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Liability & Exclusion Without Intent: Managing to Survive Under the Responsible Corporate Officer (RCO) Doctrine

Mark T. Calloway

Brian R. Stimson

Alston & Bird LLP

www.alston.com

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Case Law, Statutes, and Regulations forRCO Prosecutions and Exclusions

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RCO Doctrine

Defendant may be guilty if he had “by reason of his position in the corporation, responsibility and authority either to prevent in the first instance, or promptly to correct,” the violations of law

Actual knowledge of the violation is not required

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Origin of RCO Doctrine

Created by U.S. v. Dotterweich (1943)

Case brought under the Food, Drug and Cosmetic Act of 1938 (FDCA).

Drug company and its president prosecuted for shipping misbranded and adulterated drugs.

Company was acquitted but president was convicted.

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Origin of RCO Doctrine cont.

U.S. v. Park (1975)

Acme Markets, Inc. and its CEO were charged with violation of FDCA for unsanitary warehouse conditions

In upholding CEO’s conviction, Supreme Court stated FDCA “imposes the highest standard of care and permits conviction of responsible corporate officials who…have the power to prevent or correct violations of its provisions”

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Origin of RCO Doctrine cont.

Supreme Court upheld conviction because “the Act imposes the highest standard of care and permits conviction of responsible corporate officials who, in light of this standard of care, have the power to prevent or correct violations of its provisions”

Necessary to protect the public health & welfare and where penalties upon the individual are minor

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The Park Doctrine

“Provides that a responsible corporate official can be held liable for a … misdemeanor (and possible subsequent felony) under the FDCA without proof that [1] the corporate official acted with intent or even negligence, and [2] even if such corporate official did not have any actual knowledge of, or [3] participation in, the specific offense”

FDA Regulatory Procedures Manual § 6-5-3

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RCO Prosecutions

A public danger is central for RCO prosecutions Limited to regulatory or public safety and welfare crimes

without a mens rea element Mens rea = guilty mind Can include food and drug safety regulations and

environmental protection laws Charges against officer are wholly independent of

charges against the company or its employees

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RCO Limits and Defenses

Used for strict liability offenses Corporate officer must have been aware that the company

placed him or her “in a responsible relation to a public danger”

“A reasonable person should know that the conduct is subject to stringent regulation and may seriously threaten a community’s health and safety”

The burden is on a defendant “to ascertain at his peril whether [his conduct] comes within the inhibition of the statute”

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RCO Limits and Defenses Impossibility (Affirmative Defense)

FDCA does not require that which is “objectively impossible”

Defendant can demonstrate that it would have been impossible to prevent or remedy the regulatory violations despite exercising “extraordinary care”

Neither DOJ, the courts nor OIG-HHS have issued guidance on how the elements of this defense can be satisfied

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Health Care Prosecutions and Exclusions

“Knowledge of and actual participation in the violation are not a prerequisite to a misdemeanor prosecution but are factors that may be relevant when deciding whether to recommend charging a misdemeanor violation”

FDA Regulatory Procedures Manual § 6-5-3

FDA Commissioner and Counsel for OIG-HHS have said prosecution of individuals is a priority A committee of FDA senior leadership recommended to “[i]ncrease the

appropriate use of misdemeanor prosecutions, a valuable enforcement tool, to hold responsible corporate officials accountable” FDA Commissioner (March 2010)

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Health Care Prosecutions and Exclusions cont.

HHS-OIG will exclude responsible individuals in the company that engaged in fraud as a “[w]ay to influence corporate behavior without putting patient access to care at risk” Chief Counsel to OIG-HHS (March 2011)

Translation: We will not exclude the company, we will just exclude you!

No prosecution necessary for exclusion

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Factors for Misdemeanor RCO Prosecution (FDA Manual § 6-5-3) Individual’s position in the

company and relationship to the violation

Does the violation involve actual or potential harm to public?

Is the violation obvious?

Does the violation reflect a pattern of illegal acts or a failure to heed prior warnings?

Is the violation widespread?

Is the violation serious?

The quality of the legal and factual support for proposed prosecution

Is the proposed prosecution a prudent use of agency resources?

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Willful Blindness Willful blindness is a substitute for actual knowledge

Government can show knowledge if a defendant knew of a high probability that a fact or circumstance existed and deliberately sought to avoid confirming that suspicion

Rationale: Intentional ignorance and actual knowledge are equally culpable under the law

A willful blindness instruction is appropriate when the defendant asserts a lack of guilty knowledge but the evidence supports an inference of deliberate ignorance

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Willful Blindness cont. U.S. v. Filcheck, Halstead, Taylor (2006).

Chiropractors and consultant convicted of health care fraud

Consultant created a system to recruit new patients, perform unnecessary treatments, perform maximum reimbursable treatments regardless of medical need and bill insurance companies’ under chiropractors’ signatures without their consent

Convictions upheld because while chiropractors claimed they did not know of fraudulent billing, the evidence fully supported the inference of deliberate ignorance

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HHS Exclusion Powers

HHS can exclude individuals from government health care programs, including Medicare and Medicaid

42 U.S.C. §1320a-7(a)(1)-(4) (mandatory exclusion) 42 U.S.C. § 1320a-7(b)(1)-(16) (permissive exclusion)

Mandatory exclusion occurs upon : (1) conviction for program related crime; (2) conviction relating to patient abuse; (3) felony conviction relating to health care fraud; or (4) felony conviction relating to controlled substance

Mandatory exclusion is for a minimum of 5 years (42 U.S.C. §1320a-7(c)(3)(B))

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HHS Exclusion Powers cont. HHS may permissively exclude on 15 grounds, including:

Convictions relating to fraud

Convictions relating to obstruction of an investigation

Misdemeanor controlled substances convictions

Control by an individual who is sanctioned

Control over an entity which is sanctioned

Permissive exclusion based on a conviction relating to fraud, a conviction relating to obstruction, or a misdemeanor controlled substances conviction is for a minimum of 3 years, subject to shortening or lengthening based on mitigating or aggravating circumstances (42 U.S.C. §1320a-7(c)(3)(D))

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HHS Exclusion Powers cont. A controlling individual for exclusion purposes is one:

Who has a direct or indirect ownership or control interest in a sanctioned entity and who knows or should know of the action constituting the basis for the conviction or exclusion, or

who is an officer or managing employee of such an entity

42 U.S.C. §1320a-7(b)(15)(A)(i)-(i)

In October 2010, HHS-OIG published its internal guidelines on excluding owners and officers or managing employees

Evidence that owner, officer, or managing employee knew or should have known creates presumption of exclusion which may be overcome only by “significant factors”

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HHS Exclusion Powers cont.

Federal government will not pay for items or services furnished or ordered by any entity that employs an excluded individual

Essentially means excluded individuals are unemployable during their time of exclusion

Entities are subject to civil penalties for employing an excluded individual and, as noted, the entity itself may also be excluded for doing so

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HHS-OIG Factors for Permissive Exclusion Circumstances of the misconduct and seriousness of the offense

Nature and scope of criminal sanction against entity

Isolated conduct versus pattern of conduct

Resulting harm to public

Individual’s role in the sanctioned entity Current position

Position at the time of misconduct

Degree of managerial control or authority

Chain of command.

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HSS-OIG Factors for Permissive Exclusion cont. Individual’s response to the misconduct

Steps taken to stop or mitigate misconduct

Response prior to investigation

Self-disclosure

Information about the entity

Past history

Size

Corporate structure

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Potential Permissive Exclusion Scenarios:

Egregious quality of care deficiencies

Systemic organizational compliance violations indicating lack of institutional control

Intentional refusal of corrective action by executives

Evidence of obstruction of justice directed or instructed by leadership

Bad faith re: compliance oversight obligations (failed to act)

Consciously disregarding obligation to be reasonably informed of compliance risks

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Recent Prosecutions and Exclusions of Corporate Owners, Officers and Managers

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Purdue Frederick Co.

Purdue pled guilty to felony count of misbranding with the intent to defraud or mislead, in connection with promoting OxyContin

Purdue’s President/CEO, General Counsel and Chief Scientific Officer pled guilty to misdemeanor misbranding as RCOs The Government did not allege that the executives knew about,

much less were actively involved in the misconduct

HHS-OIG excluded the executives for 20 years, then reduced the exclusion to 15 years based on cooperation with investigation The ALJ affirmed, but the DAB reduced the exclusion to 12 years

based on lack of causal connection between misbranding and harm to program beneficiaries

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Purdue Frederick Co. Cont. The Purdue executives challenged the 12-year exclusion in the

U.S. District Court for D.C. as both arbitrary and capricious, and unsupported by substantial evidence The executives argued that mere status as RCO did not support

permissive exclusions on the grounds that convictions related to fraud and were for misdemeanor controlled substances violations

The Court held that convictions under RCO entail more than status alone, but also the responsibility and authority to prevent or correct illegal conduct, and the failure to do so.

Friedman v. Sebelius, 755 F.Supp.2d 98 (D.D.C. 2010)

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U.S. v. Synthes (E.D. PA. 2009) Synthes, Inc. and its wholly-owned subsidiary, Norian Corp.,

promoted a FDA-approved bone filler for an unapproved use: the treatment of certain spinal fractures Synthes pled guilty to one misdemeanor count for misbranding and

adulterating a medical device Norian pled guilty to one felony count for conspiracy, and more than

100 misdemeanor counts of misbranding and adulteration

Four executives pled guilty to misdemeanor misbranding based on their status as RCOs

The Government pursued sentencing based on intent. The district judge refused, cancelled sentencing hearing, and recused himself

Executives are awaiting sentencing by new district judge.

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Forest Laboratories Inc. and Howard Solomon (D.Mass. 2011)

Forest Labs and its subsidiary, Forest Pharmaceuticals, Inc., entered into $149M civil settlement to resolve FCA action involving the drugs Levothroid, Celexa, and Lexapro

In March of this year, Forest Pharma pled guilty to:

Felony count for obstructing regulatory inspection by the FDA relating to Levothroid

Misdemeanor count for distributing an unapproved new drug (Levothroid)

Misdemeanor misbranding count relating to Celexa

Forest Pharma paid $150M criminal fine + forfeit $14M in assets.

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Forest Laboratories Inc. and Howard Solomon (D.Mass. 2011)

HHS-OIG send a notice of exclusion to Howard Solomon, CEO of Forest Labs, in April 2011

Forest Labs defended Solomon in the media, arguing that he did nothing wrong. Certain media outlets questioned whether notice of exclusion was politically motivated

HHS-OIG issued “Fact Sheet” on May 10, 2011, stating that “[c]riminal convictions authorize OIG to exclude corporate officers; civil settlements with no admission of guilt do not”

In August 2011, HHS-OIG announced that it would not exclude Solomon

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U.S. v. Stevens (D.Md. 2011) Lauren Stevens, the VP and Associate Gen’l Counsel for GSK,

managed response to FDA letter requesting materials on alleged use of physicians to promote Wellbutrin for off-label uses Stevens relied upon advice of outside counsel throughout investigation

Stevens was indicted for obstructing a proceeding, concealing documents, and making false statements Indictments based on withholding of physician presentation, as well as

information regarding entertainment at medical programs

District judge granted motion for acquittal, based partly on advice-of-counsel defense (which negated intent)

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U.S. v. Farha, et al (M.D.Fla. 2011) Five executives of WellCare were indicted in March for conspiracy,

false statements relating to health care matters, health care fraud, and other false statements

In 2007, a mid-level WellCare billing analyst pled guilty to conspiring to defraud Medicaid by reporting improper or inflated expenditures in order to avoid refunding excess capitated payments

Indictment asserts that WellCare executives engaged in similar conduct, including use of corporate entity to manipulate allocation and reporting of expenses across WellCare organization Executives argue that corporate entity was created, structured, and

used upon advice of multiple outside law firms

Executives have sought pretrial conference, trial date

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Risk Mitigation

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Elements of an Effective Ethics and Compliance Program An effective ethics and compliance program can operate to

prevent violations and to alert corporate officers of violations as soon as they occur

Elements: Establish standards and procedures to prevent and

detect criminal conduct Organization’s governing authority must be

knowledgeable about compliance program and exercise reasonable oversight over it

High-level personnel must ensure the ethics and compliance program is effective

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Elements of an Effective Ethics and Compliance Program cont.

Individuals responsible for day to day operation of the program must periodically report to high-level personnel and governing authority on program’s effectiveness

Use due care to avoid hiring or promoting individuals prone to violate organizational policy or the law

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Elements of an Effective Ethics and Compliance Program cont.

Educate and train employees and agents on responsibility to follow code of conduct, regulations and laws

Organization must have monitoring and auditing systems to detect and prevent compliance violations

Including system where employees can report violations within the organization without fear of retribution

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Elements of Effective Ethics and Compliance Program cont.

Promote and enforce the program consistently throughout the organization through discipline and incentives

Take reasonable steps to address a violation when it occurs and put procedures in place to prevent a violation from reoccurring

Periodically assess the risk of criminal conduct and take appropriate steps to modify program to reduce risks