U.S. Court of Appeals for D.C. Circuit Affirms Exclusion From Federal Health Care Programs Under “Responsible Corporate Officer” Doctrine

Aug 06, 2012

On July 27, 2012, in the closely watched case of Michael Friedman, et al. v. Kathleen Sebelius, et al., the United States Court of Appeals for the D.C. Circuit held that pharmaceutical corporate executives found guilty of misdemeanor “misbranding” under the “responsible corporate officer doctrine” (“RCO doctrine”) had committed a “misdemeanor relating to fraud” pursuant to 42 U.S.C. § 1320a-7(b)(1), thereby subjecting them to exclusion from Federal health care programs.  As described further below, before the D.C. Circuit, the executives argued that misdemeanor misbranding did not relate to fraud because, among other reasons, they were convicted under the RCO doctrine, which is a strict liability offense that does not require proof of intent.  The Court rejected their arguments, finding instead that 42 U.S.C. § 1320a-7(b)(1) “authorizes the [Secretary of Health and Human Services (“HHS”)] to exclude from participation in Federal health care programs an individual convicted of a misdemeanor if the conduct underlying that conviction is factually related to fraud.” 

This is a significant decision because it confirms – subject to potential review by the U.S. Supreme Court – what many in the life sciences and health care industry have feared.  Namely, the Office of Inspector General (“OIG”) within HHS can exclude pharmaceutical, medical device, and other health care corporate and marketing executives who did not personally commit or condone fraud, but instead merely failed to prevent misbranding or other misdemeanors arguably “related to” fraud such as adulteration.  Importantly, exclusion from Federal health programs makes it nearly impossible for such executives to engage in any work – during the period of the exclusion – that may involve Medicaid or Medicare reimbursement or other Federal health care related contracting or services.  For many, such a remedy could spell the end of their careers.  

As described further below, it is also significant because the Department of Justice (“DOJ”), in concert with the Food and Drug Administration (“FDA”) and the OIG, has recently turned to the RCO doctrine with greater frequency.  In light of the Friedman decision, we anticipate that this trend will continue and will likely increase.  More broadly, there has been increased clamor for regulators and prosecutors to more aggressively pursue senior executives for corporate wrongdoing and to hold them personally liable, on the theory that prosecuting and fining the corporation alone is insufficient to prevent or deter corporate crimes and regulatory non-compliance.  Thus, perhaps now more than ever, pharmaceutical, medical device and other health care industry executives must be particularly vigilant against their RCO exposure. 

The RCO Doctrine

Under the RCO doctrine, a corporate executive may be held criminally liable for a company’s criminal violations of the Food, Drug, and Cosmetic Act (“FDCA”), if the executive’s acts or omissions facilitated the FDCA violation – whether or not the executive knew of the company’s criminal violations.  Thus, criminal liability under the RCO doctrine extends not only to corporate agents who themselves committed the criminal act, but also to those who by virtue of their managerial positions or other similar relation to the actor could be deemed “responsible” for its commission.

Accordingly, the RCO doctrine is unique in criminal law – unlike most criminal laws which require a defendant to have committed a wrongful act with criminal intent, the RCO doctrine does not require proof of such intent.  Thus, under the doctrine, a corporate officer can be held criminally liable even for a subordinate employee’s criminal activity, where the officer did not participate in, or even know anything about, the wrongful conduct. 

The RCO doctrine has existed for many years, and has been recognized and upheld by the U.S. Supreme Court in two leading cases involving the FDCA:  United States v. Dotterweich, 320 U.S. 277 (1943) (involving misdemeanor misbranding of drugs) and United States v. Park, 421 U.S. 658 (1975) (misdemeanor adulteration of food because of rats in a warehouse).  While the RCO doctrine is commonly associated with FDCA prosecutions, federal and/or state courts have also approved its use in other contexts including in matters involving violations of the securities, antitrust, environmental and consumer fraud laws.

Michael Friedman, et al. v. Kathleen Sebelius, et al.

The facts in Friedman are straightforward:  the Purdue Frederick Company had been convicted in May 2007 of fraudulent misbranding – a felony – involving the drug known as Oxycontin.  Three of its executives entered into plea agreements and were convicted under the RCO doctrine of misdemeanor misbranding of a drug, for failing to prevent the fraudulent marketing of Oxycontin.  Based upon their convictions, and after all administrative appeals had been exhausted, the Secretary of HHS ultimately excluded them from participation in Federal health care programs for 12 years. 

The executives sought a reversal of their 12-year exclusion in federal court, but the district court upheld the exclusion decision.  Accordingly, the executives appealed both the exclusion and its length to the D.C. Circuit. 

On appeal, the executives argued that section 1320a-7(b)(1) did not authorize the exclusion because misdemeanor misbranding is not a “misdemeanor relating to fraud.”  In this regard, the executives noted that misdemeanor misbranding does not necessarily require a “culpable mental state because a conviction for the offense may be, and in this case was, predicated upon the responsible corporate officer doctrine, which entails strict liability.”  The Court, however, rejected this argument, concluding that the Secretary of HHS may appropriately examine the circumstances underlying the RCO misdemeanor conviction to determine if it was “related to” fraud:

[T]he text, structure, and purpose of the statute, viz. to protect Federal health care programs from financial harm wrought by untrustworthy providers, all indicate the Secretary’s circumstance approach is proper; i.e., the statute authorizes exclusion of an individual whose conviction was for conduct factually related to fraud. 

The Court went on to construe the meaning of “related to” expansively to encompass an executive’s misdemeanor offense factually connected with a fraud committed by others employed by the corporation.  The Court reasoned that this phrase was extremely broad and “[r]ather than referring only to generic misdemeanor offenses that share all the ‘core elements’ of fraud, the capacious phrase includes any criminal conduct that has a factual ‘connection with’ fraud.”  In light of the Court’s broad construction of this language and its analysis of other aspects of the statute, the Court concluded that:

“Their convictions for misdemeanor misbranding were predicated upon the company they led having pleaded guilty to fraudulently misbranding a drug and they admitted having ‘responsibility and authority either to prevent in the first instance or to promptly correct’ that fraud; they did neither.  Accordingly, section 1320a-7(b)(1)(A) authorized the Secretary to exclude them for a time from participation in Federal health care programs.”

12-Year Exclusion Unsupported by Record.  With respect to the length of the exclusion, however, the Court agreed with the executives that the 12-year exclusion was not adequately supported in the record, and was therefore “arbitrary and capricious.”  Specifically, HHS had not adequately explained why the Secretary had excluded these executives for as long as 12 years, while previous executives excluded on the basis of a misdemeanor had all received shorter exclusion periods.  At the same time, the Court did not conclude that a 12-year exclusion was necessarily excessive:  “[w]e do not suggest the Appellant’s exclusion for 12 years based upon a conviction for misdemeanor misbranding might not be justifiable; we express no opinion on that question.”  Rather, the D.C. Circuit ordered the district court to remand the issue to HHS for further fact finding consistent with its opinion. 

Increased Reliance on the RCO Doctrine:  What Should Companies And Executives Do Now?

In the past several years, senior officials at the DOJ, FDA and OIG have stated publicly their agencies’ intent to pursue RCO cases involving FDCA violations and other misconduct.  For example, in 2009, then Assistant Attorney General of the Civil Division Tony West said the Justice Department would use the doctrine with greater frequency to combat health care fraud; and in 2010, FDA Commissioner Margaret Hamburg made a similar announcement.

Recent prosecutions and regulatory actions demonstrate that the government is determined to live up to its promise of stepped-up enforcement.  For instance, in April 2012, Gary Osborn and his corporation, ApothéCure Inc., pleaded guilty in connection with ApothéCure’s interstate shipment of two lots of misbranded colchicine injectable solution that led to the deaths of three people in the Pacific Northwest.  Regarding Osborn’s guilty plea, DOJ Acting Assistant Attorney General of the Civil Division Stuart Delery stated that the plea “shows that the Department of Justice will enforce the [FDCA] against responsible corporate officers of companies that fail to control the quality of their products.”   

Given the DOJ and OIG’s well publicized focus on combating health care fraud, pharmaceutical, medical device and other health care entities whose executives face potential RCO doctrine liability must focus their compliance efforts to guard against RCO liability.  In connection with any fraud prosecution or enforcement action against the corporation, executives will have to carefully weigh the collateral consequences – especially exclusion – of entering into a misdemeanor guilty plea should the authorities look to hold the executive criminally liable under the RCO doctrine.  More proactively, however, executives can try to protect themselves from RCO exposure in several ways, such as:

  • participating in compliance training;
  • adhering to the company’s compliance program;
  • ensuring that the company conducts regular evaluations and audits of employees whose duties could give rise to violations;
  • ensuring that such employees receive compliance training and adhere to the company’s compliance program;
  • ensuring that employees who report directly to the executives are instructed to, and made accountable for, affirmatively and timely reporting to them any suspected serious misconduct or non-compliance within the departments or divisions those employees oversee, and that in turn similar “reporting-up” obligations are imposed within each division or department and throughout the reporting chain; and
  • regularly evaluating the effectiveness of the company’s compliance program, and whether it adequately seeks to identify and address potential areas of RCO liability. 

Failure to follow these and other steps to protect against RCO liability could increase the risk not only of prosecution, but also of exclusion from Federal health care programs, as we saw in Friedman.  Indeed, in light of the Court’s decision in Friedman, DOJ and HHS may feel more emboldened than ever to pursue aggressively RCO actions and exclusions.

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