Legal Liabilities of Medical Device Outsourcing

Originally Published MDDI April 2001 Contracting for the manufacture of a product does not relieve the developer of many legal responsibilities. Both developer and manufacturer can have FD&C law and product liability exposure.

Larry R. Pilot

April 1, 2001

17 Min Read
Legal Liabilities of Medical Device Outsourcing

Originally Published MDDI April 2001

Contracting for the manufacture of a product does not relieve the developer of many legal responsibilities. Both developer and manufacturer can have FD&C law and product liability exposure.

Larry R. Pilot and Donald R. Stone

The successful manufacture and distribution of any product is a challenge for well-established businesses and entrepreneurs. Irrespective of the product type, the objective is to generate income sufficient to cover expenses and provide some return as net profit. This process is vastly complicated when the product type is subject to pervasive government regulation.

The U.S. medical device industry is a creative and dynamic force in the delivery of products that enhance, prolong, or even save the useful life of a human being. The satisfaction that companies derive from knowing their efforts benefit mankind is exhilarating. This potential for joy, however, must be tempered with the recognition that in the United States, any fault associated with distribution and use of an allegedly defective device could result in disastrous civil or criminal penalties. These penalties include the legal liabilities that can result from private civil actions, such as complaints regarding product liability or breach of contract. Severe penalties can also result from failure to comply with provisions of the Federal Food, Drug, and Cosmetic Act (the FD&C Act).

Compliance with the FD&C Act generally requires a premarket notification to FDA for most devices and premarket approval for a limited number and types of products. Some devices are exempt from 510(k) notification requirements, but all devices are subject to compliance with all or parts of the agency's quality system regulation (QSR). Whether a company uses its own facilities or contracts, or outsources, with another firm to manufacture a device, the responsibility for compliance is the same for the company.

This article briefly reviews the provisions of the FD&C Act that apply to manufacturer responsibility, the process of identifying and selecting a contract manufacturer, and the legal consequences of failure to discharge required obligations. Emphasis is placed on the role of the company responsible for the manufacture of a medical device, rather than on the contract manufacturer, although a contract manufacturer should derive a benefit from more fully understanding the perspective of the responsible company.


Before any company can offer a medical device for commercial distribution in interstate commerce, registration with FDA is required and the device must be listed with the agency. For most devices, product clearance from FDA is also required. Compliance with these requirements enables the company to manufacture and distribute the device subject to compliance with various provisions of the FD&C Act and relevant regulations. The principal regulation applicable to the manufacture of a medical device is the QSR, which is also referred to as the good manufacturing practices (GMP) regulation. Irrespective of the entity assigned by the company to manufacture the device, any commission of a prohibited act subjects the company and responsible individuals to penalties under the FD&C Act. The prohibited acts identified in section 301 of the FD&C Act are summarized as follows:

  • Interstate introduction or delivery of an adulterated or misbranded device.

  • Device adulteration or misbranding.

  • Receipt of an adulterated or misbranded device, and delivery, or proffered delivery, for pay or otherwise.

  • Refusal to permit access or copying of a required section 703 record; or failure to establish and maintain records and make reports under sections 515(f) or 519, or refusal to provide access or copying of such records.

  • Refusal to allow entry or inspection under section 704.

  • Manufacture of an adulterated or misbranded device.

  • False guaranty or undertaking under section 303(c)(2).

  • Unauthorized use or revelation by any person of trade secret information.

  • Labeling alteration, mutilation, destruction, obliteration, or removal that results in adulteration or misbranding of a device.

  • Labeling, advertising, or other sales promotion use of a section 704 report or analysis.

  • Failure to register, list, or notify under section 510.

  • Failure or refusal to comply with sections 518, 519, 520(g), or 522; or submission of a false or misleading report.

  • Movement of a device under a section 304(g) detention.

  • Failure to comply with section 801 export requirements.

  • False declaration of section 514(c) performance standard conformity.

These prohibited acts relate directly or indirectly to responsibilities affected by the manufacture of a medical device for its intended use. The penalties that can be applied through federal district court litigation apply when the federal government can prove that a prohibited act has occurred. The specific penalties that can be applied by a court or FDA under sections 302, 303, 304, or 307 of the FD&C Act include:

  • Issuance of an injunction.

  • Device seizure.

  • Criminal prosecution for misdemeanor or felony charges.

  • Imposition of civil penalties.

If FDA determines that a prohibited act has occurred for which a penalty is appropriate, it can proceed through either the Justice Department or the U.S. Attorney in a particular district. Regardless of whether the penalty sought by government is against the device, an individual, or organization, the burden is on FDA to support its position, and the defendant or manufacturer of a device has the opportunity to defend its position through a trial. Most charges relate to adulteration or misbranding of medical devices. Although the FD&C Act contains numerous definitions, there is no single definition for what constitutes adulteration or misbranding. Examples included in the act are listed in Table I.

Adulteration (Section 501 of FD&C Act)

Misbranding (Section 502 of FD&C Act)

Consists of filthy, putrid, decomposed substance, or prepared, packed, or held under unsanitary conditions—injurious to health

Strength differs from representation of purity, or quality falls below representation

Failure to comply with performance standard

PMA failure

Banned device

GMP or QSR nonconformance

Investigational device failure

False or misleading labeling

Label information failure

Label prominence failure

Absence of required wording or established name

Inadequate directions or warnings

Dangerous to health

Registration or listing failure

Restricted device false or misleading advertising

Restricted device advertising failure

Performance standard labeling failure

Required notification failure

Table I. FD&C Act examples of adulteration and misbranding of medical products.

Most of the adulteration and misbranding conditions are not directly applicable to contract manufacturers. Clearly, however, the QSR regulation, which requires development and maintenance of more than 100 types of records, can affect the liability of contract manufacturers. These requirements range from development of a variety of procedures through retention of manufacturing and complaint records.

Because of the many requirements for record creation and recordkeeping in the QSR, a company seeking to utilize the facilities and services of a contract manufacturer can face a difficult task. The company must ensure that the contract manufacturer has the facilities, personnel, and controls necessary to maintain compliance with FDA regulations. Consequently, the ultimate agreement between the parties requires considerable diligence on the part of the contracting company.


The selection of a contract manufacturer begins with identifying possible candidates, continues through establishment of the type of relationship desired, and ends with a written contract agreed to by all parties. Some of the due diligence factors to consider in this process are shown in Table II.

Table II. Examples of due diligence factors to be considered in selecting a contract manufacturer.


Because the agency has explicit inspectional rights under the FD&C Act, information gathered by FDA inspectors can be used as evidence to support allegations by the agency that violations have occurred. Regardless of whether an enforcement action is initiated by FDA, under the Freedom of Information Act (FOIA) the public has access to documents collected and created by the agency. These documents can be useful to company detractors in a variety of ways, ranging from efforts to embarrass the firm to securing punitive damages in product liability litigation. It is essential therefore to maintain control of any FDA inspection of a contract manufacturer.

Section 704 of the FD&C Act describes the inspection authority of FDA and the limits of that authority. Under subsection 704(a), authorized inspectors can inspect facilities where devices are manufactured, processed, packed, or held at reasonable times, within reasonable limits, and in a reasonable manner. Although the scope is limited, it is somewhat broader for restricted devices. Irrespective of the type of device, however, the QSR applies to nearly all devices, and its requirements impose significant documentation burdens. In addition, this documentation is disclosable during inspections. Under subsection 704(e), records that are required to be maintained pursuant to regulations promulgated under authority of section 519 of the FD&C Act are also disclosable during inspections.

At the very least, the agreement with the contract manufacturer must require it to provide notice to the company of any FDA inspection relating to its devices. When such an inspection occurs, a representative of the company must be involved to ensure that the contract manufacturer discloses to FDA only that information required by the FD&C Act or which it has the explicit permission of the company to reveal. For example, the contractual agreement between the company and the contract manufacturer is not disclosable to the FDA under provisions of the FD&C Act. Access to such a document on inspection is voluntary, and the company has the right to decline such a request. Likewise, there are a variety of other FDA requests for which disclosure is voluntary, and the company has the right to decline without being accused of an unlawful refusal. If in doubt, it is useful to confer with counsel and, if indicated, request that FDA make its request in writing for consideration by the company. With the exception of trade secrets and some confidential data, all information given to FDA is ultimately subject to disclosure under FOIA provisions.

Completion of the FDA inspection without issuance of inspectional observations on the form FDA-483 is a remarkable event and a welcome relief. If the form is issued, however, it is essential that company representatives participate in the management conference in order to understand, review, and possibly comment on each observation. In any event, it is wise to respond in writing to FDA about each observation and obtain a copy of the establishment inspection report (EIR). Likewise, the EIR must be carefully reviewed to ensure that the contents are accurate and properly reflect facts known at the time of the inspection. If the EIR content creates a false or misleading impression to the reader, it is essential to respond in writing to FDA about issues in question.

Because an FDA inspection of a contract manufacturer may represent a very comprehensive source of public information, careful management of the process can reduce possible criminal and civil legal liabilities. Prosecutions for violations of the FD&C Act generally result from evidence that is gathered during an inspection. Even in instances when FDA declines to recommend the imposition of a penalty, the results of an inspection can help the efforts of plaintiffs' lawyers—particularly for product liability litigation. The ounce of prevention required to comply with the requirements of the QSR can eliminate the need for many pounds of cure when allegations of wrongful conduct are litigated. When the preventive efforts have not been undertaken or were not successful, the legal liabilities can destroy the best of companies and their products. Allegations of QSR violations have become commonplace in legal pleadings (e.g., complaints) prepared by plaintiffs' product liability lawyers.

Under the FD&C Act, the company responsible for the manufacture of a product subject to regulation is liable for violations it caused or committed—even if there is no fault. This liability was established shortly after passage of the 1938 Act, and it has been supported repeatedly by the federal courts. One of the earliest prosecutions for violation of the FD&C Act is the landmark Supreme Court decision in U.S. v. Dotterweich. This decision established that a responsible official of a drug distributor can be prosecuted even though that individual was not at fault. Dotterweich's company purchased certain drugs that were manufactured by another company and made them available under its own label to its customers. Although the drugs were adulterated without the knowledge of Dotterweich or the company, it made no difference as to his guilt for a misdemeanor. The Supreme Court reaffirmed the Dotterweich decision decades later in a case involving adulterated food, U.S. v. Park.

In a case that is directly related to outsourcing responsibility under the FD&C Act, a cosmetic company was convicted of distributing an adulterated product. The Parfait Powder Puff Company, Inc., was engaged in the manufacture and sale of a cosmetic product, but contracted with another firm for manufacturing. The contract manufacturer substituted a deleterious ingredient without the knowledge of Parfait. Even though Parfait forbade the substitution when it learned about it, Parfait was convicted of the violation. The Circuit Court of Appeals for the Seventh Circuit subsequently affirmed the conviction in U.S. v. Parfait. Despite the fact that this incident involved a cosmetic and the decision was rendered in November 4, 1947, it represents the judicial interpretation of the prohibited acts and penalty provisions of the FD&C Act that also apply to medical devices. Of particular relevance is the following language of the circuit court:

One who owes a particular duty to the public and entrusts another, whether independent contractor or agent, becomes responsible criminally for failure of the person, to whom he has delegated the obligation to comply with the law, if the nonperformance of such duty is a crime.

Simply stated, if a company is responsible for the manufacture and distribution or sale of a medical device—whether the firm manufactures the device or has it manufactured by another—the company is subject to misdemeanor or felony criminal prosecution for violative products.


The liability associated with a violation of the FD&C Act may not result in a civil or criminal penalty. Nevertheless the product of an FDA inspection can influence the direction of civil litigation. For example, receiving a warning letter or a critical FDA-483 is embarrassing and can attract the attention of those who distribute or use a company's product. If such bad news is coupled with a voluntary or forced recall or safety alert, it can stimulate demands for compensation because of breach of contract or personal injury.

Disclosable records obtained from FDA are a very inexpensive form of discovery that can be used to satisfy the initial burden necessary to support a valid liability claim. For example, the issuance of a warning letter or an agreement to recall a medical device can be useful in establishing negligence per se because FDA has taken a position that a violation of law has occurred. If there is a court decision or consent decree, the liability of the company is likely to be certain. The trial will generally be pursued to establish compensatory and, possibly, punitive damages.


Compliance with applicable provisions of the FD&C Act can be a significant factor in reducing the legal liability of a medical device company, regardless of whether it manufactures its device or has an arrangement with a contract manufacturer. When assigning the production of a device to a contract manufacturer, however, the device company must exercise great foresight and control. In particular, the company must recognize that any authorized or unauthorized action by the contract manufacturer that adulterates or misbrands a device represents a liability to the company. Careful selection of the contract manufacturer secured by an agreement that clearly defines responsibility can limit and possibly eliminate liability.

Larry R. Pilot and Donald R. Stone are partners in the food and drug practice at the law firm of McKenna & Cuneo LLP (Washington, DC).

Illustration by Tim Lewis/Laughing Stock

Copyright © 2001 Medical Device & Diagnostic Industry

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