By John R. Fleder –
On July 27, 2012, the United States Court of Appeals for the D.C. Circuit issued its long-awaited ruling in Friedman v. Sebelius, No. 11-5028. The case involves a challenge to a decision by the Secretary of Health and Human Services ("HHS") to exclude three former executives of Purdue Frederick Company ("Purdue") from participating in federal health care programs. Although the D.C. Circuit affirmed HHS’s legal theories for excluding the Purdue executives, the Court remanded the case to the district court, ruling that HHS’s decision to exclude the three executives for twelve years was arbitrary and capricious.
The Court’s Opinion was authored by Judge Douglas H. Ginsburg. Chief Judge David B. Sentelle concurred in part, dissented in part and dissented from the judgment. Judge Stephen F. Williams concurred in part, dissented in part but concurred in the judgment. Our prior blog posts on this case can be found here and here.
Michael Friedman, Paul Goldenheim, and Howard Udell ("the Purdue Executives") were senior corporate officers at Purdue when the company marketed OxyContin. In 2007, Purdue pleaded guilty to felony violations of the FDC Act involving the alleged misbranding of drugs. The company was placed on probation, fined $500,000 and required to pay another $600 million, part of which was for restitution. In contrast, the Purdue Executives each pleaded guilty to a misdemeanor violation of the FDC Act for failing to prevent Purdue’s alleged fraudulent marketing of OxyContin. Each of the Purdue Executives was sentenced to do community service, fined $5000, placed on probation, and forced to disgorge compensation they had received at Purdue.
The felony provision of the FDC Act requires that a person (including a corporation) can be found guilty if that person acts with the intent to defraud or mislead. In contrast, the misdemeanor provision of the FDC Act does not require any such intent. Rather, an individual can be prosecuted under the “Park Doctrine” if that person was in a responsible position of authority to have prevented the FDC Act violation from occurring. The Court’s Opinion states that the Purdue Executives admitted that they had the authority to prevent Purdue’s FDC Act violations from occurring, or could have promptly corrected misrepresentations that some other Purdue employees had made regarding OxyContin. However, the Purdue Executives did not admit (nor did the Government allege) that they had intended to violate the FDC Act or had engaged in any type of fraudulent conduct.
The Purdue Executives quickly learned that their troubles with the government had not ended. A few months after the convictions, HHS’s Office of the Inspector General ("OIG") “determined” that the Purdue Executives should be excluded from participating in federal health care programs for 20 years. The Purdue executives appealed this decision to an HHS Administrative Law Judge ("ALJ"), and then to HHS’s Departmental Appeals Board (DAB). During the pendency of the appeal, the OIG reduced the exclusion period to 15 years because the Purdue Executives had assisted law enforcement authorities to combat abuse of OxyContin. Thereafter, the ALJ affirmed the 15 year exclusion periods as being within a reasonable range. However, the DAB reduced the exclusion periods to 12 years for a number of reasons.
The Purdue Executives sought review of the DAB’s decision in federal district court in Washington D.C. That court upheld HHS’s exclusion decisions, including the length of the exclusions. The Purdue Executives then appealed the District Court’s ruling to the D.C. Circuit. They challenged the HHS decision in terms of whether there was any statutory basis for exclusion, and alternatively, the length of the exclusion.
HHS relied on 42 U.S.C. § 1320a-7(b)(1)(A) as the basis to exclude the Purdue Executives. That provision provides in pertinent part that an individual can be excluded from participating in any federal health care program if that individual has been convicted “of a criminal offense consisting of a misdemeanor relating to fraud.”
The Purdue Executives did not deny that they had been convicted of a misdemeanor. However, their principal argument on appeal was that their convictions were not “relating to fraud.” Remember that they had pleaded guilty to a misdemeanor offense under the FDC Act which did not require any proof that they had engaged in fraud. The Purdue Executives argued that because the violations to which they pleaded guilty were just “strict liability” offenses, the nexus to fraud was not present for purposes of the exclusion statute. They claimed that for that exclusion provision to apply, the misdemeanor offense needed the core elements of fraud including scienter, something obviously missing from a misdemeanor charge and conviction under the FDC Act.
The Court posed the issue as being whether a “misdemeanor relating to fraud” refers to a generic criminal offense on one hand or to the facts underlying a particular defendant’s conviction. The Court concluded that HHS’s decision to use a defendant circumstance-specific approach, rather than a generic approach, was correct. In other words, HHS can exclude an individual under this provision based on a conviction which was for conduct factually related to fraud, even though the offense to which the person pleaded guilty did not require a showing of fraud.
The Court ruled that the Purdue Executives’ “convictions under the responsible corporate officer doctrine were manifestly ‘related to’ a fraud.” Slip Op. at 18. It explained:
Finally, the Appellants and their amici argue, because the Secretary’s interpretation permits her to impose “career- ending disabilities” upon someone whose criminal conviction required no mens rea, it raises a serious question of validity under the Due Process Clause of the Fifth Amendment to the Constitution of the United States . . . . Section 1320a-7(b)(1), however, is not a criminal statute and, although exclusion may indeed have serious consequences, we do not think excluding an individual under 42 U.S.C. § 1320a-7(b) on the basis of his conviction for a strict liability offense raises any significant concern with due process. Exclusion effectively prohibits one from working for a government contractor or supplier. 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. . . . [W]e hold section 1320a¬7(b)(1)(A) authorizes the Secretary to exclude from participation in Federal health care programs an individual convicted of a misdemeanor if the conduct underlying that conviction is factually related to fraud. The Appellants do not dispute they are excludable under this circumstance-specific approach: Their convictions for misdemeanor misbranding were predicated upon the company they led having pleaded guilty to fraudulently misbranding a drug and they admitted having “responsibility and authority either to prevent in the first instance or to promptly correct” that fraud; they did neither.
Next, the Court examined whether HHS acted arbitrarily and capriciously in excluding the Purdue Executives for 12 years. They challenged the exclusion periods on a number of grounds, including that HHS had failed to justify the decisions as being consistent with exclusion decisions in other cases. The Court did not find that prior HHS exclusion decisions were irrelevant to the length of exclusion that should be imposed on the Purdue Executives.
Using the arbitrary and capricious standard, the Court examined the length of prior HHS exclusion decisions. HHS had cited a number of prior HHS exclusion rulings of individuals where the period exceeded ten years. The Court found those decisions to be distinguishable. Because these decisions involved mandatory exclusion, not permissive exclusion, as relevant here, or because the HHS cited cases involving either a felony conviction or a conviction for Medicare fraud involving imprisonment, the Court could not locate any analogous precedent. The Court found that HHS had never excluded anyone for more than 10 years under the provision at issue in this case. As a result, the Court remanded the case to allow HHS to justify its 12-year exclusion decision.
Judge Sentelle agreed with the Court’s analysis regarding whether the Purdue Executives were subject to exclusion. However, he would have affirmed the 12 year exclusion period and not required a remand. Judge Williams did not agree that HHS had justified the decision to exclude the Purdue Executives. He would have remanded the case to HHS to require a better explanation of why the Purdue executives were even subject to exclusion.
The Purdue Executives can seek rehearing of the case before the same three judges and/or seek rehearing en banc by the entire D.C. Circuit. They may also seek Supreme Court review of this decision. Alternatively, they could just await a further decision by HHS regarding the length of the exclusion, and challenge that decision in court.
The decision certainly is not welcome news to the Purdue Executives and many others who have been tracking this case closely. Exclusion is a government remedy that can threaten the livelihood of people in the health care industry. This decision, if it stands, will add another weapon in the government’s enforcement arsenal, even when the government does not charge an executive with engaging in fraudulent conduct, let alone prove that such conduct occurred.
A very difficult issue posed by this decision relates to a person’s decision to plead, or not plead, guilty to a crime as a result of an FDA investigation. It was traditionally thought that a misdemeanor plea to a violation of the FDC Act under the Park Doctrine would result in a small fine, no jail time, and perhaps a period of probation. That would be all!
Today, this is no longer true. A defendant pleading guilty to a Park offense is more likely to go to jail than was true in the 1970s and 1980s, even though the person is not charged with, and does not admit to, intending to violate the law, let alone committing fraud. See our blog posting in the Synthes case here. In addition, the Friedman case shows that an individual can be subject to exclusion by HHS. Not to be forgotten is FDA’s separate authority to debar someone, particularly for offenses relating to drugs. For a recent blog entry regarding FDA debarments, look here.
Thus, what is a person threatened with criminal charges under the FDC Act to do? Going to trial is costly and the outcome is uncertain. However, the Friedman case shows that a decision to plead guilty leads to an eventual outcome that is equally uncertain. A court may or may not accept a guilty plea. Although, a person negotiating a plea may seek to reach a global resolution, is that possible in the debarment/exclusion area? Whom does the individual bargain with on this issue? DOJ? HHS? FDA? How about the VA and the Defense Department, which have their own debarment/exclusion authorities when federal funds are involved?
Reaching a plea bargain that brings certainty to whether an individual will be debarred or excluded may well be difficult if not impossible. Assuming someone considering pleading guilty is not ready to retire, this uncertainty alone may lead to more individuals simply saying “no” to plea bargains and taking a case to trial.