Jane fergason Jfergason@gardere

2. Responsible Corporate officer doctrineTHE EXPANSION OF CRIMINAL LIABILITY FOR CORPORATE OFFICERS PARTNER GARDERE WYNNE SEWELL LLP Jane fergasonJfergason@gardere.com

3. Responsible Corporate Officer or “RCO” Doctrine • Who: Responsible Corporate Officer • Holds position of responsibility • Ability to prevent the violation • Failed to prevent the violation • What: Strict Liability • Ramifications: Criminal Liability

4. Genesis of the RCO DoctrineUnited States v. Dotterweich(1943) Prosecution against pharmaceutical company under Federal, Food, Drug and Cosmetic Act (“FDCA”) for mislabeling President found guilty, company found not guilty President had no knowledge but the greater public good was served Supreme Court concluded that FDCA is of “a now familiar type” of legislation which “dispenses with the conventional requirement for criminal conduct—awareness of some wrongdoing. In the interest of the larger good, it puts the burden of acting at hazard upon a person otherwise innocent but standing in responsible relation to a public danger” 320 U.S. at 280-81 Court left open which employees fell within the zone of “responsible relation”

5. United States v. Park John Park was the president of Acme Markets Inc., a national retail food chain with approximately 36,000 employees, 874 retail outlets and 16 warehouses FDA found unsanitary conditions including rodent infestation at Acme’s Philadelphia warehouse in 1970 and similar conditions at Acme’s Baltimore facility. Mr. Park was informed of the findings

6. United States v. Park Mr. Park consulted with Acme’s legal counsel who advised that the employee in charge of the Baltimore warehouse was investigating and taking all appropriate remedial action In March 1972, FDA re-inspected the Baltimore facility and still found evidence of rodent infestation The government charged Acme and Mr. Park with misdemeanors under 21 U.S.C. §§ 331(k) and 333(a), for causing food shipped in interstate commerce to become adulterated while it was held at the Baltimore warehouse

7. United States v. Park Mr. Park testified that he did not “believe there was anything [he] could have done more constructively than what [he] found was being done” 421 U.S. at 664 The U.S. Supreme Court ruled that: “The [FDCA] imposes not only a positive duty to seek out and remedy violations when they occur but also, and primarily, a duty to implement measures that will insure that violations will not occur” 421 U.S. at 672

8. United States v. Park It also concluded that: “The requirements of foresight and vigilance imposed on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them” 421 U.S. at 672

9. United States v. Park The Court did recognize that the FDCA “does not require that which is objectively impossible.” “[t]he theory upon which responsible corporate agents are held criminally accountable for ‘causing’ violations of the Act permits a claim to be raised defensively that a defendant was ‘powerless’ to prevent or correct the violation” 421 U.S. at 673

10. United States v. Park “Assuming, arguendo, that it would be objectively impossible for a senior corporate agent to control fully day-to-day conditions in 874 retail outlets, it does not follow that such a corporate agent could not prevent or remedy promptly violations of elementary sanitary conditions in 16 regional warehouses” 421 U.S. at 677 An executive cannot be convicted solely because of the person’s title at the company

11. United States v. Park In the case of Park, “[T]he [FDCA] imposes the highest standard of care and permits conviction of responsible corporate officials who, in light of this standard care, have the power to prevent or correct violations of its provisions” Park, 421 U.S. at 676 The government can seek to obtain misdemeanor convictions of a company official for alleged violations of the FDCA or other federal acts—even if the corporate official was unaware of the violation—if the official was in a position of authority to prevent or correct the violation and did not do so

12. Statutory Basis for CriminalProsecutions Under FDCA 21 U.S.C. § 333(a)(1) – “Any person who violates a provision of [21 U.S.C. § 331 (“prohibited acts”)] shall be imprisoned for not more than one year or fined... Or both.” No “knowledge” or “intent” requirement

13. Lower courts have subsequently ruled that an officer demonstrates that compliance is objectively impossible when it is shown that the officer took “extraordinary care” to comply with the FDCA

14. Use of RCO Doctrine After Park • Cases typically arose from: • Violations under FDCA • Persistent violations observed during FDA inspections where violations were not remedied • Instances where a regulatory violation had allegedly caused injuries to consumers or animals

15. Use of RCO Doctrine After Park • Generally, the FDA’s decision to seek prosecution depended on whether: • The violations were of a continuing nature • Management must have known of the violations or could have prevented them • The violations were life threatening or resulted in injuries • A prosecution would likely affect future compliance by the company and other similarly-situated companies • FDA had enough resources to bring a case

16. Results of Actions Most RCO cases were misdemeanor prosecutions Few cases were referred to Department of Justice because of the lack of evidence of intent to defraud or mislead Small fines and no jail time Typically rejected “objectively Impossible” defense

17. Results of Actions United States v. Y. Hata & Co.,535 F.2d 508 (9th Cir. 1976) Rejected the defense because “one maintaining far less than the requisite ‘highest standard of foresight and vigilance’ would have recognized... that implementation of a wire cage system would substantially, if not completely, prevent access by thieving and untidy birds.”

18. Results of Actions United States v. Starr, 535 F.2d 512 (9th Cir. 1976) Rejected impossibility of avoiding mouse infestation because anyone with “minimum foresight” would anticipate the migration of rodents from newly plowed fields, and because the defendant failed to follow up on his delegation of duty to a janitor and could have anticipated and remedied the failure of his subordinate

19. Results of Actions United States v. General Nutrition Inc., 638 F. Supp. 556 (W.D.N.Y. 1986). Retail managers and store clerks who had no role in choosing claims or devising promotional materials for a dietary supplement alleged by FDA to be a drug were prosecuted for misbranding because “[t]he Act provided that ‘[a]ny person’ who violates section 331 shall be liable... [and] ‘Any’ means any.”

20. 305 Hearings • Almost all criminal prosecutions during the height of use the RCO doctrine were preceded by a “305 hearing” • “Before a violation... is reported... to any United States attorney for institution of a criminal proceeding, the person against whom such a proceeding is contemplated shall be given appropriate notice and an opportunity to present his views.” 21 U.S.C. § 335

21. 305 Hearings Such hearings gave targets and their attorneys a direct opportunity to argue to FDA why a case should not be brought. Courts have held that FDA is not required to hold “305 hearings” In the past 20 years, such hearings have been almost nonexistent.

22. Renewed Use of the RCO Doctrine 2009 Chemnutra Inc. Two corporate officers pleaded guilty to two counts of strict liability misdemeanors of selling adulterated food and one of selling misbranded food for shipping wheat gluten tainted with melamine, destined for pet food…

23. Renewed Use of the RCO Doctrine 2009 Syntheses Inc.Executives were indicted for the off-label promotion of a bone void filler with a single misdemeanor count of shipping adulterated and misbranded product. Both the company and the officers pleaded guilty. The officers received five to eight months in prison and each were fined $100,000

24. FDA’s Position 2010 FDA Commissioner Hamburg announced that criteria had been developed for selection of misdemeanor prosecution cases and these would be incorporated into revised policies and procedures addressing appropriate use of misdemeanor prosecutions

25. FDA’s Position Eric M. Blumberg, FDA Deputy Chief Counsel for Litigation, warned company officials about impending misdemeanor prosecutions when he stated: “Very soon, and I have no one particular[ly] in mind, some corporate executive is going to be the first in a long line.”

26. FDA’s Recent Priorities Off label promotions Health scares in the public eye Industry practices under scrutiny

27. Friedman et. al. v. Kathleen SebeliusExclusion Fraudulent misbranding of OxyContin manufactured by Purdue Frederick Company—stated it was less addictive and less subject to abuse 400 hours of community service Three years probation $5,000 fine Repay $34.5 million in compensation 12-year exclusion

28. Friedman et. al. v. Kathleen SebeliusExclusion In July 2012, the D.C. Court of Appeals found that pharmaceutical executives found guilty of misdemeanor “misbranding” under RCOdoctrine was a misdemeanor relating to fraud, subjecting them to exclusion from federal health care programs No intent required

29. Friedman et. al. v. Kathleen SebeliusExclusion Office of Inspector General within the Department of Health & Human Services can exclude pharmaceutical, medical device and other health care executives from their industries Can’t engage any work that may involve Medicaid or Medicare reimbursement or other federal health care related services

30. Exclusion Theory 42 U.S.C. §1320a-7 “exclusion”—federal government will not pay—through Medicare, Medicaid or any other directly—or indirectly—funded federal program—for any items or services furnished, ordered or prescribed by the excluded individual, anyone who employs or contracts with the excluded individual, and any hospital or provider where that person provides services.

31. Exclusion Theory “Debarment”—prohibits individual from “providing services in any capacity” to a company or individual that has an approved or pending drug product application

32. Current Factors FDA Considers The individual’s position in the company and relationship to the violation Whether the official had the authority to correct or prevent the violation Knowledge of and actual participation in the violation are not a prerequisite but are factors that may be relevant when deciding whether to recommend charging a misdemeanor violation

33. Current Factors FDA Considers Did the violation involve actual or potential harm to the public? Whether the violation is obvious Does the violation reflect a pattern of illegal behavior and/or failure to heed prior warnings? Whether the violation is widespread or serious The quality of the legal and factual support for the proposed prosecution Whether the proposed prosecution is a prudent use of agency resources

34. Future Use • Federal and state courts have expanded beyond FDCA to other “public-welfare statutes” • Clean Water Act • Clean Air Act • Federal Meat Transportation Act • Resource Conservation and Recover Act • Federal Anti-Kick-Back Statute • Federal employees are being trained on using the RCO Doctrine

35. Corporate Strategies • Determine what corporate functions are susceptible to RCO scrutiny • Be pro-active rather than reactive to regulatory compliance • Hire qualified and competent employees • Background checks • Certifications

36. Corporate Strategies • Incorporate, document and monitor a robust corporate compliance program: • Training programs • Reporting mechanisms • Internal monitoring • Audit • Disciplinary action • Supplemental insurance coverage

37. Corporate Strategies Document attempts to comply with regulatory requirements and to remedy issues Cautiously interact with the FDA—avoid giving ammunition