Enter to open, tab to navigate, enter to select
WARN Act Applied to Layoff Caused by Foreseeable FDA Pharma Product Seizure: Sixth Circuit
Practical Law Legal Update 7-618-4344 (Approx. 6 pages)
WARN Act Applied to Layoff Caused by Foreseeable FDA Pharma Product Seizure: Sixth Circuit
by Practical Law Labor & Employment
| Published on 02 Sep 2015 • USA (National/Federal) |
In Calloway v. Caraco Pharmaceutical Laboratories, Ltd., the US Court of Appeals for the Sixth Circuit held that a seizure by the US Food and Drug Administration (FDA) of an employer's products was not an unforeseeable business circumstance excusing the employer from complying with the federal Worker Adjustment and Retraining Notification (WARN) Act.
On August 26, 2015, in Calloway v. Caraco Pharmaceutical Laboratories, Ltd., the US Court of Appeals for the Sixth Circuit held that a US Food and Drug Administration (FDA) seizure of an employer's products at two manufacturing facilities was not an unforeseeable business circumstance excusing the employer from complying with the federal WARN Act. The Sixth Circuit found that a series of increasingly urgent warning letters and notices the FDA issued to the employer in the nine-year period preceding the seizure rendered the FDA's action foreseeable. (No. 14-2526, (6th Cir. Aug. 26, 2015).)
Background
Caraco manufactured pharmaceutical products and was subject to FDA regulation. In 2000 and 2002, the FDA issued warning letters to Caraco. From September 2005 through June 2008, the FDA issued Caraco multiple notices (known as Form 483s) identifying deficiencies in Caraco's products, policies and practices. In October 2008, the FDA issued Caraco a new and more strident warning letter stating that:
- Caraco's manufacturing and other policies did not adhere to current good manufacturing practices (cGMP).
- Caraco's responses to the earlier Form 483s had been significantly inadequate.
- Caraco had failed to correct failures in its processes and policies that the FDA had previously identified.
- The FDA had serious concerns about Caraco's violations and the potential risks that Caraco's products could harm consumers.
- Caraco's failure to correct the violations identified by the FDA might result in legal action without notice, including seizure and an injunction.
Caraco hired an outside consulting firm to assist it in addressing the FDA's warning letter. The firm informed Caraco that it had failed to remedy many of the deficiencies identified by the FDA in the 2008 warning letter and that Caraco was at risk of an FDA enforcement action. The firm made recommendations to Caraco on how to avoid that action but Caraco did not implement many of those recommendations.
Caraco acknowledged the FDA's warning letter in a form Caraco filed in 2009 with the US Securities and Exchange Commission (SEC). In May 2009, following Caraco issuing two separate recalls of some of its products, the FDA issued Caraco another Form 483 identifying eighteen deviations from cGMP. On June 24, 2009, the FDA filed a Complaint for Forefeiture and the following day served Caraco with the complaint and seized various Caraco products at Caraco's manufacturing facilities. On June 26, 2009, Caraco initiated a mass layoff of employees at those facilities. Less than two weeks later, on July 6, 2009, Caraco issued WARN Act notices, indicating that the notices were late because Caraco had not reasonably foreseen the FDA's actions.
In September 2014, a federal district court held that Caraco violated the WARN Act by failing to give employees at least 60 days' notice of the mass layoff.
Outcome
The Sixth Circuit affirmed the district court's grant of judgment to the plaintiff employees, holding that:
- The FDA's seizure of Caraco's manufacturing facilities in June 2009 was not an unforeseeable business circumstance excusing Caraco from complying with the WARN Act.
- Caraco violated the WARN Act by failing to notify employees at least 60-days before conducting a mass layoff.
The Sixth Circuit noted that:
- The WARN Act requires employers to provide affected employees with a 60-day notice before a plant closing or mass layoff (29 U.S.C. § 2102(a)).
- An exception to the full 60-day notice period requirement occurs if the plant closing is caused by business circumstances that were not reasonably foreseeable at the time notice would have been required (29 U.S.C. § 2102(b)(2)(A)).
- To qualify for the exception, an employer must prove that the circumstances cited by the employer:
- were unforeseeable; and
- actually caused the mass layoff or plant closing.
- DOL regulations on the WARN Act provide that:
- a key indicator of a not reasonably foreseeable business circumstance is "some sudden, dramatic, and unexpected action or condition outside the employer's control"; and
- a government-ordered closing of a work site without prior notice may be an unforeseeable business circumstance.
- Two prior Sixth Circuit decisions finding unforeseeable circumstances were inapposite. The cases required fact-specific analyses and the facts showed that the employers did not have advance knowledge that they would lose major customers (Watson v. Mich. Indus. Holdings, Inc., 311 F.3d 760, 764 (6th Cir. 2002); Pearce, 529 F. App'x at 457 (6th Cir. 2013)).
The Sixth Circuit found that:
- This case was similar to a Seventh Circuit case rejecting the employer's unforeseeable business circumstance exception argument because the employer in that case had been issued numerous regulatory violation citations by the US Department of Agriculture, which made an enforcement action reasonably foreseeable (Pena v. American Meat Packing Corp.; 362 F.3d 418, 422 (7th Cir. 2004)).
- The FDA's substantial product seizures and the resulting layoffs of Caraco's employees were reasonably foreseeable because:
- Caraco received multiple FDA warnings letters and Form 483s over a lengthy period that escalated in their criticism of Caraco's policies and practices;
- the consulting firm hired by Caraco observed that Caraco had failed to remedy product deficiencies identified by the FDA in the 2008 warning letter and warned Caraco that the company likely faced FDA enforcement action including a mass seizure;
- Caraco issued nationwide recalls of its products only months before the FDA's seizure; and
- Caraco's SEC filing and internal communications acknowledged the possibility that serious deficiencies observed by the FDA at Caraco's facilities could lead the FDA to take legal action.
- The general rareness of FDA enforcement does not give Caraco a basis to claim this particular FDA seizure action was unforeseen given the spate of FDA warnings and Form 483s that Caraco received.
- Caraco's argument that it was difficult to predict the exact timing of the FDA's seizure was baseless because:
- WARN liability does not require that the exact date of a government enforcement action be predictable; and
- Caraco could have issued its employees WARN notices or conditional notices that layoffs were probable if a government enforcement action occurred.
Practical Implications
Circuits courts rarely analyze WARN's unforeseeable business circumstances exception, particularly in the context of a government agency's regulatory enforcement action. The Sixth Circuit's decision in Calloway illustrates the type of circumstances in which a court might refuse to apply the exception. Employers that are in a government agency's sights and have received multiple regulatory notices and warnings including a threat of potential enforcement action should:
- Be aware of their notice and other obligations under the WARN Act.
- Consider issuing WARN Act mass layoff notices to affected employees if enforcement action requiring a mass layoff appears imminent.