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File this under “They should have seen it coming.”

In a decision that provides an important lesson for the pharmaceutical industry, a federal appeals court decided that Caraco Pharmaceutical Laboratories did not provide sufficient notice to employees of a possible mass layoff. Caraco’s problems stem from quality-control issues that resulted in product seizures by the Food and Drug Administration, which, in turn, led to a mass layoff.

Any drug maker can encounter quality-control problems, prompting a tough regulatory response and resulting in a plant closing. But the decision by the appeals court “provides a rare judicial analysis” of a company’s response to serious manufacturing issues, writes the FDA Law Blog, which brought the August ruling to our attention.


In June 2009, Caraco Pharmaceutical Laboratories conducted a mass layoff two days after the FDA seized various products at two troubled manufacturing plants in Michigan. The move followed long-running quality-control problems the generic drug maker failed to rectify.

But then, Caraco ran into yet another headache. An employee filed a lawsuit claiming the company should have known much earlier that the FDA would take such a step, and, as a result, Caraco was obligated to notify state authorities and employees that a layoff would occur.


The appeals court agreed and said that Caraco, which was acquired by Sun Pharmaceutical in 2011, was wrong to claim that the layoff was the result of an “unforeseeable business circumstance.”

Caraco received numerous notices for failing FDA plant inspections and subsequent warning letters dating back to 2000, the ruling noted, and the agency repeatedly cited ongoing deficiencies. As recently as October 2008, FDA expressed “serious concerns,” which prompted a pair of quality control consultants to warn Caraco management that an FDA enforcement action was likely, the court added.

In its defense, Caraco argued that it appeared unlikely the FDA would seize products based on a reading of past regulatory actions, and that, in any event, such a move would be difficult to predict. The drug maker further contended that the warning letters included “boilerplate language,” which suggested the agency was unlikely to take any unusual actions, according to court documents.

But Caraco “knew that enforcement action could result from product deficiencies and its consultants had told them such action was likely,” the appeals court said in its decision. Moreover, a lower court earlier determined “Caraco knew as early as July 2008 that an FDA seizure was likely and would be very difficult to avoid.” The company also issued several product recalls and disclosed the problems in US Securities and Exchange Commission filings.

“Taken together and combined with the warnings from both of Caraco’s consultants and the FDA’s dissatisfaction with Caraco’s previous corrective actions, the enforcement action was reasonably foreseeable by April 27, 2009,” when the FDA seizure occurred, the appeals court wrote.

For this reason, the drug maker should have complied with the WARN Act, a federal law that requires employers to give a 60-day notice to employees before a plant closing or mass layoff.

Although the drug maker argued such a notice would have been premature, the court maintained that Caraco could have issued notices to its employees that an FDA action was imminent “without actually conducting the layoffs if the action never occurred.” The court noted that anticipating the exact FDA enforcement action is “rarely, if ever,” foreseeable.

The upshot? As the FDA Law Blog notes, any drug maker facing serious manufacturing problems ought to consider filing a WARN notice to employees, just in case production is eventually halted and layoffs ensue.