Indirect fraud, or indirect deception, is a common law cause of action that is widely recognized in many states, including California. Defendant makes a fraudulent misrepresentation to a third party, with the knowledge or expectation that the misrepresentation will be communicated to plaintiff. The third party reasonably relies on the misrepresentation, and there is resulting harm to plaintiff. Under the indirect fraud cause of action, plaintiff has a claim against defendant for his injury, even though defendant may never have had any contacts with plaintiff at all. The application of this theory to alleged misrepresentations made by manufacturers of medical devices to the Food and Drug Administration which result in injury to patients, however, was rejected by the U.S. Supreme Court in February 2001.
In Buckman Co. v. Plaintiffs’ Legal Committee, 121 S. Ct. 1012 (2001), plaintiffs alleged a fraud claim against a bone screw manufacturer and a consulting company. The claim rested on tort law principles that where one sustains injuries from another’s justifiable reliance on a fraudulent misrepresentation, the injured party may recover damages from the one who makes the misrepresentation. Defendants had allegedly applied for FDA approval specifying a certain function or use with the actual but undisclosed intent that the medical device be used in an off-label manner (i.e., when a physician decides to use a drug or device for some purpose not approved by the FDA).
The Supreme Court ruled that state law fraud claims conflict with and are impliedly preempted by the Food, Drug, and Cosmetic Act, as amended by the Medical Device Amendments of 1976. Regulation of medical devices is governed by these two Acts, under which is there is no private right of action for fraud. The conflict exists because the federal statutory scheme empowers the FDA to punish and deter fraud against the agency. This authority is used by the FDA to achieve a delicate balance of statutory objectives that could be skewed if state law fraud-on-the-FDA claims are allowed.
The Supreme Court held plaintiffs’ claims were preempted because they were not actually relying on traditional state tort law where the fraud claims existed solely by virtue of the FDCA disclosure requirements. Although there is a presumption against federal preemption of a state law cause of action when a field is traditionally occupied by the states, the fraud action was not subject to such a presumption because the defendant was accused of making fraudulent representations to the FDA during the course of the product approval process. The Court stated that the prevention of fraud against federal agencies cannot be regarded as a field traditionally occupied by the states.
Furthermore, the Court emphasized that complying with the FDA’s complex regulations in the shadow of 50 states’ tort regimes would increase the burden on applicants and might deter them from seeking approval of devices with potentially beneficial off-label uses for fear of being exposed to unpredictable civil liability. The Court found that off-label use of medical devices is an accepted and necessary corollary of the FDA’s mission to regulate in this area without directly interfering with the practice of medicine. Allowing state law claims for off-label use would effectively interfere with the practice of medicine. Moreover, if an applicant’s disclosures to the FDA could later be deemed insufficient by a state court, the FDA would be deluged with unnecessary information, delaying the health care professional’s ability to prescribe appropriate off-label uses.
In his concurrence, Justice Stevens said to show causation, plaintiffs had to show that but for defendant’s fraud, the defective bone screws would not have reached the market. However, even after learning of the alleged fraud, the FDA still did not remove the bone screws from the market.
If the FDA determines both that fraud has occurred and that such fraud requires the removal of a product from the market, then state damages remedies would not encroach upon, but rather would supplement and facilitate, the federal enforcement scheme.
In 1984 and September of 1985, AcroMed, Inc. sought clearance under section 510(k) of the Medical Device Amendments of the FDCA, indicating it intended to market its Variable Screw Placement (“VSP”) device for use in spinal surgery. Medical devices may be approved by the FDA for sale under section 510(k) if they are “substantially equivalent” to a device already on the market.
The 510(k) process is significantly less rigorous than the premarket approval process required for new devices. AcroMed’s applications were rejected by the FDA both times based on the determination that the VSP was not substantially equivalent to any existing device.
In December 1985, AcroMed and Buckman, a consulting firm, split the VSP device into its component parts and filed a separate 510(k) application for each component. In both applications, the new intended use specified for the plates and screws was for use in the long bones of the arms and legs. AcroMed and Buckman claimed the two components were substantially equivalent to predicate devices used in long bone surgery. The FDA approved the devices for this purpose in February 1986.
The Supreme Court decision reversed the ruling by the U.S. Court of Appeals for the Third Circuit that allowed the state law claims of more than 2,300 patients who alleged they were harmed by bone screw systems implanted into their spines. Plaintiffs claimed manufacturer AcroMed Inc. and consultant Buckman Co. sought FDA clearance to market a device for use in the long bones of the arms and legs, despite the companies’ intent to market the device for spinal surgery; a use already disapproved by the FDA. Based on Medtronic Inc. v. Lohr; 518 U.S. 470 (1996), the Third Circuit found there was no federal requirement applicable to the spinal screw systems and thus rejected implied preemption. The Third Circuit also ruled there was no inconsistency between the FDA having the exclusive prerogative of bringing actions to enforce the FDCA and the right of plaintiffs to bring common law fraudulent misrepresentation claims.
The Supreme Court distinguished Medtronic on the basis 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. The Court stated that although Medtronic can be read to allow certain state-law causes of actions that parallel federal safety requirements, it does not stand for the proposition that any violation of the FDCA will support a state-law claim.
Indirect Fraud in California
In California, the law generally is that a fraudulent representation must be made directly to a particular person with the intent to induce action by that person in reliance upon it. The defendant is liable only to those persons to whom the representation was directly made. If others become aware of the statement and act upon it, there is no liability even though the defendant could have foreseen this possibility.
An exception to this general rule exists, however, where the defendant intends or has reason to expect that his comments will be passed on and will influence the conduct of others. California law supports an indirect fraud claim, which is derived from the Restatement 2nd of Torts section 533. Section 533 provides that “the maker of a fraudulent misrepresentation is subject to liability ... to another who acts in justifiable reliance upon it if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other, and that it will influence his conduct ...” Geernaert v. Mitchell, 31 Cal. App. 4th 601 (1995) (quoting the Restatement 2nd); Shapiro v. Sutherland, 64 Cal. App. 4th 1534 (1998) (holding defendant liable for misrepresentation to third party where it was obvious that third party, having purchased property solely for resale, was going to show it to someone eventually); Varwig v. Anderson-Behel, 74 Cal. App. 3d 578 (1977) (holding that summary judgment for defendant was not warranted where defendant’s representation of title to plaintiff’s seller was in law an indirect misrepresentation to plaintiff, who purchased the car in reliance on the repetition of the representation, and since defendant knew that plaintiffs seller was buying the car for resale); Barnhouse v. Pinole, 133 Cal. App. 3d 171 (1982) (holding a developer liable to subpurchasers for fraudulent concealment) ; see also Mirkin v. Wasserman, 5 Cal. 4th 1082 (1993) (holding that although indirect fraud claims are recognized in California, reliance by plaintiff cannot be presumed).
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