Alerts and Updates
D.C. Circuit Affirms HHS Power to Disqualify Corporate Officials Convicted of Misdemeanors Under the "Responsible Corporate Official" (RCO) Doctrine
August 8, 2012
The Friedman decision highlights the personal legal risks faced by executives and other supervisory officials in responsible positions in FDA-regulated industries such as the drug, medical device and food sectors, and reinforces the vital importance of ensuring that a robust and comprehensive compliance program is in place and followed to prevent violations from occurring, to discover them when they do, and to promptly and fully correct violations when found.
On July 27, 2012, the U.S. Court of Appeals for the D.C. Circuit issued the long-anticipated decision in Friedman v. Sebelius.1 Friedman addressed whether the U.S. Department of Health and Human Services (HHS), through its Office of Inspector General (OIG), had the power, under the exclusion provisions of the federal statute governing healthcare programs, to disqualify a person from participating in federal healthcare programs where the person proposed for exclusion had been convicted of a misdemeanor violation of a federal law if the conviction was based on the "Responsible Corporate Official" (RCO) doctrine.
Commonly known in the U.S. Food and Drug Administration (FDA) realm as the "Park Doctrine" after a key 1975 Supreme Court decision,2 under the RCO3 theory of liability, a person such as a senior executive who was in a position to prevent a violation from occurring can be held criminally liable for violations that happened on his or her watch, even if the official did not know about the circumstances constituting the violation or did not intend for those events to occur.4
In Friedman, the D.C. Circuit upheld the exclusions of three former Purdue Frederick Company (Purdue) executives who had pleaded guilty in 2007 to misdemeanor violations of misbranding a drug under the Federal Food, Drug, and Cosmetic Act ("the Act") in connection with the marketing of OxyContin®, a potent narcotic. The appeals court did remand the case back to the trial court to determine if the length of the exclusions for these misdemeanor convictions was excessive in view of other HHS exclusions made following criminal convictions.
The Friedman appeal arose from the ashes of the federal criminal prosecution of Purdue and three past officers—Michael Friedman, former CEO, Howard R. Udell, ex-Senior Vice President and Chief Legal Officer, and Dr. Paul D. Goldenheim, former Executive Vice President and Chief Scientific Officer—alleging that the company engaged in the off-label promotion of OxyContin® and used extensive marketing efforts that severely downplayed the potential side effects of the narcotic, including its abuse potential, all of which misbranded the drug under the Act.
After a lengthy investigation dating to 2001, the company entered into an agreement in 2007 under which it pled guilty to a single felony violation of the Act. Under the plea agreement, Purdue agreed to a relatively small fine for the felony criminal violation, but also simultaneously settled various other claims resulting in fines, assessments, and disgorgement totaling $600 million.
The individual defendants, while denying any involvement in—or knowledge of—the activities leading to the corporate conviction, entered into agreements at the same time as the company under which they each pleaded guilty to a single misdemeanor violation of the Act as responsible corporate officials under the Park Doctrine. In connection with their pleas, while the individual defendants paid a criminal fine of just $5,000 each, they also agreed to collectively disgorge $34.5 million that they had made while at Purdue, payable to the Virginia Medicaid Fraud Control Unit Income Fund.
The Proposed Exclusions
In the autumn of 2007, just a few months after the individuals pleaded guilty, the OIG informed the individuals that it was considering excluding them from federal and state healthcare programs based on their convictions. The OIG confirmed the exclusions in a formal notice the following spring, proposing to disqualify each of the three for 20 years. Even though the individual convictions were not based on knowledge or intent, the OIG concluded that the three could still be excluded, at HHS's discretion, under 42 U.S.C. § 1320a-7(b)(1) and (3).5
While HHS later reduced the exclusions to 15 years and then 12 years, HHS refused to reverse the exclusions after appeals to both an administrative law judge and to the HHS Departmental Appeals Board. The three executives then filed suit in the federal district court for the District of Columbia to test the legality of their exclusions, contending essentially that, because they had pleaded guilty under the RCO doctrine as reflected in Park, exclusion was not authorized by 42 U.S.C. § 1320a-7(b)(1) or (3) because RCO prosecutions do not require proof of personal wrongdoing. The executives also contended that the 12-year exclusions were excessive under the permissive exclusion provisions.
The district court disagreed and ruled that HHS showed that it had the legal authority to exclude the executives and that the length of the disqualifications was justified by the aggravating circumstances presented by the illegal activities involved in Purdue's marketing of OxyContin®. Friedman v. Sebelius, 755 F. Supp. 2d 98 (D.D.C. 2010). The executives appealed to the federal D.C. circuit court, which heard oral arguments in December 2011.
The Appellate Court's Decision
On appeal, the three executives contended that their misdemeanor misbranding convictions did not rise to the level of "relating to fraud" so as to support exclusion under 42 U.S.C. § 1320a-7(b)(1). They also claimed that the length of their exclusions was not supported by substantial evidence and thus was arbitrary and capricious. Finally, the appellants averred that it was a due process violation of the Fifth Amendment to the U.S. Constitution to exclude them based on a conviction that did not involve personal wrongdoing.
The appellate court reviewed the district court's decision de novo and rejected the executives' contention that their convictions were not related to fraud, finding that there was a factual relationship between the conduct underlying the misdemeanor and the conduct underlying a "fraud," allowing discretionary exclusion.6 The court also held that, because the exclusions were not criminal in nature, they did not run afoul of constitutional due process. The court then turned to the excessiveness assertions.
In contending their 12-year exclusions were excessive, the appellants asserted: (1) HHS had considered two aggravating factors improperly, claiming HHS lacked substantial evidence to support the aggravating factors; (2) HHS had failed to consider a mitigating factor; and (3) HHS had neglected to reconcile the length of their exclusions with prior exclusion determinations.
While the appellate court soundly rejected the executives' first two arguments on excessiveness, it found that the length of their exclusions was inconsistent with past HHS permissive exclusions, none of which had ever been longer than four years. In addition, the court noted that HHS had not excluded anyone during the prior 10 years on the basis solely of a misdemeanor conviction. While declining to specifically rule that the 12-year exclusions were not justified, the court held that HHS's failure to provide a reasoned explanation for the length of the exclusions in the face of past precedents was arbitrary and capricious.7 Accordingly, the appellate panel remanded the case to the district court with instructions to remand the matter on to HHS for further consideration of the length of the exclusions.
Impact on Regulated Industry
The exclusions in Friedman, even if reduced on remand, constitute a severe penalty for any official at an FDA-regulated company facing a misdemeanor prosecution under the Park Doctrine. As FDA regulates about 25 percent of the gross domestic product of the United States, the potential reach of Friedman is broad. Indeed, FDA, in 2010, reiterated its commitment to seeking misdemeanor prosecutions under the Park Doctrine.8
The Park Doctrine's tenets of strict criminal liability pose a particular risk for executives and other officials at FDA-regulated companies that run afoul of the agency's requirements. To support a misdemeanor conviction under Park, the agency's burden is relatively low—to show the violation occurred and that the person alleged to be the responsible corporate official actually occupied a position of responsibility where the official could have prevented the violation or corrected it upon discovery.
With the added specter of HHS disqualification now clearly looming in the wake of Friedman,9 executives at FDA-regulated firms should revisit their compliance programs to ensure that, at minimum, those programs contain:
- A commitment to full compliance from the highest levels of the corporation, including its board of directors;
- Clearly stated written policies and procedures and standards of conduct;
- A compliance officer and committee with the authority and freedom, including adequate budget, to function effectively;
- Training and education to all employees not only on their jobs, but also on behaviors that are not acceptable under corporate policy and applicable law;
- Effective lines of communication to ensure that compliance concerns are raised and reported to the proper channels (including to the board of directors when appropriate), including conveying policies on confidentiality and non-retaliation;
- Enforcement of policies, procedures and standards of conduct via well-publicized disciplinary guidelines;
- Monitoring and auditing, including, when appropriate, by outside independent experts; and
- Prompt and comprehensive responses to detected problems.
While the presence of a robust compliance program is not a defense to an RCO-based prosecution under the Park Doctrine, it can help reduce the ultimate consequences a firm or individual may face in such cases.
For Further Information
If you have any questions about this Alert, please contact Frederick (Rick) R. Ball, Michael A. Swit, any member of the Pharmaceutical, Pharmacy & Food industry group, any member of the White-Collar Criminal Law Practice Group or the attorney in the firm with whom you are regularly in contact.
- No. 11-5028, July 27, 2012.
- United States v. Park, 421 U.S. 658 (1975).
- While sometimes called the Responsible Corporate Officer Doctrine and officers and other senior executives are prime targets under the RCO doctrine, a defendant need not have been a corporate officer to face misdemeanor criminal liability under Park as long as the defendant held a position where they could have prevented a violation from occurring or corrected it once they learned of the violation.
- Although the RCO doctrine has its roots in FDA criminal actions, federal agencies impacting other industries have used the doctrine to redress unknowing/unintentional violations. For example, the SEC has used Section 304 of the Sarbanes-Oxley Act to seek a clawback of compensation from a CEO after a restatement of earnings even though the SEC did not contend the CEO knew about the violation. See discussion in Clark, Michael E. "The Responsible Corporate Officer Doctrine." Journal of Health Care Compliance. January-February 2012, pp. 5–15, at 10, accessible at: //www.duanemorris.com/articles/static/clark_healthcarecompliance_0112.pdf.
- Under subsection (b)(1), exclusion is authorized for any individual convicted of a misdemeanor relating to "fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct" linked to delivery of a healthcare item or service. Under (b)(3), discretionary exclusion is authorized for an individual convicted of a misdemeanor relating to the illegal manufacture, distribution, prescription or dispensing of a controlled substance. The exclusion statute prescribes a three-year exclusion in the event of a misdemeanor, but, allows HHS to lengthen the disqualification period in the face of "aggravating circumstances" (42 U.S.C. § 1320a-7(c)(3)(D). OIG justified the exclusion under both subsections.
- Slip Op., at 12.
- Slip Op., at 26.
- See March 4, 2010 letter from FDA Commissioner Margaret Hamburg to Senator Charles E. Grassley (R-Iowa), at: http://www.grassley.senate.gov/about/upload/FDA-3-4-10-Hamburg-letter-to-Grassley-re-GAO-report-on-OCI.pdf. The agency later updated its Regulatory Procedures Manual (RPM) to reflect criteria for Park Doctrine prosecutions. See RPM, § 6-5-3, http://www.fda.gov/downloads/ICECI/ComplianceManuals/RegulatoryProceduresManual/UCM074317.pdf, pp. 6–49 to 6–50.
- Another potential result of Friedman may be for defense counsel to seek HHS input on potential exclusion before entering into RCO misdemeanor plea agreements. However, whether HHS would entertain such discussions before a guilty plea remains unknown. It appears that this was not done in the case of the Purdue executives.
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