Pharmaceutical Criminal Liability: Continuing Risks for Executives and In-House Counsel

Last month, the government abandoned all criminal charges against four Stryker Corp. executives in a case involving the off-label promotion of Stryker’s Biotech medical devices.  Earlier, in May 2010, after the government had rested its case at trial against GlaxoSmithKline’s vice president and corporate counsel, a federal district judge acquitted her.  Notwithstanding these setbacks to the government, executives of pharmaceutical and biotech companies —including in-house counsel—continue to face substantial risks of criminal prosecution, and all that that entails.  It is not just about charging companies anymore; in the past several years, the government has made plain its intent to root out healthcare fraud by charging, convicting, and seeking jail time for individuals believed to be involved in, responsible for, or even just in a position to prevent or correct, such fraud.

In December 2009, a federal grand jury sitting in the District of Massachusetts returned an indictment against Stryker Biotech, a division of Stryker Corp.; the former Stryker Biotech president; and three sales managers (United States v. Stryker Biotech, LLC, et al. No. 1:09-CR-10330 (D. Ma.)).  The government alleged that the defendants participated in an off-label marketing scheme involving certain bone-growth products.  Both the company and the individual executives were charged with wire fraud, conspiracy, and distribution of a misbranded device.  The indictment also alleged that Stryker and the former president made false statements to the Food and Drug Administration (FDA).  All of these charges were felonies.

However, in January 2012, after several days of trial, the government agreed to drop all of the charges against Stryker Biotech, in exchange for the company’s plea to one misdemeanor count of misbranding a medical device and payment of a $15 million fine.  Additionally, the government dropped its case against the sales managers.  As the government made this determination after opening statements were made and some testimony was taken—a rare occurrence in a federal criminal trial—it appears that the government did not believe that it had sufficient evidence to prove its case.  Furthermore, the government’s case against the former president, whose case was severed from that of the other defendants, was also subsequently dismissed.

In contrast, in another off-label marketing prosecution, in June 2009 four Synthes executives pled guilty to misdemeanor charges of introducing misbranded medical devices and were sentenced to terms of imprisonment ranging between five and nine months (United States v. Norian Corp., el al., No. 2:09-CR-403 (E.D. Pa.)).  Unlike in the government’s case against the Stryker executives, the government did not have to prove that the Synthes defendants acted intentionally or knowingly.  The Synthes executives pled guilty pursuant to the Responsible Corporate Officer (RCO) doctrine, which provides that any corporate officer, who has the authority and responsibility to prevent violations of any health or welfare statute, including the Federal Food, Drug, and Cosmetic Act (FDCA), may be held criminally liable for the underlying violations, regardless of the person’s knowledge or intent.

The RCO was first recognized by Supreme Court in United States v. Dotterweich, 320 U.S. 277 (1943).  In Dotterweich, the Court upheld the misdemeanor conviction of a drug company’s president as a result of the company’s shipment of adulterated drugs, “solely on the basis of his authority and responsibility as president.”  320 U.S. at 286.  The Court reasoned that it was preferable to penalize “those who have at least the opportunity of informing themselves of the existence of conditions imposed for the protection of consumers before sharing in illicit commerce, rather than to throw the hazard on the innocent public who are wholly helpless.”  Id. at 285.

Decades later, in United States v. Park, 421 U.S. 658 (1975) the Supreme Court reaffirmed its holding that conviction of an individual for an FDCA misdemeanor violation does not require awareness of wrongdoing or conscious fraud on the part of a corporate officer, where the government demonstrates that a prohibited act took place and the defendant’s position within the company was one that gave him or her the responsibility and authority either to prevent the violation or to correct it.  In Park, the president and CEO of a large national retail food chain, Acme Markets, Inc., whose Baltimore warehouse was rat-infested, was convicted under the FDCA, even though the president had delegated the responsibility for warehouse operations to others.  Evidence at trial established that the FDA had issued a Warning Letter in 1970 advising Park of unsanitary conditions in Acme’s Philadelphia warehouse.  In 1971 and again in 1972, the FDA found similar contamination in Acme’s Baltimore warehouse.  At trial Park testified that, upon learning of the violations, he consulted the relevant personnel and that “he did not believe there was anything [he] could have done more constructively than what [he] found was being done.”  Id. at 664.  The Court disagreed.

The Park Court described the duty of those who voluntarily assume positions of authority under the FDCA as “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.”  Id. at 672.  (We call such measures “corporate compliance programs” today.)  Nevertheless, the Park Court did recognize that the FDCA does not “require that which is objectively impossible. . . .  [T]he Act permits a claim that a defendant was powerless to prevent or correct the violation.”  Id. at 673 (internal quotations omitted).  Therefore, a defendant may assert “powerlessness” as an affirmative defense.

RCO is a powerful tool in the prosecutor’s toolbox.  Until recently, RCO lay dormant.  In the last several years, the government has breathed new life into the doctrine in highly publicized prosecutions such as that against a former CEO and director of KV Pharmaceutical (United States v. Hermelin, No. 4:11-CR-85 (E.D. Mo)).  As FDA Commissioner Margaret Hamberg stated in a letter to Senator Charles Grassley in 2010, the FDA has decided to “increase the appropriate use of misdemeanor prosecutions, a valuable enforcement tool, to hold responsible officials accountable.”

An additional consequence of even a misdemeanor conviction is potential exclusion of the individual from participation in federal healthcare programs, pursuant to the Department of Health and Human Services Office of Inspector General’s authority under the Social Security Act.  (Certain felony convictions require mandatory exclusion.)

Corporate counsel are not immune from this ramped-up prosecutorial trend.  In the most recent and high profile case, a former vice president and corporate counsel for GlaxsoSmithKline, was indicted by a grand jury in the District of Maryland (United States v. Stevens, No. 8:10-CR-694 (D. Md.)).  The government’s charges were in connection with the FDA’s investigation into whether GSK engaged in the off-label promotion of Wellbutrin, approved for the treatment of major depressive disorders, as a weight-loss and obesity treatment.  The indictment alleged that the in-house counsel withheld documents and information from the FDA during its investigation.  In a stunning ruling, U.S. District Judge Roger Titus granted a defense motion for acquittal.  The Judge stated that “only with a jaundiced eye and with an inference of guilt that’s inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant.”

In theory, the government could seek to indict corporate counsel under the RCO and perhaps avoid the difficulties of proving intent and knowledge as in the GSK case.

With a national focus on preventing and punishing healthcare waste, fraud, and abuse, and, in turn, a focused Department of Justice, companies must ensure that they have in place robust compliance programs and aggressively investigate non-frivolous complaints of wrongdoing.  In fact, the Patient Protection and Affordable Care Act, enacted in 2010, mandates that healthcare providers enrolled in Medicare and Medicaid adopt compliance plans.  The consequences of not doing so—jail, fines, restitution, exclusion, reputational harm, and legal costs—can be severe.