Shifting Gears

The Supreme Court disagreed and relied on its earlier decision in Dotterweich, in which it was held that a criminal conviction was permitted because 21 U.S.C. ' 331 was a “strict liability” provision. The Supreme Court explained:

[T[he requirements of foresight and vigilance imposed [by section 331] on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and product affect the health and well-being of the public that supports them.

Id

. at 672. Park, in the Court's view, as a “responsible corporate officer,” was criminally liable because he had the “responsibility and authority either to prevent [the problem] … or, promptly to correct, the violation complained of, and … he failed to do so.” Park, 421 U.S. at 674.

The RCO doctrine continues to be a vigorous enforcement tool. A recent example involved former executives of the pharmaceutical firm Purdue Frederick Co. The company pleaded guilty to felony drug misbranding charges under 21 U.S.C. ' 331(a) and 333(a)(2) after fraudulently marketing and promoting its drug OxyContin as being “less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications.” United States v. Purdue Frederick Co., 495 F. Supp. 2d 569, 570-571 (W.D. Va. 2007). Three senior executives pleaded guilty to misdemeanor drug misbranding charges for failing to prevent Purdue's fraudulent marketing, although it was not alleged that they themselves actually fraudulently marketed the drug. Nonetheless, as “responsible corporate officers,” they had not taken the steps to prevent illegal marketing or establish adequate compliance procedures. The executives were forced to disgorge tens of millions of dollars in compensation, and serve three years of probation. See Friedman v. Sebelius, 686 F.3d 813, 816 (D.C. Cir. 2012). See also U.S. v. Norian Corp., 09-CR-00403, (E.D. Pa. 2009) (four former executives of a major manufacturer of medical devices that performed illegal clinical trials pleaded guilty under the responsible corporate officer doctrine.)

The Expansion of Consequences for Park Convictions

The consequences for executives held liable under the Park doctrine has, in recent years, brought with it additional and onerous civil consequences beyond the criminal plea. After convictions, senior executives are increasingly faced with penalties, including an administrative exclusion from working at companies that receive federal healthcare payments. Under 42 U.S.C. ' 1320a-7(b)(1)(a), the exclusion of a corporate officer by the Office of Inspector General (OIG) is authorized if he or she has been convicted “of a criminal offense consisting of a misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct.” These exclusions effectively preclude officers from working in the industry, because any “item [or] service” furnished by them would not be reimbursable under Medicare, Medicaid and other federal healthcare programs.” 42 C.F.R. ' 1001.2.

The 12-year administrative exclusion for the executives in Friedman was the longest under 42 U.S.C. ' 1320a-7(b)(1) that had ever been approved. Friedman, 686 F.3d at 827-828. Id. The executives challenged the basis for their exclusion under 21 U.S.C. ” 331(a) and 333(a)(1), claiming that it did not relate to “fraud” as required by the exclusion statute. The U.S. Court of Appeals for the District of Columbia disagreed, stating, “[The appellants] convictions for misdemeanor misbranding were predicated upon the company they led having pled 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.” Friedman, 686 F.3d at 824. Since the executives' convictions, even though they were misdemeanors, were based on their liability for the company's fraud, the exclusion could stand.

The D.C. Circuit Court expressly stated that exclusion on the basis of a “conviction for a strict liability offense” does not raise due process concerns. Id. The exclusions, because they are administrative proceedings, have lower burdens of proof, despite the potential severity of the penalties. However, the court ultimately remanded the exclusion decision because the administrative appeals board had not provided an explanation for the length of the exclusion. Friedman, 686 F.3d at 828.

Another collateral consequence has been instituting “clawback” programs for financial incentives, such as bonuses and stock options, paid to executives that are involved in illegal conduct. GlaxoSmithKline (“GSK”) recently faced civil and criminal liability for marketing drugs for unapproved uses and failing to report drug safety data. As part of its record $3 billion fraud settlement with the U.S. Department of Justice, GSK agreed to enter into a Corporate Integrity Agreement (CIA) that included a financial recoupment program. See Corporate Integrity Agreement Between The Office Of Inspector General Of The Department Of Health And Human Services And Glaxosmithkline LLC (6/28/2012), available at: http://oig.hhs.gov/fraud/cia/agreements/GlaxoSmithKline_LLC_06282012.pdf. It allows GSK to recoup up to three years of annual bonuses and long term incentives from an executive “who is discovered to have been involved in any significant misconduct.” CIA at 32. The definition of significant misconduct under the agreement includes both acts by the executive, and “significant misconduct by subordinate employees in the business unit over which the [executive] knew or should have known was occurring.” CIA Appendix E at 3. The latter provision can be the basis for RCO doctrine prosecutions. The program applies to members of GSK's “Corporate Executive Team,” as well as to select Senior Vice Presidents and even Vice Presidents located within the United States. CIA Appendix E at 1. If significant misconduct occurs by employees under their supervision, these financial penalties could apply.

While these civil consequences occurred in the healthcare industry, the imposition of civil liability on responsible corporate executives has occurred, on a limited basis, outside of the healthcare context as well. In SEC v. Nature's Sunshine, the Securities and Exchange Commission (SEC) brought a civil enforcement action alleging FCPA violations against Nature's Sunshine Products, Inc., as well as its former CEO and CFO in their capacities as “control persons.” Their failure was in not having adequate internal accounting controls, although there was no indication that they were directly involved in the improper payments to foreign customs officials, or with the falsification of the company's books and records, that were at issue. See Final Judgment as to Defendant Douglas Faggioli, SEC v. Nature's Sunshine Products Inc, No. 09-CV-0672 (C.D. Utah 2009).

Conclusion

Even for those not directly involved in the criminal conduct, the potential for individual criminal liability under the RCO doctrine is escalating. No longer does a matter resolved by a criminal plea, or even a misdemeanor, end the potential enforcement actions and penalties for executives. A recent New York Times article noted there is currently no RCO doctrine for financial industry executives strictly liable for misconduct committed by employees under their supervision comparable to the Park doctrine. Peter J. Henning, Is That It for Financial Crisis Cases?, N.Y. Times, Aug. 13, 2012, available at: http://dealbook.nytimes.com/2012/08/13/is-that-it-for-financial-crisis-cases/. Whether or not the RCO doctrine and its consequences will be expanded to other industries, corporate officers in healthcare should be concerned that their supervision, or lack of it, is increasingly leading to career-threatening sanctions.

Jonathan S. Feld, a member of this newsletter's Board of Editors, is a partner at Katten Muchin Rosenman LLP in Chicago. Blake Goebel is an associate in the Firm's Chicago Office. They focus their practices on civil and criminal enforcement matters and compliance.

Recent news accounts have been replete with large corporate settlements for violations of the Federal Food, Drug, and Cosmetic Act (FD&C Act). Some corporate plea arrangements and deferred prosecution agreements require companies to accept responsibility and pay a large fine. However, their officers are not prosecuted. That is changing, especially in the healthcare and pharmaceutical context. Increasingly, the focus is on senior executives who, under 21 U.S.C.
” 331 and 333(a)(1), can be held strictly liable as “responsible corporate officers” for the actions of persons under their supervision. The responsible corporate officer (RCO) doctrine is now forming the basis for significant civil and administrative ramifications.

The Park Doctrine

The RCO doctrine stems from two decisions of the U.S. Supreme Court ' United States v. Dotterweich , 320 U.S. 277 (1943) and United States v. Park , 421 U.S. 658 (1975). In Park, the defendant was the Chief Executive Officer of a large national food chain that pleaded guilty to contamination of food stored in its warehouses. Park, 421 U.S. at 660-661. In his capacity as CEO, Park had received letters from FDA inspectors about unsanitary conditions at the company's warehouses. The CEO argued at trial that although he was CEO of the company and ultimately responsible for its actions, he had not personally done anything illegal. While Park had received letters from FDA inspectors about the sanitation problem, he emphasized that he operated “by delegating 'normal operating duties' including sanitation” to others in the company. Id. at 663. In other words, Park contended that he could not be held criminally responsible because any failures or wrongful acts were performed by others. Park admitted that, as CEO, he was responsible for the entire operation of the company, but that the company had an organizational structure that assigned this area to “'dependable subordinates.” Id. at 664. Notwithstanding his position, Park was convicted after a trial. The conviction was overturned by the US. Court of Appeals for the Fourth Circuit. It explained that Park could not be convicted without a finding of “wrongful action” by the CEO. Id.

The Supreme Court disagreed and relied on its earlier decision in Dotterweich, in which it was held that a criminal conviction was permitted because 21 U.S.C. ' 331 was a “strict liability” provision. The Supreme Court explained:

[T[he requirements of foresight and vigilance imposed [by section 331] on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and product affect the health and well-being of the public that supports them.

Id

. at 672. Park, in the Court's view, as a “responsible corporate officer,” was criminally liable because he had the “responsibility and authority either to prevent [the problem] … or, promptly to correct, the violation complained of, and … he failed to do so.” Park, 421 U.S. at 674.

The RCO doctrine continues to be a vigorous enforcement tool. A recent example involved former executives of the pharmaceutical firm Purdue Frederick Co. The company pleaded guilty to felony drug misbranding charges under 21 U.S.C. ' 331(a) and 333(a)(2) after fraudulently marketing and promoting its drug OxyContin as being “less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications.” United States v. Purdue Frederick Co. , 495 F. Supp. 2d 569, 570-571 (W.D. Va. 2007). Three senior executives pleaded guilty to misdemeanor drug misbranding charges for failing to prevent Purdue's fraudulent marketing, although it was not alleged that they themselves actually fraudulently marketed the drug. Nonetheless, as “responsible corporate officers,” they had not taken the steps to prevent illegal marketing or establish adequate compliance procedures. The executives were forced to disgorge tens of millions of dollars in compensation, and serve three years of probation. See Friedman v. Sebelius , 686 F.3d 813, 816 (D.C. Cir. 2012). See also U.S. v. Norian Corp., 09-CR-00403, (E.D. Pa. 2009) (four former executives of a major manufacturer of medical devices that performed illegal clinical trials pleaded guilty under the responsible corporate officer doctrine.)

The Expansion of Consequences for Park Convictions

The consequences for executives held liable under the Park doctrine has, in recent years, brought with it additional and onerous civil consequences beyond the criminal plea. After convictions, senior executives are increasingly faced with penalties, including an administrative exclusion from working at companies that receive federal healthcare payments. Under 42 U.S.C. ' 1320a-7(b)(1)(a), the exclusion of a corporate officer by the Office of Inspector General (OIG) is authorized if he or she has been convicted “of a criminal offense consisting of a misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct.” These exclusions effectively preclude officers from working in the industry, because any “item [or] service” furnished by them would not be reimbursable under Medicare, Medicaid and other federal healthcare programs.” 42 C.F.R. ' 1001.2.

The 12-year administrative exclusion for the executives in Friedman was the longest under 42 U.S.C. ' 1320a-7(b)(1) that had ever been approved. Friedman, 686 F.3d at 827-828. Id. The executives challenged the basis for their exclusion under 21 U.S.C. ” 331(a) and 333(a)(1), claiming that it did not relate to “fraud” as required by the exclusion statute. The U.S. Court of Appeals for the District of Columbia disagreed, stating, “[The appellants] convictions for misdemeanor misbranding were predicated upon the company they led having pled 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.” Friedman, 686 F.3d at 824. Since the executives' convictions, even though they were misdemeanors, were based on their liability for the company's fraud, the exclusion could stand.

The D.C. Circuit Court expressly stated that exclusion on the basis of a “conviction for a strict liability offense” does not raise due process concerns. Id. The exclusions, because they are administrative proceedings, have lower burdens of proof, despite the potential severity of the penalties. However, the court ultimately remanded the exclusion decision because the administrative appeals board had not provided an explanation for the length of the exclusion. Friedman, 686 F.3d at 828.

Another collateral consequence has been instituting “clawback” programs for financial incentives, such as bonuses and stock options, paid to executives that are involved in illegal conduct. GlaxoSmithKline (“GSK”) recently faced civil and criminal liability for marketing drugs for unapproved uses and failing to report drug safety data. As part of its record $3 billion fraud settlement with the U.S. Department of Justice, GSK agreed to enter into a Corporate Integrity Agreement (CIA) that included a financial recoupment program. See Corporate Integrity Agreement Between The Office Of Inspector General Of The Department Of Health And Human Services And Glaxosmithkline LLC (6/28/2012), available at: http://oig.hhs.gov/fraud/cia/agreements/GlaxoSmithKline_LLC_06282012.pdf. It allows GSK to recoup up to three years of annual bonuses and long term incentives from an executive “who is discovered to have been involved in any significant misconduct.” CIA at 32. The definition of significant misconduct under the agreement includes both acts by the executive, and “significant misconduct by subordinate employees in the business unit over which the [executive] knew or should have known was occurring.” CIA Appendix E at 3. The latter provision can be the basis for RCO doctrine prosecutions. The program applies to members of GSK's “Corporate Executive Team,” as well as to select Senior Vice Presidents and even Vice Presidents located within the United States. CIA Appendix E at 1. If significant misconduct occurs by employees under their supervision, these financial penalties could apply.

While these civil consequences occurred in the healthcare industry, the imposition of civil liability on responsible corporate executives has occurred, on a limited basis, outside of the healthcare context as well. In SEC v. Nature's Sunshine, the Securities and Exchange Commission (SEC) brought a civil enforcement action alleging FCPA violations against Nature's Sunshine Products, Inc., as well as its former CEO and CFO in their capacities as “control persons.” Their failure was in not having adequate internal accounting controls, although there was no indication that they were directly involved in the improper payments to foreign customs officials, or with the falsification of the company's books and records, that were at issue. See Final Judgment as to Defendant Douglas Faggioli, SEC v. Nature's Sunshine Products Inc, No. 09-CV-0672 (C.D. Utah 2009).

Conclusion

Even for those not directly involved in the criminal conduct, the potential for individual criminal liability under the RCO doctrine is escalating. No longer does a matter resolved by a criminal plea, or even a misdemeanor, end the potential enforcement actions and penalties for executives. A recent New York Times article noted there is currently no RCO doctrine for financial industry executives strictly liable for misconduct committed by employees under their supervision comparable to the Park doctrine. Peter J. Henning, Is That It for Financial Crisis Cases?, N.Y. Times, Aug. 13, 2012, available at: http://dealbook.nytimes.com/2012/08/13/is-that-it-for-financial-crisis-cases/. Whether or not the RCO doctrine and its consequences will be expanded to other industries, corporate officers in healthcare should be concerned that their supervision, or lack of it, is increasingly leading to career-threatening sanctions.

Jonathan S. Feld, a member of this newsletter's Board of Editors, is a partner at Katten Muchin Rosenman LLP in Chicago. Blake Goebel is an associate in the Firm's Chicago Office. They focus their practices on civil and criminal enforcement matters and compliance.