State Licensing Spotlight – Prescription Medical Device Manufacturers & Distributors: Enforcement and penalties for operating without a license

This article is the third in our new thought leadership series on the critical and continually evolving state regulatory concerns facing medical device manufacturers. Part one of the series examined complex licensing challenges that set devices apart from drugs. Part two explored the role of the National Association of Boards of Pharmacy (NABP), and its impact on licensing and compliance for prescription medical device manufacturers and distributors. Next week, our final publication will provide compliance solutions that manufacturers can adopt to avoid or mitigate those penalties. For more information about state medical device licensing and compliance generally, please see our other articles on these topics, available online here.

Factors influencing increased enforcement of state-based requirements:

1. Medical Device-Specific Laws & Regulations. States commonly regulate the manufacture and distribution of drugs and devices using the same laws and regulations. However, regulators recognized that these laws and regulations were often ill suited to capture the activities of medical device manufacturers and distributors. Increasingly, state legislators, and state-based departments of health / boards of pharmacy, have adopted medical-device specific laws, regulations, and interpretations of existing laws and regulations that specifically target medical device manufacturers and distributors.
2. Public Health Concerns. With more patients relying on medical devices, regulators have prioritized safety and effectiveness, recognizing that licensing plays a critical role in ensuring product control, quality and accountability.
3. Industry Expansion. As more companies enter the medical device market, states have responded by increasing oversight to prevent non-compliance.
4. Coordination Among Regulators. State agencies have been working closely with each other, the U.S. Food and Drug Administration, and national third-party organizations such as NABP to publicize instances of non-compliance. Similarly, the National Practitioner Data Bank (NPDB) — an information clearinghouse established by Congress — allows a number of parties such as states, the Federal Government, and health care plans to report and track adverse actions against certain health care suppliers, sellers, and manufacturers. This type of collaboration can result in a domino effect where state-based enforcement in one state can lead to a number of consequences, including detection and subsequent enforcement in other states.
5. Focus on Online and Cross-State Sales. The rise of e-commerce and cross-state distribution of medical devices has prompted states to strengthen their licensing requirements and close regulatory loopholes, targeting both out-of-state and unlicensed online distributors. For example, some states retain expansive jurisdiction to regulate out-of-state manufactures whose products simply end up in that state’s stream of commerce, even if the manufacturer was not directly involved in the shipment or distribution.

Potential penalties & consequences for operating without a license:

Significant consequences can flow from operating without a license or registration. Although the specific penalties vary by state, agencies that enforce state-based requirements often have the ability to impose some or all of the following:

1. Financial Penalties

Civil Fines. States may impose substantial fines on companies operating without a license, and fines are often structured to increase with the duration and severity of the infraction.

• Relevant statutes or regulations often designate a dollar amount which can range in the thousands to tens of thousands of dollars “per violation.”
• While many states have adopted the view that every shipment, every device distributed into the state, or every day that a firm operates without a license could be a “violation,” others have left the term undefined and ambiguous, increasing the uncertainty of how a state agency could respond to a violation.
• Moreover, in some cases, states impose fines on a “per facility,” rather than “per company” basis, which can cause the total penalty amount to increase substantially depending upon the company’s specific operations./li>

Upper Limits. Although some states place a cap on total fines, other states do not have an upper limit and total dollar amounts calculated on a per violation basis can escalate dramatically. Many states are open to negotiating fine amounts or the method used to calculate the fine (e.g., per shipment versus per device) and it is advisable to gain an understanding of prior treatment of similar violations before attempting to negotiate fine amounts with the state agency.

2. Cease-and-Desist Orders

Immediate Halts to Operations. State agencies routinely issue cease-and-desist orders to prevent unlicensed companies from continuing operations. These orders can halt manufacturing, distribution, and sales activities, causing significant financial and operational disruptions.

Product Recalls. In extreme cases, regulators may require companies to recall products distributed while unlicensed, especially if safety concerns arise. This recall process can be logistically complex, financially burdensome, and is often accompanied by reputational harm to the recalling organization. 

3. Suspension, Revocation, or Delay of Future License Applications

Suspension of Applications. If a company is found to be operating without a license, state regulators may refuse or delay future licensing applications, effectively preventing the company from legally operating in that state.

Disclosure Requirements. Many state-based applications require disclosure of prior discipline or non-compliance in other states and state agencies have the ability to query the NPDB, discussed above, to discover reported discipline in other jurisdictions. Although the existence of prior discipline may not be disqualifying, regulatory authorities can require applicants with prior discipline to answer additional questions before a license is issued or renewed. This can delay the application approval process and temporarily obstruct a firm’s ability to do business in a given state.

4. Criminal Penalties for Egregious Violations

Criminal Charges. In cases of serious or intentional violations, some states may pursue criminal charges against a company and / or a company’s officers, directors, or executives. If found guilty, individuals could face significant fines and, in severe cases, imprisonment.

Fraud Allegations. Operating without a license, particularly when intentional, can sometimes lead to allegations of fraud, which carry additional penalties and long-term legal implications.

5. Reporting Requirements & Cascading Penalties

Cross-State Repercussions. Licensing violations in one state can lead to investigations in other states where the company operates, creating a cascade of potential licensing issues and penalties across jurisdictions.

Out-of-state Reporting Requirements. Non-compliant firms are frequently required to self-report any new instances of discipline to other states where the company is licensed. The method and time period of reporting vary by state. For example, some states require a firm to report out-of-state discipline within 30 days, while other states simply require disclosure during the license renewal process. Failure to timely disclose discipline in other states can result in further monetary penalties and other consequences. Thus, it is important for firms to understand the reporting obligations and timelines associated with state discipline.

Information Sharing / National Alerts. States are required to report discipline against health care suppliers to the NPDB and some states contract with NABP to accomplish the reporting. Information sharing with organizations who possess the ability to issue nation-wide bulletins has become increasingly prevalent and may lead to state regulatory authorities directly reaching out to medical device manufacturers and distributors to inquire about discipline imposed by other states. Moreover, this unique form of collaboration and national reporting is frequently used by individual states to verify whether regulated parties have satisfied the state’s reporting requirements.

6. Contract Considerations

Breach of Contract & Damages. Many contracts between medical device manufacturers / distributors and their customers or business partners require one or both parties to maintain all necessary licenses to carry on the activities specified in the agreement. Thus, failure to obtain required state licenses could serve as the basis of contractual disputes and liability between manufacturers, distributors, customers, third-party logistics providers, and other business partners.

7. Reputational Harm and Loss of Reimbursement & Other Business Relationships

Reputation Damage. Non-compliance and licensing violations, especially when publicized, can damage a company’s reputation, impacting its relationships with key stake holders, investors, customers, health care providers, patients, and suppliers.

Reimbursement Implications. It is possible third-party payors may refuse to provide reimbursement for products is the provider of said products was not properly licensed by the relevant state. This is most common amongst durable medical equipment providers. Additionally, when submitting for federal reimbursement, the submitter is required to certify compliance with all applicable laws and regulations, which has the potential raise questions as to whether a company that does not meet licensing requirements can legitimately make the certification.

Loss of Distribution Channels. Customers, manufacturers, distributors, and other business partners may be forced to sever ties with companies operating without a license to protect their own reputations and avoid regulatory risk.

Conclusion 

Operating without a license as a medical device manufacturer or distributor can result in serious penalties, including financial fines, criminal charges, and operational disruptions. Discipline in one state can easily lead to discipline in others. The increased focus on state licensing enforcement makes it crucial for companies to understand their requirements and remain compliant in order to avoid regulatory consequences. By implementing robust compliance programs, conducting regular audits, and staying informed of regulatory changes, medical device manufacturers and distributors can protect their operations, reputation, and long-term success in this highly regulated industry.

If you have any questions about the penalties and consequences associated with operating without a state license, please contact any of the authors of this article or the Hogan Lovells lawyer with whom you usually work.

Authored by Jodi Scott, Wil Henderson, Greg Kass, Lauren Massie, and Hannah Wailes.