDA more interested in the iPhone use by licensed medical professionals.  Mobihealthnews.com reports that Witters has defined a medical device as:

“…an implementation, product, apparatus or other component or accessory, which is used in the diagnosis, cure, mitigation, treatment, prevention of disease or effects any structure of the body–that could actually include some information technologies and performance technologies–but usually something that is performed on the patient, touches the patient or is performed between physician and patient.”

Can an iPhone achieve many or all of these uses and purposes?  Yes. It appears that an iPhone loaded with the proper apps is indeed a medical device of some sort.

If that’s the case, how should the FDA get involved in regulating the device? Witters said the FDA’s role is “to provide some reasonable assurance of safety and effectiveness in medical devices marketed in the U.S.”

mHealth apps developers as well as wireless medical device makers should contact the FDA to provide their views about how this emerging industry should be regulated.  For questions on this subject, or to provide an opinion, contact the FDA’s CDRH.  As regulations and roles are defined and categorized, so too will laws emerge regarding mobile devices and their medical use.

This post courtesy of The AppsLawBlog.  Come visit us here.

To understand why Sen. John McCain introduced a bill on dietary supplements, read the press releases. The legislation announced Feb. 3  addresses public safety, but mostly it’s about the reputation and revenue of professional and Olympic sports.

The evidence: McCain says in the release that “a little over a year ago the NFL suspended six players, including two players from one of the teams competing this Sunday, for violating the league’s anti-doping policy.  Several of the players were surprised that they tested positive for a banned substance because they used a dietary supplement they believed to be safe and legal.”

McCain ends the release, “It is my hope that this legislation will ensure that all Americans, including athletes, have all the information necessary to make informed decision when choosing whether to use a dietary supplement, and that the FDA has the ability to remove any harmful dietary supplements from the market.”

What organization was first to endorse the legislation? Major League Baseball. Commissioner Bud Selig issued a statement supporting the bill and MLB.com reported on McCain’s announcement of the legislation.

Next on board: The U.S. Anti-Doping Agency, which issued a press release with an affiliated group, Supplement Safety Now. Its members include Major League Baseball, NFL, NBA, NHL, PGA, NCAA and other national sports organizations. All are powerful organizations inside and outside Washington. And they share a complaint: Their athletes have been unwitting victims of mislabeled supplements that caused disqualifications and suspensions.

In other words, the products were bad for business. The groups want to arm the FDA with the data to monitor supplements and the power to yank immediately the detrimental ones off the shelf. They found an ally in McCain, whose 2008 presidential campaign received substantial financial support from athletes and others in pro sports, ESPN reports.

The initial response from groups representing supplement makers and marketers was tepid. “Though we have not yet examined this bill completely, it places new burdens on dietary supplements that are not required for any other class of food,” Michael McGuffin, president of the American Herbal Products Association said the third paragraph of a press release.

The last sentence of the third paragraph of a press release from the Council for Responsible Nutrition quotes CEO Steve Mister as saying, “The best way to help consumers is through collaborative efforts with industry, government and other stakeholders, such as USADA, to implement the current laws, to provide more resources and funding to FDA, and to pass the food safety bill, which already includes many of these provisions.”

As the bill moves from the headlines to the sidelines, look for an intense lobbying effort by sports organizations. Supplement-related scandals have hurt their reputations and wallets. They see a solution in increased federal action and will push hard for that.