Insight The Resurgence of the Responsible Corporate Officer Doctrine

Hospitals and healthcare systems and their attorneys should take note of the recent resurgence of the responsible corporate officer (RCO) doctrine. Aptly referred to as the crime of doing nothing, the RCO doctrine is a strict-liability theory used by the government to bring misdemeanor charges against officers and directors who fail to prevent or correct a corporation’s misconduct. Traditionally used in Federal Drug Administration (FDA) cases, prosecutors have successfully expanded RCO doctrine-type liability to public welfare statutes, including The Sherman Antitrust Act, federal securities laws, and state and federal environmental laws.1 Notably, the Office of the Inspector General of the Health and Human Services Department (OIG) has recently applied elements of the RCO doctrine to exclude certain individuals from participating in federal healthcare programs such as Medicare and Medicaid, meaning that no program payment may be made for any items or services furnished, ordered, or prescribed by these excluded individuals.2 This growing enforcement trend leaves officers, directors, certain managers, administrators and even general counsel of hospitals and healthcare systems vulnerable to exclusion. These individuals should stay well-informed of the risks associated with the RCO doctrine, and should adopt and enforce comprehensive compliance programs to help avoid potentially career-ending exclusion.

1. The History of the RCO Doctrine

The United States Supreme Court first analyzed the RCO doctrine in United States v. Dotterweich.3 In Dotterweich, the federal government prosecuted Buffalo Pharmacal Company, Inc., a wholesaler of drugs, and Joseph Dotterweich, its president and general manager, for violations of the federal Food, Drug and Cosmetic Act (FDCA).4 Section 331(a) of the FDCA prohibits in pertinent part “[t]he introduction or delivery for introduction into interstate commerce of any . . . drug . . . that is adulterated or misbranded.” Section 333 goes on to make “any person” who violates Section 331(a) “guilty of a misdemeanor,” thus making Section 333 one of the few strict liability crimes under federal law.

The jury found Dotterweich guilty on three counts – two for shipping misbranded drugs in interstate commerce and one for shipping an adulterated drug. All three counts were based on a single shipment for which Dotterweich had no personal connection. Nevertheless, Dotterweich was “in general charge of the corporation’s business and had given general instructions to its employees to fill orders received by physicians.”5 Notably, the jury found Buffalo not guilty on all charges.

On appeal, the Second Circuit Court of Appeals reversed Dotterweich’s conviction on the ground that the corporation was the only “person” subject to prosecution unless Buffalo was merely Dotterweich’s alter ego.6 The Supreme Court reversed, holding that the term “any person” may include any corporate officer or employee standing in “responsible relation” to a condition or transaction forbidden by the FDCA. Moreover, the Supreme Court observed that the FDCA “dispenses with the conventional requirement for criminal conduct-awareness of some wrongdoing” and “[i]n the interest of the larger good . . . puts the burden of action at hazard upon a person otherwise innocent but standing in responsible relation to a public danger.”8

Over thirty years later, in United States v. Park,9 the Supreme Court reaffirmed Dotterweich and upheld an executive’s conviction under the FDCA. In that case, the federal government prosecuted Acme Markets, Inc., a national retail food chain, and John Park, its president and chief executive officer, for shipping adulterated food (i.e., contaminated by rodents) in interstate commerce. The Food and Drug Administration (FDA) had repeatedly notified Acme of insanitary conditions in its warehouses, and Park, personally, had received notice of a failed violation in 1970. Acme pleaded guilty but Park pleaded not guilty.

During the trial, the government introduced Acme’s bylaws, which prescribed the duties of the CEO.10 The government also called Acme’s vice president to testify that Park delegated “normal operating duties” such as “sanitation,” but ultimately retained “certain things, which are the big, broad, principles of the operation of the company” and had “the responsibility of seeing that they all worked together.”11 On cross-examination, Park conceded that providing sanitary conditions for food offered for public sale fell under the ambit of his responsibilities for “the entire operation of the company.”12 The trial court instructed the jury that in order to find Park guilty, Park was required to have a responsible relation to the adulterated food, even if he did not consciously do wrong. The jury found Park guilty on all counts and he was subsequently sentenced to a fine of $50 on each count.

The Fourth Circuit Court of Appeals reversed Park’s conviction, reasoning that the trial court’s instruction left the jury with the erroneous impression that Park could be found guilty in the absence of “wrongful action” on his part, and that proof of this element was required by due process.13 The Fourth Circuit directed that on retrial the jury be instructed as to “wrongful action,” which might be “gross negligence and inattention to discharging . . . corporate duties and obligations or any of a host of other acts of commission or omission which would ‘cause’ the contamination of food.”14

The United States Supreme Court disagreed and upheld the trial court’s instruction. The Supreme Court noted that “Dotterweich and the cases which have followed reveal that in providing sanctions which reach and touch the individuals who exercise the corporate mission. . . 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.”15

2. The Resurgence of the RCO Doctrine

The resurgence of the RCO doctrine is evidenced by two recent high-profile cases. First, in 2007, the federal Department of Justice (DOJ) brought charges against Purdue Frederick Company, Inc. and three of its officers (the president and chief executive officer, chief legal officer, and former chief medical officer) for violations of the FDCA associated with the misbranding of OxyContin. Purdue’s supervisors and employees fraudulently marketed the drug by falsely claiming that OxyContin was less addictive, less subject to abuse, and less likely to cause withdrawal symptoms than other pain medications. There was neither the research to support the off label marketing, nor had the FDA approved such claims.

The DOJ alleged that the three executives were responsible corporate officers at the time the misbranding occurred and, therefore, guilty of misdemeanors. Notably, the executives were not charged with personal knowledge of the misbranding or with any personal intent to defraud. Purdue and the executives pled guilty and agreed to pay $634,515,475 in fines. In their plea agreements, the three executives agreed to pay a total of $34,500,000 to the Virginia Medicaid Fraud Unit’s Program Income Fund in exchange for no jail time.16

Almost immediately, the OIG used its permissive exclusion authority to debar the three Purdue executives from participation in federal healthcare programs for 12 years, effectively excluding them from the health care industry all together. Under Section 1128(b) of the Social Security Act,17 the OIG has 16 bases for permissive exclusion, which include certain misdemeanor convictions. Further, pursuant to the Balanced Budget Act of 1997,18 the OIG is authorized to impose civil monetary penalties against health care providers or entities that employ or enter into contracts with excluded individuals for the provision of services or items to federal program beneficiaries. “Thus, a provider or entity that receives [f]ederal health care funding may only employ an excluded individual in limited situations,” such as where the provider can pay the individual exclusively with private funds or from other non-federal funding sources, or where the services furnished by the excluded individual relate solely to non-federal program beneficiaries.19

The three Purdue executives appealed their exclusions, arguing that the RCO doctrine misdemeanor convictions did not relate to fraud or the unlawful distribution of a controlled substance. The United States District Court of the District of Columbia affirmed their exclusion,20 and an appeal before the United States Court of Appeals for the District of Columbia Circuit is currently pending. The ban, if upheld, will effectively end the executives’ careers.

Even more troubling is that Howard Udell, one of the three executives, is Purdue’s former general counsel, making him the first known general counsel to be de debarred under the RCO doctrine.21 The Association of Corporate Counsel (“ACC”) filed an amicus brief in support of the executives’ appeal, arguing, among other things, the OIG’s exclusionary power as applied to general counsel “inappropriately shifts liability and punishment that the government cannot pin on the corporate entity to those who are obliged to provide legal counsel and advocate for their clients’ positions.”22

In the second case filed in 2009, the DOJ brought charges against Synthes Inc., a medical device manufacturer, and four of its executives (the chief operating officer, former president of the Spine Division, former director of regulatory and clinical affairs of the Spine Division, and former vice president of operations) related to the unauthorized use of bone cements, Norian SRS and Norian XR, in spinal surgery clinical trials.23 The cements, which were produced by Norian, a wholly-owned subsidiary of Synthes, were injected into patients’ spines without FDA approval. Of the 200 patients operated on, three died. The four executives each pled guilty to one misdemeanor count of shipping adulterated and misbranded Norian XR in interstate commerce under the RCO doctrine. They were each were sentenced to prison terms ranging from five to nine months and ordered to pay $100,000 in fines. It is expected that the OIG will seek to exclude the four executives from participation in federal healthcare programs.

The OIG has also recently invoked its permissive exclusion authority against officers and managing employees in non-FDCA cases. In 2009, the OIG permanently excluded Emmanuel Bernabe, the president and chairman of Pleasant Care Corporation, from further participation in federal healthcare programs following an investigation of allegations regarding substandard care nursing homes managed by Pleasant Care.24 The ban stemmed from the OIG’s permissive authority to exclude an individual that fails to meet professional recognized standards of health care to be furnished to patients.25 In a press release, Inspector General Daniel Levinson stated: “It is critical that boards and management make compliance with professionally recognized standards of care a priority at all levels of their organizations.”26

In addition, the OIG has made efforts to ban executives of pharmaceutical companies. In 2010, Marc Hermelin, the former chief executive officer and substantial owner of KV Pharmaceutical, was banned from participating in federal healthcare programs after a KV subsidiary pled guilty to two counts of criminal fraud for failing to report to the FDA that it was making oversize tablets that could be harmful to patients.27 And although in 2011 the OIG sought to exclude Howard Solomon, chairman of Forest Laboratories, the agency elected to drop the action later that year.28

3. OIG Guidance

On October 20, 2010, the OIG released guidance regarding what factors it will consider when determining whether to implement its permissive exclusionary authority. 29 Individuals with an ownership or controlling interest in a sanctioned entity may be excluded if they knew or should have known of the conduct that led to sanctions, whereas officers and managing employees, which includes a general manager, business manager, administrator or director,30 may be excluded based solely on their position within the entity.31 Thus, there is no knowledge element with respect to officers and managing employees.

Although the OIG has announced that it does not intend to exclude all officers and managing employees, the agency will operate with a presumption in favor of exclusion when there is evidence that the officer or managing employee knew or should have known of the conduct.32 The presumption may be overcome if the OIG finds significant factors that weigh against exclusion.33

In the absence of evidence that the individual knew or should have known of the conduct, the OIG will consider the following factors:

• Circumstances of the misconduct and seriousness of the offense;
• Individual’s role in the sanctioned entity;
• Individual’s actions in response to the misconduct; and
• Information about the entity.34

In regards to the second factor, the OIG will focus on (i) the individual’s position during the time of the misconduct, (ii) the individual’s degree of managerial control or authority in the position, (iii) the relation of the individual’s position to the misconduct, and (iv) whether the conduct occurred within the individual’s chain of command. For the third factor, the OIG will consider (i) whether the individual took steps to stop the underlying misconduct or mitigate the ill effects of the misconduct, (ii) whether such actions took place before the individual had reason to know of an investigation, (iii) whether the individual disclosed the misconduct to the appropriate federal or state authorities, and (iv) whether the individual cooperated with investigators and prosecutors and responded in a timely manner to lawful requests for documents and evidence.35 If the individual can demonstrate that it was impossible to prevent the misconduct or that the individual exercised extraordinary care but still could not prevent the misconduct, the OIG may weigh this evidence against exclusion.36

4. Defense to the RCO Doctrine

The only defense to the RCO doctrine is objective impossibility. In Park, the Supreme Court indicated that a defendant can present evidence that he was “‘powerless to prevent or correct the violation.”37 In cases after Park, defendants have argued that despite having exercised “extraordinary care,” it was impossible for them to prevent the violations.38 As set forth above, the OIG similarly recognizes the impossibility defense in exclusion actions. It should be noted, however, that courts have been hostile to delegation arguments made by executives in support of the impossibility defense.39

Because the impossibility defense offers scarce protection, commentators suggest that that the best defense against RCO liability is implementing a comprehensive compliance program.40 According to compliance guidance from the OIG, at a minimum, an effective compliance program should include the following seven elements:

• The development and distribution of written standards of conduct, as well as written policies and procedures that promote the entity’s commitment to compliance;
• The designation of a chief compliance officer and compliance committee charged with the responsibility of operating and monitoring the compliance program;
• The development and implementation of regular, effective education and training for all pertinent employees;
• The maintenance of a hotline or other process to receive complaints, and the adoption of procedures to protect the anonymity of complainants and whistleblowers from retaliation;
• The development of a system to respond to allegations of improper/illegal activities and the enforcement of appropriate disciplinary action against employees who have violated internal policies, statutes, regulations or other requirements of federal health care programs;
• Regular audits or evaluations to monitor compliance; and
• Investigation and remediation of compliance issues.41

In fact, Inspector General Daniel Levison recently recommended that every hospital have an effective compliance program, which “promote[s] the prevention, detection and resolution of actions that do not conform to federal and state law.”42 The Inspector General has made it clear that a successful compliance plan “establishes a culture of ethical and legal standards of behavior” and that the OIG expects hospital and hospital system boards to take “active roles” in areas such as compliance.43 According to the Inspector General, a board’s “commitment to and promotion of ongoing [compliance] efforts greatly enhances their opportunity for success.”44

Given the heightened risk of RCO doctrine prosecutions, insurance providers have recently unveiled policies to cover the costs associated with RCO investigations and related enforcement actions and administrative debarment/exclusion proceedings.45 Executives can even recover a portion of their annual salary under the policy.46 However, rather than relying on insurance policies, the best line of defense for executives is corporate compliance.

5. Conclusion

Although the OIG has not yet aggressively applied its permissive exclusion authority to hospitals and health systems, the agency’s recent exclusion efforts subject officers, managing employees and general counsel of hospitals and health systems to RCO-type exposure.47 As such, these individuals should stay educated about the risks associated with the RCO doctrine and, as explained above, implement effective compliance programs to deter liability. The risks are too great to overlook the importance of compliance. Attorneys for hospitals and health systems will certainly find no measure of added comfort in the knowledge that the OIG has yet another enforcement tool that it appears willing to utilize.

For more information please contact a member of our Health Care group or call 208.344.6000

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*Article published in the June/July 2012 edition of The Advocate.

1. Michael Peregrine et al., Coming on Strong: The Responsible Corporate Officer Doctrine, Am. Health Lawyers Ass’n, In-House Counsel & Bus. L. & Governance Practice Groups, Feb. 2011, at 1, available at http://www.mwe.com/info/pubs/AHLA_0211.pdf [hereinafter Peregrine, Coming on Strong].
2. See id. at 1–2. 
3. 320 U.S. 277 (1943).
4. 21 U.S.C. § 301 et seq.
5. United States v. Buffalo Pharmacal Co., 131 F.2d 500, 501 (2d Cir. 1942), rev’d, 320 U.S. 277, 285 (1943).
6. United States v. Dotterweich, 320 U.S. 277, 279 (1943).
7. See id. at 285.
8. Id. at 280–81.
9. 421 U.S. 658 (1975).
10. Id. at 662–63.
11. Id.
12. Id. at 664.
13. United States v. Park, 499 F.2d 839, 841–42 (4th Cir. 1979), rev’d, 421 U.S. 658, 678 (1975).
14. Id. at 842.
15. United States v. Park, 421 U.S. 658, 672 (1975). 
16. United States v. Purdue Frederick Co., Inc., 495 F.Supp.2d 569, 573 (W.D. Va. 2007).
17. 42 U.S.C. § 1320a-7(b). 
18. Pub. L. No. 105-33, 111 Stat. 324. 
19. The Effect of Exclusion from Participation in Federal Health Care Programs, Special Advisory Bull. (Office of the Inspector Gen. for the Dep’t of Health and Human Servs.), September 1999, available at http://oig.hhs.gov/fraud/docs/alertsandbulletins/effected.htm.
20. Friedman v. Sebelius, 755 F. Supp. 2d 98 (D.D.C. 2010).
21. Michael Clark, The Responsible Corporate Officer Doctrine, J. of Health Care Compliance, Jan.– Feb. 2012, at 8.
22. Brief for Ass’n of Corporate Counsel as Amicus Curiae Supporting Appellants, Friedman v. Sebelius (No. 11-5028), available at http://www.acc.com/vl/public/AmicusBrief/upload/ACCAmicusFriedmanvSebelius.pdf.
23. Press Release, United States Department of Justice, International Medical Device Maker and Four Executives Charged in Connection with Unlawful Clinical Trials (Jun. 16, 2009), available at http://www.justice.gov/usao/pae/News/2009/jun/synthesrelease.pdf.
24. Press Release, Office of the Inspector General for the Department of Health and Human Services, Nursing Home Executive Agrees to Permanent Exclusion In Settlement with OIG (Jul. 13, 2009), available at http://oig.hhs.gov/publications/docs/press/2009/hhs_oig_bernabe_exclusion_release.pdf.
25. Id.
26. Id.
27. Tom Herrmann, The New OIG “Responsible Corporate Officer Doctrine,” J. of Health Care Compliance, Jan.–Feb. 2011, at 50, available at http://www.compliance.com/wp-content/files_mf/jhcc_0111_herrmann.pdf. 
28. Press Release, Office of the Inspector General for the Department of Health and Human Services, OIG Fact Sheet on Forest Laboratories, Inc., and the Inspector General’s Exclusion Authorities (May 10, 2011), available at http://oig.hhs.gov/publications/docs/press/2011/factsheet_051011.asp.
29. Press Release, Office of the Inspector General for the Department of Health and Human Services, Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act (Oct. 20, 2010), available at http://oig.hhs.gov/fraud/exclusions/files /permissive_excl_under_1128b15_10192010.pdf.
30. Id.
31. Id.
32. Id.
33. Id.
34. Id.
35. Id.
36. Id.
37. United States v. Park, 421 U.S. 658, 673 (1975).
38. See, e.g., United States v. New England Grocers Supply Co., 488 F. Supp. 230, 235 (D. Mass. 1980).
39. See, e.g., State v. Rollfink, 475 N.W.2d 575, 580 (Wis. 1991).
40. See, e.g., Peregrine, Coming on Strong, at 8–9; Lisa Krigsten, Criminalizing Management Decisions: Prosecuting the Responsible Corporate Officer, 11 ABA Crim. Litig. 7, 8–9 (Fall 2010), available at http://www.huschblackwell.com/files/Publication/3f25e3ce-7f03-408a-aa21-1252fcf5ead7/Presentation/PublicationAttachment/d9897859-eec5-4a90-ba03-143f1b57d08f/Krigsten_CriminalLitigation2010.pdf.
41. Compliance Program Guidance for Hospitals, 63 Fed. Reg. 8987, 8989 (Feb. 23, 1998).
42. Daniel Levinson, Trustee Engagement and Hospital Success, Trustee Mag., July 2010.
43. Id. 
44. Id. 
45. Gregory Schwab, Insuring Against Responsible Corporate Officer Liability, martindale.com (Mar. 26, 2012), http://www.martindale.com/corporate-law/article_Saul-Ewing-LLP_1484722.htm.
46. See id.
47. Peregrine, Coming on Strong, at 1.