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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 for
RCO 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
 Is the violation widespread?
 Does the violation involve
actual or potential harm to
public?
 The quality of the legal and
factual support for proposed
prosecution
 Is the violation obvious?
 Is the proposed prosecution
a prudent use of agency
resources?
 Does the violation reflect a
pattern of illegal acts or a
failure to heed prior
warnings?
 Is the violation serious?
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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-ofcounsel 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