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Court Ruling Could Lead to More Executive Exclusions

By Mari Serebrov
Washington Editor

Executives of biopharma companies got a little good news and a lot of bad news when an appeals court, in a split decision, upheld the federal exclusion of three former Purdue Frederick Co. officials, clearing the way for more corporate officers to be forced out of the industry over off-label drug promotion.

The good news is that the U.S. Court of Appeals for the District of Columbia (DC) found that the length of exclusion, 12 years, set by the Department of Health and Human Services (HHS) for Michael Friedman, Paul Goldenheim and Howard Udell was arbitrary and capricious.

Under the Social Security Act, HHS has the authority to exclude individuals from participating in federal programs for three years when they've been convicted of a misdemeanor relating to fraud or any one of several other offenses. The exclusion can be lengthened if there are aggravating factors.

In this case, Friedman, Goldenheim and Udell pleaded guilty to misdemeanor misbranding as part of a government settlement with Purdue over the off-label marketing of OxyContin (oxycodone) as "less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications," according to court documents.

The misdemeanor charges against the three senior officials were based on the responsible corporate officer (RCO) doctrine, also known as the Park doctrine, which holds corporate executives criminally liable for the wrongdoing of their company, even if they were unaware of the action. The strict liability charge is based on a person's status, rather than action or knowledge. (See BioWorld Insight, May 21, 2012.)

Several months after the misdemeanor pleas, HHS excluded each of the men for 20 years, which meant they could not work during that period for any drug- or devicemaker whose products were reimbursed by Medicaid or Medicare. The exclusion was later whittled to 12 years.

While the court recognized two aggravating factors HHS cited in increasing the length of the exclusion – namely, that the off-label promotion continued for more than one year and that the government's financial loss resulting from the marketing exceeded $5,000 – it said the 12-year exclusion was arbitrary and capricious because HHS had never before imposed more than a four-year exclusion on someone convicted of a misdemeanor under the RCO doctrine.

The court instructed HHS to reconsider the terms of the exclusion. That part of Friday's ruling provides executives subject to "possibly ruinous sanctions with some ability to predict, based on previous decisions, what is a reasonable range of punishment," said Carter Phillips, a partner at Sidley Austin LLP and lead counsel for the former Purdue officials.

Such knowledge would be helpful in plea negotiations, he told BioWorld Today.

Now for the Bad News

Despite that bit of good news, the bad news is that the court's decision basically gave HHS a green light to seek federal exclusion of biopharma officials, effectively forcing them out of the industry based on a misdemeanor for which there is no defense, said Richard Samp, chief counsel for the Washington Legal Foundation, which filed an amicus brief in support of the officials.

In the past, the Supreme Court has upheld the constitutionality of strict liability crimes because the penalties tend to be "relatively small, and conviction does no grave damage to an offender's reputation."

Given what can be the career-ending results of exclusion, Friedman, Goldenheim and Udell questioned the unconstitutional lack of due process involved in the civil penalty. The DC court responded that even though "exclusion may indeed have serious consequences," it raises no significant concern with due process because it is a civil penalty rather than a criminal one.

"Surely the government constitutionally may refuse to deal further with senior corporate officers who could have but failed to prevent a fraud against the government on their watch," the court said, even if they didn't know about the fraud.

The result is that "executives may be much less willing to take a bullet for the team," Samp told BioWorld Today, noting that HHS has increasingly demanded that corporate officials plead guilty as an RCO as part of a settlement of federal criminal charges. Knowing that such a plea paves the way to exclusion, company officials will look at all their options.

John Fleder, a director at Hyman, Phelps & McNamara PC, agreed that, in light of Friday's decision, the Department of Justice and the FDA are likely to pursue more biopharma officials under the RCO doctrine. And there will probably be more HHS exclusions, making executive pleas a bigger issue in settlement agreements – especially since many other government departments and agencies, including the FDA and Department of Defense, have authority to exclude, debar or disqualify individuals from federal programs.

While company officials may not want to plead guilty, they could face shareholder pressure to do so, Fleder told BioWorld Today. But if the individuals involved are no longer with the company, they're more likely to be concerned about their own skin than what the shareholders want, he added.

Friedman, Goldenheim and Udell, as well as HHS, have 45 days to appeal the DC court's decision – either to the full DC Circuit or to the Supreme Court. Phillips said his clients probably won't make that decision for a number of weeks.

Even if Friedman v. Sebelius is appealed to the Supreme Court, that court probably wouldn't grant cert, Samp said. That will come when another circuit court rules differently in a similar case, he added.