Responsible Corporate Officer: Not Just A Criminal Concept

By: William A. Coates, Esq.
Roe Cassidy Coates & Price, P.A.
Greenville, South Carolina

The responsible corporate officer doctrine established what amounts to strict liability for certain corporate officials and employees in criminal cases. The doctrine is now being used by many regulatory agencies, particularly those dealing with healthcare and pharmaceuticals, as a tool to debar employees and officials from the industry of which they have been a part for many years. This is the case even though no criminal intent was involved and in some cases, no criminal conviction obtained.

The responsible corporate officer doctrine was enunciated by the United States Supreme Court over 40 years ago in the case of United States v. Park, 421 U.S. 658 (1975). Park was the CEO of a national food chain with approximately 874 retail outlets and 36,000 employees. The government charged the food chain and Park with holding food that had become adulterated in a company warehouse, a violation of the Federal Food Drug and Cosmetic Act. The company entered a guilty plea. Park went to trial and was convicted. Park did not personally participate in the actions which caused the violations, yet the Supreme Court rejected the argument that a conviction required proof that the executive intended to cause a violation or was even aware of the offending conduct. The Court found that the government established a prima face case by introducing evidence “that the defendant had, by reasons of his position in the corporation, responsibility and authority either to prevent in the first incident or promptly to correct, the violation complained of, and that he failed to do so.” 421 U.S. at 673-74. Thus, the responsible corporate officer doctrine began an expansive journey.

A violation of any number of federal statutes will give rise to mandatory debarment. Debarment is exclusion from participation in the affected federal program. For example, a violation of certain portions of the Clean Air Act and Clean Water Act will result in mandatory debarment. The same is true for felony convictions related to federal healthcare programs and certain state healthcare programs. 42 U.S.C. § 1320a-7(a).

In addition to mandatory debarment, federal law also provides for permissive debarment. Debarment relating to healthcare program decisions is administratively made by the Office of Inspector General (OIG) of the Department of Health and Human Services (DHHS). Utilizing the responsible corporate officer doctrine, the OIG has been taking an increasingly aggressive stance in seeking to debar individuals who have not been convicted of a felony, and in once instance have not been convicted of anything at all.

The case of Freidman v. Sebelius, 755 F.Supp. 2nd 98 (D.D.C. 2010) is illustrative. Purdue Frederick Company (Purdue) pled guilty to a felony due to misstatements made to healthcare providers regarding the addictiveness of the drug oxycontin. Purdue was assessed a total of $600 million dollars in criminal fines and civil monetary sanctions. In addition, the government required three of the company’s executives to plead guilty to misdemeanor off-label marketing as responsible corporate officers. Under Park, no intent was required for conviction, as the positions of the executives made them “responsible” for preventing or correcting the misbranding. While these executives agreed to the plea, none of them admitted to any personal knowledge of the violations. Several months after the plea and sentencing, the OIG excluded the executives from participation in any federal healthcare program pursuant to 42 U.S.C. § 1320a-7(b)(1) which allows for the exclusion of an individual convicted of a “misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct.” The OIG excluded the executives for 20 years. The executives appealed through the administrative process, which ultimately resulted in a reduction of the exclusion to 12 years. The executives then appealed to the United States District Court for the District of Columbia arguing that any exclusion should be based solely on their personal conduct. The executives argued that inasmuch as they had no personal knowledge of the conduct involved, they should not be excluded simply because of their positions in the company. The District Court found that personal knowledge of the false off-label marketing was not required for debarment. The Court reasoned that because the misdemeanor convictions were related to the fraud detailed in the statement of the offense adopted at the time of the guilty plea, the permissive exclusions were proper. The decision of the District Court has been appealed to the Circuit Court of Appeals for the District of Columbia.

More opportunity for mischief lies in the government’s use of the permissive exclusion contained in 42 U.S.C. § 1320a-7(b)(15). This paragraph applies to two types of individuals: (a) Owners who knew or should have known of the actions which constitute the basis for the underlying conviction, or (b) officers or managing employees (one who exercises operational or had general control over the entity or who directly or indirectly conducts the day-to-day operations of the entity. See 42 U.S.C. § 1320a‑5(b)). There is no requirement that the officer or managing employee know or should know about the underlying corporate misconduct. While this is consistent with the Park doctrine, it has been applied in at least one instance to an individual who was not convicted of anything.

Forest Pharmaceuticals pled guilty to two misdemeanors, one involving illegal promotion of a certain drug and the other involving illegal distribution of an unapproved drug. In addition, the company pled guilty to a felony for lying to the FDA during an inspection. The company paid a total of $313 million dollars to resolve all criminal, civil, and forfeiture matters. In addition, the company entered into a Corporate Integrity Agreement (CIA) with the OIG.

Only after all of the above was completed did the OIG advise Howard Solomon, the CEO of Forest Laboratories (parent of Forest Pharmaceuticals), that it intended to exclude him from federal healthcare programs pursuant to Paragraph (b)(15). Solomon was neither charged nor convicted of a crime. The government never advised him he was a target of either: (a) The government’s investigation of Forest Laboratories, or (b) any proposed exclusion. Yet, the government proposed to permissively exclude Solomon in reliance upon Paragraph (b)(15) and the Park doctrine. Solomon resisted. Ultimately, the government dropped its exclusion action; however, there is no indication the government has changed its policy of aggressively pursuing debarment of corporate executives.

Counsel for healthcare entities and their employees should be aware of the OIG’s aggressive stance regarding debarment. Counsel should be alert to these possibilities even at the beginning of an investigation which, on its face, does not appear to be criminal such, as a civil investigative demand. Needless to say, counsel engaged in settlement negotiations (whether civil or criminal), with the government need to keep the possibility of exclusion at the forefront. At a minimum, executives should be advised of the option to obtain advice from counsel separate from the company’s counsel. Counsel for any corporate executives should work closely with counsel for the organization regarding the scope of any factual recitations in any document or proceeding. This will minimize the potential that any admissions can be used in any subsequent exclusion proceeding.

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