Combating Counterfeits

June 1, 2002
Lourdes M. Villarnovo

Lourdes is a partner and associate in Kirkpatrick & Lockhart, www.kl.com, a national law firm experienced in complex commercial litigation, intellectual property enforcement, and regulatory practice

,
Lucas Paglia

Lucas is a partner and associate in Kirkpatrick & Lockhart, www.kl.com, a national law firm experienced in complex commercial litigation, intellectual property enforcement, and regulatory practice

,
Mark Rush

Mark is a partner and associate in Kirkpatrick & Lockhart, www.kl.com, a national law firm experienced in complex commercial litigation, intellectual property enforcement, and regulatory practice

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-06-01-2002,

After last year's anthrax scare, people desperately began stockpiling Cipro (ciprofloxacin) and other products to prepare for bioterrorism attacks. Not wanting to bother with a visit to their doctor and not willing to pay the product's high retail price of several dollars a pill, they began ordering Cipro-or what they believed to be Cipro-online, from dozens of websites offering it at discounted rates. The problem is, there is no guarantee they were getting the real thing.

After last year's anthrax scare, people desperately began stockpiling Cipro (ciprofloxacin) and other products to prepare for bioterrorism attacks. Not wanting to bother with a visit to their doctor and not willing to pay the product's high retail price of several dollars a pill, they began ordering Cipro-or what they believed to be Cipro-online, from dozens of websites offering it at discounted rates. The problem is, there is no guarantee they were getting the real thing.

During the past year, counterfeits of two other high-profile biotech products circulated around the United States. Patients, doctors, and pharmacists noticed problems with batches of Genentech's Nutropin AQ (somatropin), a growth hormone used to treat children with dwarfism. Elsewhere, inspectors discovered counterfeit versions of Neupogen (filgrastim), Amgen's product to help chemotherapy patients regenerate white blood cells and fight off infections. Indeed, the counterfeiting of pharmaceutical products is a serious problem on the rise. But with the proper focus and determination, legitimate manufacturers can successfully combat the practice and stop it in its tracks.

This article outlines the statutory and practical resources that pharma companies can use to combat counterfeiting and stem the dangerous tide of bogus medications. It also explains counterfeiting's methods of manufacture and distribution and discusses the medical and economic effects of the problem-as well as the damage done to legitimate manufacturers. Even more important, the article discusses the optimal strategies for investigating counterfeiting and enforcing the intellectual property and other rights infringed by bootleggers.

Scope of the Problem

US customs officials seized 32,000 doses of phony Viagra (sildenafil) last year in Louisville, Kentucky. Agents at Washington Dulles International Airport seized 30,000 pills with an expiration date of "11/80," which were likely to be sold as counterfeit Prozac. And recently, AIDS patients in San Francisco unwittingly ingested counterfeit doses of Serono's Serostim (somatropin), which is used to fight the disintegration of muscle and weight brought on by the disease.

Although many bogus versions of well known products have been purchased over the internet in recent years, victims of the counterfeit Serostim purchased it at familiar local pharmacies. Inside some vials of the fake Serostim was a growth hormone to treat infertility; others were diluted to dosages so weak as to be incapable of providing any meaningful treatment. Some patients injecting the counterfeit dosage suffered burning pain and large red welts at the site of injection; others developed a low-grade fever and suffered nausea. Fortunately, the situation did not get out of hand. But it's only a matter of time before it does, and AIDS medications are not the only targets.

Modus operandi. In each of the cases mentioned, FDA investigation revealed a cheap, non-active ingredient in place of the key active element: clear liquid took the place of filgrastim in the Neupogen counterfeit lots, and human insulin substituted for a key ingredient in Nutropin AQ. FDA further found that counterfeiters manufactured their products with tap water rather than distilled water, seriously undermining the products' sterility. That modus operandi is all too familiar. Subtle differences in the manufacture and packaging of counterfeit drugs-a rubber stopper in place of a cap here, a more powdery version instead of a tablet there-make it difficult to discern fakes from the real thing.

Why Now?

FDA is currently investigating at least four cases of fake prescription products found on pharmacy shelves in seven states last year. Countless other cases go unreported because users often are oblivious to the risk that their medications may be counterfeit.

International problem. Although counterfeit medications are prevalent in the United States, most illicit prescription drugs appear to originate beyond US borders. According to the World Health Organization, up to eight percent of the global supply of pharmaceuticals is counterfeit. And, according to Colleen Slevin, author of "Researchers Hope to Weed Out Fake Drugs," Tulsa World, November 2001), a corporate security officer at a major pharma company told a House Committee on Energy panel that he believes the figure is conservative. In underdeveloped countries such as Argentina, Mexico, and Colombia, up to 40 percent of manufactured pharmaceuticals are believed to be counterfeit.

The recent group of knock-off drugs found in the United States highlights the growing problems of importation and diversion. In the past five years, nearly 5,000 foreign pharma manufacturers have exported products into the United States without FDA inspection. Large quantities of fake medications emanate from China and India. In March 2001, several pharma companies-under authority from the Trademark Counterfeiting Act-raided a Shantou, China factory and seized several thousand cartons of counterfeit products from more than a dozen international companies. Foreign entities are not only manufacturing the fakes; in many cases, they serve as pivot points for large-scale multinational counterfeiting cartels.

Much like the global narcotics trade, counterfeit pharmaceuticals are manufactured in one country, reduced to tablets or capsules in another, packaged in a third country, then shipped to various territories before reaching a final destination for sale. In addition, the raw materials used to make counterfeits often are diverted to separate countries for packaging. And the different sets of packaged product are diverted to various territories for distribution and sale. Often, a given country may import and export a product or its components multiple times throughout this process. Ultimately, one batch of fakes may serve as the foundation for a counterfeiting network that ultimately reaches 20 separate markets worldwide.

Compartmentalizing the process makes it difficult to investigate counterfeits, and as a result, many fake products reach local pharmacies across the United States without being detected. (See "Who and How.")

Who and How

Internet access. The diversion problem is exacerbated by the recent proliferation of internet websites dedicated to the sale of discount pharmaceuticals. Such online stores are ideal breeding grounds for the spread of inexpensive, lower-quality knockoffs, and regulation of the marketing and sale of counterfeit drugs over the internet is virtually nonexistent.

Given the borderless nature of the web, international "laundering" of counterfeit medications through otherwise legitimate websites and e-businesses is a vexing problem, as Jim Erickson of the Rocky Mountain News notes in his October 2001 article, "A Game of Russian Roulette: Cipro Sales."

The Real Costs

As long as such practices continue, both patients and the pharma industry are at risk. The risks to patients are well known: allergic reactions, dangerous interactions with other drugs, failure to receive real treatment, and, in the worst cases, death. In 1996, FDA attributed several dozen deaths to a suspected counterfeit version of the popular antibiotic gentamicin. And in 1998, three Brazilian men died after taking a fake version of the prostate cancer drug Androcur (cyproterone).

Counterfeiting also costs pharma approximately $2 billion each year and undermines public confidence in the industry. In addition, because bogus and legitimate products are often indistinguishable until it is too late, legitimate companies may be wrongly subjected to liability for harm caused by the knockoffs or expired drugs. Inevitably, patients who take counterfeit versions of legitimate products and suffer ill effects as a result are likely to misdirect their anger toward the pharma company, whose reputation and sales will suffer.

Did You Know?

The problems extend beyond substandard knock-offs. Indeed, many foreign companies manufacture, without license, exact replicas of patented pharma products for resale in the United States and elsewhere. Innovator companies face an uphill battle in their attempts to preserve patent protection for such products. Blatant piracy of patented medication often goes unpunished in countries where justice systems are antiquated, patent prosecutions can take years, and corruption runs rampant.

In addition, governments in developing countries generally frown on judicial and administrative measures that protect foreign intellectual property interests at the expense of local economies. Thus, given the choice between (a) enjoining a local manufacturer of counterfeit pharmaceuticals, whose goods may infringe a pending patent or (b) permitting the questionable conduct in the interest of spurring local and regional economies, cash-strapped developing nations are much more likely to choose the latter option.

Legislative Tools

There is a strong and growing connection between counterfeiting and organized crime. Therefore, government and private interests alike must be increasingly suspicious of pharmaceuticals and increasingly vigilant about preventing, detecting, and prosecuting counterfeiting in any way. The following resources and strategies provide the necessary foundation for government and industry to move in that direction:

Trademark Counterfeiting Act. Drafted in 1984, the TCA is a civil seizure process that can provide immediate, meaningful relief to companies that fall victim to counterfeiting. They may obtain, ex parte-without notice to the counterfeiters-both a temporary restraining order and a seizure order authorizing the immediate impoundment of all offending goods before the counterfeiters have an opportunity to disappear.

The TCA expressly empowers a federal court to authorize the seizure not only of infringing goods, but also the means of making counterfeit marks and all records documenting the manufacture, sale, or receipt of materials involved in the counterfeiting process. The TCA technically applies only to counterfeiting of registered trademarks and service marks, but unregistered marks are protectable under the ex parte seizure process as well. The federal trademark act, or "Lanham Act, " protects the public against deception and confusion with respect to non-registered service and trademarks. Unregistered marks are thus afforded equal protection as registered marks, and that carries over into the ex parte seizure context. Accordingly, courts may issue a seizure order against counterfeiters who are infringing unregistered marks as well, a key concern for pharma companies that may not yet have obtained registrations for all of their brands.

Tariff Act. For counterfeiting that does not occur principally within US borders, companies can engage the Tariff Act of 1930, which mandates customs' interdiction of any international packages entering the United States that are suspected of containing counterfeit products. Section 526(e) of the Tariff Act provides that the US government shall seize merchandise that is (i) of foreign manufacture, (ii) bears a "counterfeit" mark, and (iii) was imported in violation of the Lanham Act.

Under the Lanham Act, trademark owners may lodge their registrations and product and contact information with the Department of Treasury for seizure purposes. Forewarned and forearmed with such information, customs officials may impound on behalf of pharma companies any shipments suspected of containing counterfeit medications or related materials.

The provisions of section 526(e) also apply to "certification marks" as well as "trademarks" in the traditional sense. Thus, in addition to imports bearing spurious drug names or labels, any packaging that contains questionable reference to FDA testing or approval, for example, would be subject to seizure and impoundment. Pharma companies intent on stopping counterfeiting are well advised to work with customs to that end.

International Trade Commission. Section 337 of the Tariff Act provides trademark owners with access to expedited relief against the importation of counterfeit materials. The legislation authorizes the International Trade Commission (ITC) to investigate and prosecute the unlawful importation of articles that infringe US intellectual property rights, including trademark rights. If an ITC investigation reveals counterfeit pharmaceuticals en route to the United States, the commission may instruct customs to deny entry of any suspect shipments.

Typical investigation and order turn-around is approximately six to nine months before an administrative law judge, after which the ITC issues a formal final determination binding on US Customs officials. Expedited as they are, and subject to their own procedural and discovery rules, ITC proceedings offer an attractive alternative to more time-consuming and costly traditional infringement litigation in the courts, and they can provide meaningful injunctive relief against counterfeiting.

USA Patriot Act. Under this recently enacted anti-terrorism legislation, the federal government, including all of its national security, intelligence, law enforcement, and prosecutorial arms, enjoys broad powers of surveillance and search/seizure with respect to any suspected crimes it believes are linked to terrorism. It also provides for increased information sharing among federal, state and local law enforcement to facilitate better detection, investigation and prosecutions of multi-jurisdictional conspiracies and acts.

Given the increasing link between counterfeiting and organized crime, the tendency of terrorist networks to fund themselves through illegitimate businesses such as counterfeiting and the ever-present threat of bioterrorism and medical contamination, pharma companies would do well to take advantage of the Patriot Act and involve law enforcement resources in the investigation of suspected incidents of counterfeiting as soon as they are detected.

Criminal remedies. The criminal implications for counterfeiters may also serve as a strong deterrent. In 1996, the Anti-Counterfeiting Consumer Protection Act (ACCPA) triggered certain amendments to the federal Racketeer Influenced and Corrupt Organizations statute, creating criminal liability for the misappropriation of certain types of intellectual property. ACCPA amended RICO to add trademark infringement, counterfeiting, and other intellectual property violations as predicate offenses under the statute. Thus, RICO now includes trafficking in counterfeit goods or services in its definition of unlawful racketeering activity. Counterfeiters may be prosecuted for their actions in manufacturing, distributing, transporting, and selling counterfeit pharmaceuticals. The language of the act calls for penalties to individuals of "not more than $2,000,000 or imprisoned not more than 10 years, or both."

FDCA. Peddlers of fake medicines may also be prosecuted directly under the federal Food, Drug and Cosmetics Act, which specifically prohibits the manufacture and sale of counterfeit drugs. The statute criminalizes the following:

  • the introduction or delivery for introduction into interstate commerce of any drug that is adulterated or misbranded

  • the adulteration or misbranding of any drug in interstate commerce

  • the receipt in interstate commerce of any drug that is adulterated or misbranded and the delivery thereof for pay or otherwise

  • the manufacture within any territory of any drug that is adulterated or misbranded

  • the doing of any act which causes a drug to be a counterfeit drug or the sale or dispensing, or the holding for sale or dispensing, of a counterfeit drug.

The FDCA is a valuable weapon in the battle against domestic counterfeiting as well as the diversion of counterfeit medications through the United States to destination markets and the gray marketing of pharmaceuticals bound for foreign markets. Under FDCA, a counterfeiter is criminally liable for involvement in any stage of counterfeiting, from manufacture, to mislabeling activities, to sales. The statute also enables prosecution of counterfeiters who have prepared but not actually sold counterfeit medications, which means that counterfeiters may be stopped before the public has suffered any harm from their actions.

Economic Espionage Act. Although the problem is international, there are local weapons at companies' disposal to aid in the fight against foreign counterfeiters. For example, the Economic Espionage Act makes the theft of trade secrets in connection with any interstate or foreign commerce a criminal offense, including such offenses committed by foreign nationals or foreign governments. The EEA can be used to prosecute counterfeiters who pilfer confidential business information-including formulas and recipes-from legitimate US manufacturers to use in the distribution or sale of bogus drugs.

International investigation and counsel. All victims and potential victims of counterfeiting must establish a network of foreign attorneys and investigators to advise them of trademark-related laws and customs protocols in their respective jurisdictions. Wherever a pharma company produces, distributes, or sells its products, it should have at least one legal contact to facilitate domestic government relations and maximize intellectual property and other protections against counterfeiting.

An international network of former FBI agents, for example, who once served as legal attachés to various US embassies can be optimal in that capacity. In a similar vein, companies must be aware of the various laws and treaties that afford reciprocal trademark and other protections to multinational and international business interests across the globe.

Catching the Crooks

Knowledge of the various statutory and administrative tools available is not enough; action is required. Companies must establish integrated enforcement programs. A successful anti-counterfeiting strategy requires a serious commitment of financial resources, manpower, patience, and focus. According to Alana Sharenow and Patricia Wilczynski in "To Catch a Counterfeiter," INTA Bulletin, October 2001, "Locating counterfeit products and eradicating counterfeiters takes time, effort, money, coordination, and, sometimes, even a little luck."

Time. A weekend sweep of an industrial manufacturing complex for counterfeit drugs may take only hours to execute, but it could be years in the making. Pharma companies must implement sustained mechanisms for surveillance and investigation to gather the evidence and information necessary to support a civil ex parte seizure order. Although it can be painstaking and expensive, extended surveillance will almost always ensure a successful raid and subsequent prosecution.

Likewise, companies must be patient with US and foreign customs officials and other government agents, whose information and input can be critical to identifying and eradicating a counterfeiting ring. As with the surveillance of a manufacturing or retail facility, detailed observations of shipping and importation patterns over extended periods will deliver the information necessary to track and prosecute international counterfeiters. Not all government agencies and customs systems run as quickly or smoothly as the US version, but virtually every one, given the time and support necessary, can contribute to a meaningful enforcement program.

Effort. Pharma companies must also be willing to put forth the manpower to sustain an anti-counterfeiting enforcement program. That means creating and supporting a team of in-house personnel, outside counsel, private investigators, agency officials, and law enforcement contacts to work together toward the goal of eradicating product counterfeiting. That network of individuals must be able to rely on each other to develop the intellectual property and business information, investigative intelligence, regulatory knowledge, and practical experience necessary to bring down any counterfeiting operation anywhere in the world.

Critical to such an effort is an individual or group that oversees the enforcement on a consistent basis, rather than an ad hoc approach. To be meaningful, an anti-counterfeiting program must be a permanent fixture within the company. The efforts and leadership of a company point person-ideally someone already in charge of protecting intellectual property-to direct and coordinate enforcement efforts will ensure optimal performance from outside counsel, investigators, and government/ law enforcement contacts alike.

Money. Naturally, a first-rate anti-counterfeiting and enforcement program costs plenty. Such activity is not and cannot be a profit center. Rather, it must be the single most effective loss-prevention center a company operates. Indeed, with some companies losing up to 22 percent of their total sales to trademark infringement and counterfeiting, it is foolish not to invest in an anti-counterfeiting program.

Beyond the relatively fixed costs of registering and maintaining patents, product trademarks, and related intellectual property, pharma companies are likely to incur expense in supporting teams of investigators and foreign associates to keep tabs on suspected counterfeiting worldwide. Local counsel-trademark associates, customs liaisons, and other administrative contacts-wherever the company operates can mean the difference between fruitless observations and meaningful policing designed to stop counterfeiting before it reaches the company's target markets.

Time-intensive work by investigators and foreign associates are costly, but not nearly as costly as the losses a company could incur in the absence of such preventive medicine. It is imperative for pharma companies to budget personnel and resources to staff and fund anti-counterfeiting efforts.

Luck. Successful anti-counterfeiting programs create their own luck through careful detection and enforcement. Companies can create innovative products and labels that are designed to frustrate counterfeiting and engage in concerted lobbying efforts to make the sale of bogus drugs over the internet more difficult.

Understanding both the problem and the federal and international resources available to eradicate it, in addition to formulating an aggressive approach to the detection, investigation, and punishment of it, will help to shield patients-and bottom lines-from the ills of counterfeiting.

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