Federal Court has bone to pick with Medtronic, awards largest ever penalty under Therapeutic Goods Act 1989 (Cth)

The Federal Court of Australia in New South Wales has hit medical devices giant Medtronic with a $22 million penalty and a $1 million costs order in its decision of Secretary, Department of Health v Medtronic Australasia Pty Ltd [2024] FCA 1096, which was handed down last week.

Pursuant to its originating application dated 31 August 2021, the Secretary of the Department of Health (the Secretary) sought declarations[1] that Medtronic Australasia (Medtronic), the Australasian branch of one of the largest medical device companies in the world, Medtronic plc, contravened provisions of the Therapeutic Goods Act 1989 (Cth) (Act) in that it supplied unregistered therapeutic goods in Australia for use in humans.

The alleged breaches were admitted by Medtronic, and the parties ultimately agreed on the appropriate penalty to be ordered, which is the largest ever imposed for contraventions of the Act.

Facts of the case

The therapeutic good in question was Medtronic’s ‘Infuse Bone Graft Kit’ (Kit), which formed one component of Medtronic’s ‘Infuse Bone Graft/LT-Cage – Graft kit, spinal fusion’ (Device). The other component of the Device was a metallic spinal fusion cage (Cage).

The Device as a whole had been listed on the Australian Register of Therapeutic Goods (ARTG) as a Class III ‘medical device’ since August 2005.[2] When listing medical devices on the ARTG, the Therapeutic Goods (Medical Devices) Regulations 2002 (Cth) (Regulations),[3] require manufacturers to include ‘instructions for use’ (IFU), so as to inform users of certain matters, including:

• the medical device’s intended purpose;
• its proper use and intended user; and
• any precautions to be taken regarding use of the medical device (including any contra-indications, warnings and restrictions).

The Device’s ‘intended purpose’ according to its ARTG entry was for use in certain spinal fusion procedures for patients with degenerative disc disease. The Cage component of the Device was intended to hold the spine in the desired position, whilst the Kit comprised a protein to promote bone growth, and a sponge to act as a ‘carrier for the protein’ and a ‘scaffold for new bone growth’.

Due to ‘significant clinical demand’ for the Kit by itself between 1 September 2015 and 31 January 2020, Medtronic supplied 16,267 units of the Kit without the Cage to over 100 hospitals across Australia. For the purposes of the proceeding only,[4] the parties submitted, and her Honour accepted,[5] that the Kit on its own could be classified as a ‘therapeutic good (medicine)’ within the meaning s 3 of the Act, rather than a medical device.

Breach of civil penalty provisions

As the Kit alone was not registered on the ARTG, its supply without the Cage was a direct contravention of s19D(1)(iv) of the Act, which prohibits the supply in Australia of therapeutic goods for use in humans, unless the goods are registered on the ARTG or are otherwise subject to an exemption, approval or authority,[6] which the Kit was not. Notably, the Act did not prohibit a health practitioner from using the Kit (without the Cage) in surgical procedures. The Secretary therefore did not allege that health practitioners acted unlawfully by using the Kit without the Cage.

The Secretary argued that as Medtronic had not applied for the inclusion of the Kit alone on the ARTG, it had no opportunity to implement the statutory procedures that would ordinarily ensure that possible risks associated with the Kit were properly assessed and mitigated, (including in relation to quality, safety and the Kit’s efficacy as a ‘stand-alone’ therapeutic good).

When discussing the background to and nature of the contraventions, her Honour cited several failures within Medtronic that enabled the breaches, which included:

• using inadequate internal product control systems for the monitoring and control of product supply that enabled the Kit and the Cage to be released separately from Medtronic’s warehouse;[7]
• failing to appropriately disseminate and adhere to a Standard Operating Procedure (SOP) in relation to the Device (developed in 2009) that would have assisted if not ensured that Medtronic staff and/or its agents complied with the Device’s ARTG entry;[8]
• failing to conduct quality audits and compliance reviews that would have analysed the supply conditions of Medtronic’s products and associated ARTG entries, resulting in the contraventions not being identified until January 2020 (considered below);
• a lack of regular interaction between the responsible business unit for the Device and Medtronic’s regulatory and quality teams, which may have resulted in a lack of awareness of the importance of regulatory compliance[9]; and
• not including the ‘supply of unapproved products; components of products; or supply of products in contravention of ARTG conditions’ in its policies and training concerning ‘unapproved’ activities[10].

After being instructed by its parent company to conduct a ‘comprehensive review of spinal product inventory to identify products which may be obsolete’ in August 2018, a Medtronic operations manager identified a lack of sales of the Cage in FY18 and FY19 and took steps to arrange the withdrawal of the Cage from supply and sale by Medtronic. At no stage during this review did the operations manager turn his mind to the requirement to supply the Cage and the Kit together; and focused only on meeting the instructions from its parent company to reduce obsolete and slow moving inventory. Medtronic withdrew the Cage from supply in Australia as a result, yet Medtronic’s regulatory team was not informed or consulted about the decision[11].

It was not until January 2020 that the Secretary wrote to Medtronic informing it of concerns raised by private health insurers that the Kit was not being used in accordance with its ARTG entry[12]. On becoming aware of the contraventions, Medtronic ceased selling the Kit’s and began investigating alternative solutions that might remedy the contraventions[13]. In March 2020 however, Medtronic resolved it could not maintain compliant supply of the Device and requested the Secretary cancel the Device’s ARTG entry. Medtronic ceased supplying the Kit in Australia shortly after[14].

Penalty

The parties reached agreement that an appropriate penalty to be ordered against Medtronic was $22,000,000, plus the Secretary’s costs. Whilst her Honour stressed that the imposition of a civil penalty order was not a ‘consent jurisdiction’ she was ultimately persuaded of the appropriateness of the remedy suggested by the parties having regard to the totality of Medtronic’s conduct.[15]

On reaching this conclusion, her Honour noted it was appropriate to infer that Medtronic had paid insufficient attention to compliance, training, and systemic improvements that would have enabled it to deal with concerns as they arose. This was made even more obvious by the fact that the corrective actions taken by Medtronic were only done so after the Department of Health brought the contraventions to Medtronic’s attention in early 2020. Her Honour lamented the harm done to the system of regulation of therapeutic goods in Australia, through Medtronic’s ongoing and numerous contraventions of the Act by its supply of the Kit, which also, it was estimated, resulted in Medtronic obtaining a net revenue of $8,982,474 (excluding GST).

In any event, her Honour formed the view that there was limited importance to be placed on imposing a penalty designed to specifically deter Medtronic from further contraventions, given that:

• Medtronic had no prior instances of breach;[16]
• there was no suggestion the contraventions were deliberate;
• Medtronic had, on becoming aware of its contraventions, taken ‘considerable steps’ to address the causes of its contraventions, including by:
  • updating its regulatory processes and controls for ‘non-standard’ or ‘higher-risk’ products;
  • adopting a ‘Product Approval SOP’ which requires a Medtronic Regulatory Affairs specialist to conduct a series of assessments on a product being considered for registration on the ARTG;[17]
  • increasing appropriate supervision and control on the spinal products team by restructuring and integrating it with the wider operations and supply chain teams;[18]
  • improving communication between the relevant business units, and the quality and regulatory teams; [19]
  • implementing new policies and conducting additional training on, among other things, its quality management systems;
• Medtronic had cooperated with the Secretary in the course of proceedings including by admitting the contraventions early and by issuing a formal apology; and
• there was nothing in the evidence that indicated specific harm arose out of any of Medtronic’s contraventions.

These factors also weighed against the maximum possible penalty being imposed, not least because the maximum penalty ‘was a figure beyond which any reasonable Court might go in these circumstances’, being $162 billion.

Her Honour cited the decision of Australian Building and Construction Commissioner v Pattinson (2022)[20] when explaining that civil penalty should be fair but significant enough to protect the public from future contraventions, and ‘must also be sufficiently high enough that a cynical operator may not take it into account as the cost of doing business’.[21]

Key takeaways for industry

Whilst the Medtronic decision imposed a civil penalty limited to the supply of therapeutic goods for use in humans, section 19D of the Act (and regarding medical devices, section 41MIB) also prohibits the importation, exportation and manufacturing of therapeutic goods (and medical devices) for use in humans, unless those goods are registered on the ARTG or are otherwise subject to an exemption, approval or authority.

To protect the public from the potential harm of unregulated products, and to avoid the risk of incurring a substantial penalty, any business carrying on one or more of these activities with respect to therapeutics goods and medical devices must ensure that its internal processes support compliance with the goods’ specific ARTG entries by:

• adopting and appropriately implementing policies and standard operating procedures that govern the way in which specific therapeutic goods and medical devices are imported, exported, manufactured or supplied;
• ensuring that internal product control systems and other technology does not allow for goods to be handled in a way that is inconsistent with its ARTG entries;
• senior management maintaining a vigilant level of oversight over the operations of the business;
• conducting regular quality control audits and compliance reviews that specifically consider ARTG entries;
• ensuring consistent communication between relevant business departments, quality and regulatory teams, and restructuring to facilitate this if required.

The biggest takeaway from this case is the importance of reviewing and considering your ARTG registrations against the way in which the specific products are actually being used in the market, and ensuring that the current ARTG registrations cover that use. As demand for certain products (and their intended use) evolves, this must be considered frequently as part of ongoing compliance reviews and quality control audits.

Should you have any questions in relation to the decision or about how Gadens can assist your organisation with its regulatory compliance, please contact Kelly Griffiths.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:

Kelly Griffiths, Partner
Katie Collinson, Associate

[1] Federal Court of Australia Act 1976 (Cth), s 21

[2] Therapeutic Goods Act 1989 (Cth), s 41BD; Therapeutic Goods (Medical Devices) Regulations 2002, Part 3

[3] Essential Principle 13.4 (set out in Schedule 1 to the Devices Regulations

[4] [2024] FCA 1096, [32]

[5] [2024] FCA 1096 [104]

[6] Therapeutic Goods Act 1989 (Cth), s 19D(2)

[7] Decision [62] – [64]

[8] [2024] FCA 1096, [65] –

[9] [2024] FCA 1096, [72]

[10] [2024] FCA 1096, [73]

[11] [2024] FCA 1096, [75] to [78]

[12] [2024] FCA 1096 [72], [79]

[13] [2024] FCA 1096 [80] – [83]

[14] [2024] FCA 1096 [82] – [83] subject to a very limited exception

[15] See Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 at [58].

[16] The Act, s 42YB(3)(d)

[17] [2024] FCA 1096 [86]

[18] [2024] FCA 1096 [88]

[19] [2024] FCA 1096 [89]

[20] 274 CLR 450, [15], [71]

[21] [2024] FCA 1096 [117], 274 CLR 450 [17]