Health Law Daily State fraud claims against stem cell practice cannot be tried in federal court
Thursday, April 15, 2021

State fraud claims against stem cell practice cannot be tried in federal court

By Harold Berman, J.D.

A medical services company accused of state law consumer fraud failed in its bid for the case to be tried in federal court. Although the complaint invoked misrepresentations concerning FDA regulation, the case centered on state law violations.

A medical practice that was accused of violating a Georgia consumer protection statute by falsely promoting and misrepresenting stem cell products to Georgia residents would not be permitted to litigate the case in federal court, a federal district court in Georgia ruled. Although a portion of the state of Georgia’s complaint against the medical practice alleged it made false claims concerning FDA regulation, state law was dispositive. The case revolved around allegations of fraud to Georgia consumers under Georgia statute, and concerned no substantial question of federal law. Nor were the state claims preempted by federal statute (Georgia v. Elite Integrated Medical, LLC, April 12, 2021, Totenberg, A.).

Products and representations. Elite Integrated Medical operated a practice which promoted and sold various stem cell and related products to residents of Georgia. The products were touted to safely cure or alleviate various health conditions. In its advertisements, the company claimed that its stem cell products could provide “remarkable improvement” unavailable through traditional medicine for numerous serious conditions such as Alzheimer’s, Parkinson’s disease, diabetes, multiple sclerosis, and stroke. The company purchased its stem cell products from third-party suppliers and then resold them. The products were derived from umbilical cord tissue. Although the third-party manufacturers claimed they were regulated by the FDA, they were not FDA-approved.

The State of Georgia sued the company in Georgia state court, alleging the company violated the Georgia Fair Businesses Practice Act (GFBPA). According to the Georgia Attorney General, the company made false and misleading representations about its products in online, print, and live formats. The company allegedly claimed its products were safe and effective by referencing studies concerning unrelated stem cell products derived from different stem cell tissue and manufactured differently. Similarly, the company sent marketing emails with athlete success stories, even though the athletes had used different stem cell therapies than the ones the company offered.

The company also allegedly advertised that it employed a staff of doctors who specialized in stem cell therapy, yet only engaged doctors as independent contractors for the sole purpose of giving injections as needed. Company seminars were led by chiropractors wearing white lab coats who introduced themselves as “doctor.” The company also falsely claimed in its seminars that human cellular tissue in general was not regulated by the FDA.

The company removed the case to federal district court. The State of Georgia than moved to remand to state court, contending that its complaint asserted no federal claims or claims dependent on a disputed federal question. The company maintained that the suit involved the disputed question of whether the FDA regulated stem cell products, and that Georgia’s claims were preempted by the federal Food, Drug and Cosmetic Act (FDC Act).

No substantial question of federal law. The court remanded the case to state court, first finding that the case was not dependent on any substantial question of federal law. Georgia’s complaint exclusively asserted the company’s violations of the GFBPA, which concerned only unfair and deceptive business practices taking place within Georgia.

The court rejected the company’s argument that one count of the complaint asserting “false and misleading representations regarding regulation of regenerative medicine products” arose under federal law. Although that count of the complaint alleged that the company misrepresented to consumers that its stem cell products were not regulated by the FDA or not required to be FDA-approved, Georgia’s allegations did not implicate the federal question of whether the FDA regulates stem cell products.

Georgia’s right to relief did not necessarily depend on a question of federal law because a jury could find the company was liable without finding an FDA violation. Although Georgia would introduce FDA regulations into evidence to support its claim that the company made false or misleading statements, that evidence by itself would not implicate federal law.

Nor did the complaint raise any substantial federal questions. Georgia claimed that the company violated a Georgia statute by making false and misleading misrepresentations in its advertising. The suit did not include any alleged violation of the FDC Act, such as misbranding in violation of FDA regulations or making false claims in an FDA approval process.

Any potential consideration of FDA regulations under the FDC Act would be made in the context of whether the company’s actions violated Georgia’s Fair Business Practice Act. If a court were to issue any ruling in the case concerning FDC Act and FDA regulations, that ruling would exclusively concern the company’s own products and the representations it made about them.

The court also held that resolving the case in federal court would disrupt the federal-state judicial balance of responsibilities. There is no federal private cause of action for violating the FDC Act, and consequently, it would undermine Congressional intent if federal courts exercised federal question jurisdiction where FDC Act violations were a presumption or proximate cause under state law, and not a federal action under federal law. Several subsequent federal district court cases had held that permitting state law claims that involved the FDC Act to be adjudicated in federal court would disrupt the federal-state judicial balance.

State claims not preempted by federal law. The company could not show that either the FDC Act or the Public Health Service Act, under which the FDA regulates stem cell products and procedures, preempted Georgia state law sufficient to create federal question jurisdiction. Absent exceptional circumstances, a state law claim brought in state court did not create preemption such that the case could be removed to federal court. Complete preemption could occur only when an area was completely regulated by federal law to the extent that a state could not regulate in that area without conflicting with federal law.

The company’s argument failed that Georgia’s claims were really “fraud on the FDA” claims such that federal jurisdiction could be invoked. Fraud on the FDA claims involve a manufacturer making fraudulent representations directly to the FDA. In contrast, Georgia made no allegations that the company committed fraud in an FDA approval process or otherwise made fraudulent statements to the FDA. Georgia instead alleged that the company misrepresented its products to Georgia consumers.

The case is Civil Action No. 1:20-cv-4946-AT.

Attorneys: Jacquelyn L. Kneidel (Georgia Department of Law) for State of Georgia and Christopher M. Carr. Andrew Mason (Chilivis Grubman Dalbey & Warner LLP) for Elite Integrated Medical, LLC f/k/a Superior Healthcare of Woodstock, LLC d/b/a Superior Healthcare Group d/b/a Superior Healthcare Sandy Springs d/b/a Superior Healthcare Morrow and Justin C. Paulk.

Companies: Elite Integrated Medical, LLC f/k/a Superior Healthcare of Woodstock, LLC d/b/a Superior Healthcare Group d/b/a Superior Healthcare Sandy Springs d/b/a Superior Healthcare Morrow

MainStory: TopStory FDCActNews DrugBiologicNews SafetyNews

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