Federal Law Allows Guilt By Association

Connecticut Law Tribune

Imagine a hospital's assistant administrator submits millions of dollars in false claims to the Medicare program. Would the administrator face criminal liability if he had no knowledge of the criminal conduct of the assistant? The answer to this question is likely "yes."

If you answered "no," keep reading to learn about the resurgence of the responsible corporate officer doctrine (RCOD) in health care. If you answered "maybe" or "yes," keep reading to discover preventive tools to avoid facing this type of liability.

The RCOD (a.k.a. Park doctrine) is a Supreme Court-established strict liability theory which sets forth "that a responsible corporate official can be held liable for a first-time misdemeanor (and possible subsequent felony) . . . without proof that the corporate official acted with intent or even negligence, and even if such corporate official did not have any actual knowledge of, or participation in, the specific offense." (FDA Regulatory Procedures Manual, Section 6-5-3.) This is counter-intuitive to a traditional criminal matter where there is a requirement of scienter or mens rea (a.k.a. guilty mind).

This doctrine emerged in the 1940s, was clarified in the 1970s and expanded in the 1990s in connection with public welfare-based statutes designated to protect and safeguard the public from adulterated drugs, contaminated food and polluted water. U.S. v. Dotterweich, 320 U.S. 277 (1943); U.S. v. Park, 421 U.S. 658 (1975); U.S. v. Iverson, 162 F. 3d 1015 (1998). The rationale was that a corporate officer should face liability when he possessed the authority to prevent or correct such a health and safety violation and failed to take action to do so.

RCOD has recently been expanded to include health care violations. Assistant Attorney General Tony West, in a speech on November 2, 2011 at the Annual Pharmaceutical Regulatory and Compliance Congress, stated that "since May 2009, when the president formed the Health Care Fraud Prevention and Enforcement Action Team or 'HEAT,' aggressively battling health care fraud has been a cabinet-level priority." West further stated that "demanding accountability means we will consider prosecutions against individuals, including misdemeanor prosecution under the Park doctrine. . ." A logical extension of the Justice Department's position is that the Affordable Care Act may be interpreted by the government to be a public welfare statute.

There appear to be altruistic, public welfare, criminal deterrent and financial reasons for this resurgence:

  • As West stated in a Justice Department Press Release, No. 11-306: "We will hold corporate executives responsible when company profits are pursued at the expense of consumer safety."
  • Lewis Morris, chief counsel to the Inspector General of HHS, in his statement to the House Committee on Ways and Means explained: "Some hospital systems, pharmaceutical manufacturers, and other providers . . . believe that they are 'too big to fire'. . . . We are concerned that the providers that engage in health care fraud may consider civil penalties and criminal fines a cost of doing business. . . . One way to address this problem is to attempt to alter the cost-benefit calculus of the corporate executives who run these companies."
  • In addition to a year in prison, a RCOD conviction can result in the corporate officer being excluded from participating in federal and state health care programs, the equivalent of the so-called employment "death penalty."
  • The New York Daily News reported on March 12, 2013 that "over Obama's first four years in office, his administration recouped $14.9 billion in health-care fraud in government programs."

Misdemeanor Misbranding

As the U.S. District Court of Appeals for the District of Columbia explained in Friedman v. Sebelius, 686 F.3d 813, 816-17 (2012): "Criminal liability under the RCO doctrine extends not only to those corporate agents who themselves committed the criminal act, but also to those who by virtue of their managerial positions or other similar relation to the actor could be deemed responsible for its commission. A corporate officer may therefore be guilty of misdemeanor misbranding without knowledge of, or personal participation in, the underlying fraudulent conduct."

The Food and Drug Administration's Regulatory Procedures Manual now contains a new section (Section 6-5-3) on RCOD prosecution, which provides the following guidance to prosecutors: "When considering whether to recommend a misdemeanor prosecution against a corporate official, consider the individual's position in the company and relationship to the violation, and whether the official had the authority to correct or prevent the violation. Knowledge of and actual participation in the violation are not a prerequisite to a misdemeanor prosecution but are factors that may be relevant when deciding whether to recommend charging a misdemeanor violation."

This clearly places pressure on corporate executives. In an FDA Law Update Blog post by Mike Emmick and Joseph Barton, the authors note that a prosecutor no longer will ask the corporate executive what he knew or what he did, but instead will ask what is his position in the company and was this his area of responsibility.

Some recent illustrations of corporate executives charged pursuant to RCOD, found guilty and/or excluded under RCOD:

  • Corporate executives who were responsible for supervisors and employees who misled the public by marketing and promoting a drug "as less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications." U.S. v. Purdue Frederick Co. Inc. 495 F.Supp.2d 569, 571 (2007)
  • Chairman of the board/CEO of a pharmaceutical company whose company introduced misbranded morphine sulfate tablets which contained more active ingredients of the drug than were specified on the label. (Justice Department Press Release, No. 11-306 – KV Pharmaceutical Co. (2011))
  • Compounding pharmacy owner who was responsible for the pharmacy's operations permitted the shipping of super-potent and sub-potent drugs, which were used in injections for treatment of back/neck pain resulting in three patient deaths. (Justice Department Press Release, No. 12-119 — Gary D. Osborn and ApotheCure Inc. (2012).

Meningitis Cases

Following on the heels of the RCOD prosecution of Osborn is the highly publicized recent national meningitis outbreak attributed to New England Compounding Center's unsanitary laboratories. As noted in articles by the Boston Globe and Professor Kathleen Boozang (6 St. Louis University, Journal of Health Law & Policy 77 (2012)), it is likely that the top executives of the New England Compounding Center will be criminally prosecuted under RCOD.

On November 21, 2012, the Globe reported that shortly before the outbreak, "the company sent customers a 'Quality Assurance Report Card' trumpeting the cleanliness of its labs, even as internal tests showed widespread contamination." This past April, The New York Times reported that "more than 50 people died from fungal meningitis and another 680 were sickened after receiving injections . . . of a contaminated steroid made by the New England Compounding Center."

Providing little comfort is the fact that the only recognized affirmative defense to RCOD liability is impossibility. In an article for HCCA Compliance Today, Francis Serbaroli described impossibility to mean "that the corporate officer was 'powerless' to prevent or correct the violation or did in fact exercise extraordinary care." That being said, there are some tools that may assist a corporate executive in avoiding prosecution. The following tools are an amalgamation from articles by Robert T. Rhoad & Brian M. Castro (The Health Lawyer, Vol. 24, No. 5, June 2012) and Francis J. Serbaroli (HCCA Compliance Today, Vol. 13, No. 8, August 2011):

  • Performing background checks prior to hiring employees.
  • Procedures in place for preventing fraud, including a toll free hotline for confidential reporting.
  • Deterrents such as a "zero tolerance" policy for violations of law.
  • Annual recertification to ensure understanding and compliance of policies and procedures.
  • Internal checks – including internal audits and internal monitoring system to identify problems quickly.
  • Most importantly – employees, officers, and executives knowing their job responsibilities and potential liability.

Other tools to convince a prosecutor not to pursue a RCOD case would be to show him that the corporation and its executives satisfied the guidelines for permissive exclusion authority in the FDA Regulatory Procedures Manual and the Federal Sentencing Guidelines for an effective compliance program.

While corporate executives may lament that RCOD is an abuse of prosecutorial discretion or simply not fair, it is the current reality.


Alan J. Sobol is a partner at Pullman & Comley practicing in the White Collar, Criminal Defense and Corporate Investigations, Litigation and Health Care departments. Tiffany K. Spinella is an associate practicing in the firm's Litigation and Property Valuation departments.  Reprinted with permission from the May 20th issue of Connecticut Law Tribune. ©2013 ALM Properties, Inc.  Further duplication without permission is prohibited.  All rights reserved.  

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