Government Targeting Pharmaceutical Executives with Renewed Enthusiasm

Over the past several years, we have seen an increasing focusing on litigation and prosecution of large pharmaceutical and medical device manufacturers ranging from off-label promotion, to fraud and abuse, and a number of other legal and regulatory issues. 

Many of these cases, in fact, almost all of them, have settled, largely because companies face the threat of debarment—the inability of a company to do business with the federal government (i.e. the Centers for Medicare and Medicaid).  These kinds of prosecutions of “responsible” officers trouble defense lawyers in the health sector because the threat can be career ending.

For example, last December, the U.S. District Court in Washington affirmed a federal health-care program exclusion of three Purdue Frederick Co. executives who had earlier pled guilty to misdemeanor violations of the food and drug laws associated with the misbranding of the drug OxyContin.

The Justice Department didn’t allege that the three officers participated in or were even aware of the misbranding, but rather that they were “responsible” corporate officers at the time the conduct occurred.

“The exclusion of these individuals by HHS is unprecedented and unjust,” said Andrew Good of Good & Cormier, the lawyer for one of the three executives. The exclusions have been appealed to the D.C. Circuit Court of Appeals, he added.

Additionally, a large portion of money contained in the American Recovery and Reinvestment Act, as well as the Affordable Care Act, went towards funding more attorneys and investigators at the Department of Justice and Department of Health and Human Services (HHS) to root out fraud, abuse and waste.  Over the past few years, these efforts have yielded billions of dollars and extremely large settlements, with virtually every company out there.  But the company money is not enough.

Consequently, a recent article from the Wall Street Journal noted that, the “U.S. authorities are now stepping up enforcement of a little-used law—the so-called “responsible corporate officer doctrine”—to hold executives personally and criminally responsible for corporate violations of U.S. food and drug laws.”

According to the article, “the development has triggered a new wave of worry among defense lawyers representing health-care executives.”

Congress authorized criminal sanctions against corporate officers in 1938 under the Food, Drug and Cosmetic Act.

The Supreme Court has since interpreted the law to allow prosecutions without evidence that executives knew a crime was committed—a lower standard than for other industries — because of the potential for health-care and food products to cause death and injury.

The doctrine is the prosecutors’ “ticket around the need to prove criminal intent,” says Michael W. Peregrine, a lawyer at McDermott Will & Emery LLP. “It puts the pistol to the head of the very senior executives.” During the 1960s and 1970s, the government used the doctrine in a series of liability cases involving dirty food warehouses. But by the late 1980s, its use had declined.

Earlier this year, however, Marc Hermelin, the former chief executive of a Bridgeton, Mo., pharmaceutical maker, pleaded guilty to two misdemeanor violations of the food and drug laws as a “responsible corporate officer” in a case involving KV Pharmaceutical Co.’s production and distribution of two oversized morphine sulfate tablets.  A judge ordered Mr. Hermelin to pay a $1 million fine, forfeit $900,000 and serve a sentence of less than 30 days in jail.

Lawyers concerned about the revival of the so-called “corporate-officer responsibility doctrine” cite other recent health-sector cases, including one in Philadelphia involving medical-device maker Synthes Inc. and Norian Corp., a subsidiary.

In 2009, federal prosecutors accused the two companies of running an unauthorized trial of a bone filler in spinal procedures. Three patients died, although prosecutors said they couldn’t prove the Synthes product was the cause. The companies pleaded guilty and agreed to pay more than $23 million to settle with the government.

Four Synthes executives were accused of wrongdoing. Acknowledging that they were “responsible corporate officers,” the employees each pleaded guilty in federal court to a misdemeanor associated with shipping the misbranded product, Norian XR, across state lines.

But prosecutors and defense lawyers are now fighting over what they can introduce in their arguments to the judge about sentencing, which could come as soon as this fall. Under current law, misdemeanor cases carry sentences for company executives of up to a year in prison and a maximum fine of $100,000 per count.

“If the government asks the court to impose jail time in this case, it will have a chilling effect on future ‘responsible corporate officer’ pleas,” said Adam Hoffinger of Morrison & Foerster LLP, lead attorney for Thomas Higgins, a former Synthes division president, who is one of the defendants.

“You’re going after defendants who by definition had no idea they [were] committing a violation,” said Robert J. Becerra, a Miami-based lawyer who represented ChemNutra Inc., a Nevada pet-food company, and one of the two executives who pleaded guilty to a misdemeanor and got three years’ probation in connection with the import of tainted wheat gluten that killed thousands of dogs and cats.

“There’s more focus now on trying to identify whether it’s a case where it’s appropriate to charge corporate officials with wrongdoing,” said John J. Pease, chief of the health-care fraud unit in the U.S. Attorney’s Office in Philadelphia, which brought one of the recent prosecutions.

Ultimately, as the recent trend of going after company executives picks up, businesses will have to look closely at their practices.  A number of provisions contained in the Affordable Care Act, such as the Physician Payment Sunshine Act, along with the Foreign Corrupt Practices Act, and the increased scrutiny on fraud and abuse, all lead to heavier regulation of the health industry and greater oversight.  With the added threat of going after company executive’s, the need for compliance from the top down has never been greater.  Now that the government will be tracing every $10 that a company spends, and will know who that money goes to and for what, executives can be on the hook for anything considered to be a kickback or fraudulent claim.

Companies must begin changing their cultures now, before it is too late.  Training and education, as well as new policies adapting to the new regulatory culture are necessary.  To be able to continue doing business successfully today, the drug and medical device industry will need to focus on complying with federal rules, laws and regulations, otherwise the boardroom could soon be the jail cell.