D.C. Circuit Affirms HHS Power To Disqualify Corporate Officials Convicted Of Misdemeanors Under The 'Responsible Corporate Official' (RCO) Doctrine

On July 27, 2012, the U.S. Court of Appeals for the D.C. Circuit issued the long-anticipated decision in Friedman v. Sebelius.1 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 healthcare programs, to disqualify a person from participating in federal healthcare 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 U.S. Food and Drug Administration (FDA) realm as the "Park Doctrine" after a key 1975 Supreme Court decision,2 under the RCO3 theory of liability, a person such as a senior executive who was in a position to prevent a violation from occurring can be held criminally liable for violations that happened on his or her watch, even if the official did not know about the circumstances constituting the violation or did not intend for those events to occur.4

In Friedman, the D.C. Circuit upheld the exclusions of three former Purdue Frederick Company (Purdue) executives who had pleaded guilty in 2007 to misdemeanor violations of misbranding a drug under the Federal Food, Drug, and Cosmetic Act ("the Act") in connection with the marketing of OxyContin®, a potent narcotic. The appeals court did remand the case back to the trial court to determine if the length of the exclusions for these misdemeanor convictions was excessive in view of other HHS exclusions made following criminal convictions.

Background

The Friedman appeal arose from the ashes of the federal criminal prosecution of Purdue 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 potential side effects of the narcotic, including its abuse potential, all of which misbranded the drug under 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. Under the plea agreement, Purdue agreed to a relatively small fine for the felony criminal violation, but also simultaneously settled various other claims resulting in fines, assessments, and disgorgement totaling $600 million.

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 pleaded 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...