INNsight article by Michael A. Swit, November 2012

A recent U.S. federal appeals court decision highlights the personal criminal and civil legal dangers faced by generic drug industry executives for FDA violations that occur on their watch even when the executive did not know of the violation or intend for it to occur.

On July 27, the U.S. Court of Appeals for the District of Columbia Circuit issued the long-anticipated decision in Friedman v. Sebelius (No. 11-5028, July 27, 2012). 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 health care programs, to disqualify a person from participating in federal health care 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 FDA realm as the “Park Doctrine” after a key 1975 U.S. Supreme Court decision [United States v. Park, 421 U.S. 658 (1975)], under the RCO theory of liability, a person such as a senior executive or other supervisor who was in a position to prevent a violation from occurring can be held criminally liable for FDA violations that happened on their watch, even if the official did not know about the circumstances constituting the violation or did not intend for those events to occur.

Background

The Friedman appeal arose from the ashes of the federal criminal prosecution of Purdue Pharma 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 side effects of the narcotic, all of which misbranded the drug under the Federal Food, Drug, and Cosmetic Act (“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. 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 pled 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 State of Virginia Medical Fraud Control Unit Income Fund.

The Proposed Exclusions

In late 2007, just a few months after they pled guilty, the OIG informed the three Purdue executives that it was considering excluding them from federal and state health care programs based on their convictions. The OIG confirmed the exclusions in the spring of 2008, proposing to disqualify each for 20 years, a term later reduced to 12 years each during administrative appeals. Even though these individual Park Doctrine convictions were not based on the executive’s personal 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).

After HHS refused to reverse the exclusions after internal appeals, the three executives sued in federal court to test the legality of their exclusions, contending essentially that, because they had pled guilty under the RCO doctrine as reflected in Park, their exclusion was not authorized because RCO prosecutions do not require proof of personal wrongdoing.

The district court disagreed and ruled that HHS had shown that it had the legal authority to exclude the executives (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 their Park Doctrine 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 the length of their exclusions was not supported by substantial evidence and thus was arbitrary and capricious.

The appellate court rejected the executives’ contention that their convictions were not related to fraud, finding there was a factual relationship between the conduct underlying the misdemeanor and “fraud,” allowing HHS to exclude them from participating in healthcare programs. However, the court found that the length of the exclusions were inconsistent with past HHS exclusions, none of which had ever been longer than 4 years. Because HHS had failed to provide a reasoned explanation for the length of the exclusions in the face of past precedents, the appellate court found the length of the executives’ exclusions arbitrary and capricious. Accordingly, the appellate panel remanded the case to the district court with instructions to remand the matter to HHS to reconsider the length of the executives’ exclusions.

Impact on the Generic Drug Industry

The exclusions in Friedman, even if reduced on remand, constitute a severe penalty for any generic drug official facing a misdemeanor prosecution under the Park Doctrine, a prospect that is greater now than ever before. Indeed, FDA, in 2010, reiterated its commitment to seeking misdemeanor prosecutions under the Park Doctrine in a March 4, 2010 letter from FDA Commissioner Margaret Hamburg to Senator Charles E. Grassley (R-Iowa). Shortly thereafter, the agency updated its Regulatory Procedures Manual (RPM) to reflect criteria for Park Doctrine prosecutions.

The Park Doctrine’s tenets of strict criminal liability are particularly threatening for generic drug executives due to the relatively low burden on the government to sustain a Park Doctrine conviction. Essentially, all the government needs to secure a conviction is prove 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.

Given the heightened interest by the federal government in Park Doctrine prosecutions and the added specter of HHS disqualification now clearly looming in the wake of Friedman, generic drug industry executives 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.