Friday, September 16, 2011

Respondeat Superior in Reverse?

It's a well-established principle that companies are liable for the damages caused by the authorized actions of their employees. Employment law consists of virtually nothing else, save for those relatively rare occasions when a supervisor is sued in his individual capacity for some type of personal tort against an employee. Think assault, battery, defamation, etc.

It's a particularly nasty turn of events when individual management personnel, however, are found liable for the actions of their companies. And it's even worse when the issue of liability in no way turns on whether the corporate officer knows or had any involvement in the illegal activities of others in the company.

But that's the current status of the law under something called the "responsible corporate officer" doctrine, a prosecutorial theory that is reviving under the current administration. Frequently cited as "RCO", the theory provides an extremely powerful tool for prosecutors because it imposes individual liability on corporate officers without the need to show that the officers themselves had any unlawful intent, acted negligently, participated in the wrongdoing, or even had knowledge of the specific federal violation alleged. An RCO prosecution seeks to prove two very simple propositions: the corporate executive was in a position of responsibility and authority in the company such that she had the capacity to prevent the wrongdoing, and that the manager failed to prevent a violation of federal law or regulation.

The RCO doctrine has had its principal application in the food and drug industry (although there have been some rumbles of it in SEC prosecutions). In fact, the doctrine originated in a 1943 Supreme Court case involving violations of the Food, Drug, and Cosmetic Act, and resulted in the conviction of  the president and general manager of a pharmaceutical operation, whose company was repackaging and shipping unadulterated and misbranded drugs.

The government has currently expanded its RCO focus into the realm of health care criminal prosecution. The Commissioner of the Food and Drug Administration recently noted that the agency was seeking to increase the use of misdemeanor prosecutions with the specific intent of holding corporate officers responsible for the actions of their companies. In January, 2011, the FDA issued new guidelines laying out the threat of RCO prosecutions to hold liable corporate officers "for a first-time misdemeanor (and possible subsequent felony) under the [FDCA] 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."

In addition to the potential criminal penalties, there are significant financial issues associated with a conviction under the RCO. Individuals convicted of health care-related crimes are typically excluded from involvement in any federal health care programs. Moreover, any company employing such an individual as an officer, director, agent or management employee is also subject to the exclusion. The ramifications are obvious-any person convicted under this doctrine becomes effectively unemployable in the healthcare field, unless working in that rare facility that does not receive federal funding, even in the form of Medicaid or Medicare funds. And in case you think the feds are kidding about this, HHS recently barred three senior executives of a pharma company-including the general counsel-convicted under the RCO doctrine of drug misbranding, from participation in all federal health care programs for 12 years.

So those of you in the healthcare and pharmaceutical industries can add this to your list of compliance issues. What's most disturbing from a due process perspective is that the best intentioned compliance program in the world is not going to save company senior management if a violation actually occurs. Given the increased federal focus on healthcare management and delivery, the recent expansion of the RCO doctrine is a worrisome development.

UPDATE on the Perdue Pharma case here.

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