The August 5, 2011 announcement by Forrest Labs Inc. that the Department of Health and Human Services Office of Inspector General (OIG) was ending its investigation of excluding president and chief executive officer Howard Solomon from participating in federal healthcare programs should not be seen as an indication that federal regulators are backing off on the issues raised by the matter. (See the Pharma Beat column in the July/August 2011 issue of Contract Pharma for more on this topic.)

Rather, industry should look to OIG’s statements and guidance documents on the issue of executive responsibility for violations of the Federal Food, Drug and Cosmetics Act (FDCA) for a sense of the seriousness with which the government takes this issue. In short, the message from the Solomon matter should be that OIG devoted considerable time and resources to develop guidelines for prosecuting executives for FDCA violations committed by their companies — and it is not afraid to use them. 

The Social Security Act and OIG’s Enforcement Criteria

The Social Security Act authorizes OIG to exclude an individual owner, officer, or managing employee of an entity that has been convicted of certain offenses or excluded from participation in the federal healthcare programs (a “sanctioned entity”). Exclusion from federal healthcare programs results in the government refusing to pay for an item or service furnished, ordered, or prescribed by the excluded individual, effectively banning him or her from the healthcare industry. Exclusion under the Act is permissive, giving OIG tremendous discretion in determining whether or not to exclude, and the presumption of exclusion may be overcome if
OIG determines significant factors weight against the action. There are two different bases for permissive exclusion:

• Owners: Those with an ownership or control interest in a sanctioned entity may be excluded if they knew or should have known of the conduct that led to the sanction.1

• Officers and Managers: Those who exercise operational or managerial control over the entity or who directly or indirectly conduct the day-to-day operations of the entity may be excluded based solely on their position within the entity.2

The distinction between the two groups is important because, in the latter group, knowledge of the conduct is not required.

The law provides OIG with a powerful enforcement tool due to the unique public harm associated with violations of the FDCA. Although intimidating, OIG has rarely utilized or even suggested it would exercise its permissive exclusion power in the last 30 years. More recently, however, OIG has changed course — proactively informing the pharmaceutical industry that it intends to do so, effectively warning responsible corporate officers and managers of the potential for liability when an entity is sanctioned. OIG’s focus on its exclusion power comes on the tail of record-breaking monetary settlements during the end of the last decade — including Pfizer’s settlement for $2.3 billion in 2009, top 10 fraud recoveries in 2010 coming from the pharmaceutical industry, and OIG reporting expected recoveries of $3.4 billion at the 2011 mid-year point — as the government became concerned that extraordinary monetary penalties were being viewed as simply the “cost of doing business.” In October 2010, FDA’s deputy chief for litigation in the Office of Chief Counsel opined, “to the extent the government is unable to capture all lost profits and impose additional meaningful deterrence, these (previous off-label marketing) settlements provide an inadequate deterrent.” 

In October 2010, OIG released enforcement guidance on when it would exercise its permissive exclusion power with respect to officers or managing employees in the absence of evidence that the person knew or should have known about the misconduct.3 While OIG asserts its authority to exclude every officer and managing employee of a sanctioned entity, it clarifies in the guidance that it intends to favor exclusion of those who knew or should have known of the conduct for which the entity was sanctioned. This discretion may hearten officers and managers, but it also underscores the importance of the knowledge requirement in distinguishing the two groups forming the bases for exclusion. The guidance document outlines what categorical factors OIG will consider in determining which officers and managers warrant exclusion based solely on their position: the circumstances of the misconduct and the seriousness of the offense, the individual’s role in the sanctioned entity, the individual’s action in response to the entity’s misconduct, and information about the entity. 

OIG Exclusion of Officers 

OIG reliance on its exclusions authority has manifested itself over the last few years, presenting an evolution in government reliance on a finding of individual liability with regard to the entity’s misconduct as demonstrated by the following notable cases. 

Purdue Frederick

In 2007, OIG excluded three Purdue Frederick executives from participating in federal healthcare programs. In this case, each executive had been individually charged and pled to misdemeanor charges. In their plea deal with the criminal court, the executives acknowledged that they served as responsible corporate officers and had “responsibility and authority to prevent in the first instance or to promptly correct certain conduct resulting in the misbranding of a drug introduced or delivered for introduction into interstate commerce.” The executives received a fine and were placed on probation. After the criminal case concluded, OIG excluded the executives for 12 years based on their position within the sanctioned company, relying on the statements made in the plea deal. The Purdue Frederick executives are currently appealing their exclusion, arguing, among other things, that OIG did not prove they were officers in a position to prevent the underlying illegal conduct. 

KV Pharmaceutical Co.

In March 2010, the KV subsidiary Ethex Corporation was convicted for failing to report manufacturing violations. In November 2010, one month after issuance of its guidance, OIG excluded Marc Hermlin, KV’s chairman, chief executive officer, and controlling shareholder, using its permissive authority. At the time of Mr. Hermlin’s exclusion, there was no apparent individual culpability for FDCA violations; however, individual actions had apparently been underway as Mr. Hermlin pled to two misdemeanor FDCA violations four months after his exclusion. 

Forest Laboratories

In April 2011, OIG issued a 30-day show cause letter as to why it should not exclude president and chief executive officer Howard Solomon from federal healthcare programs for FDCA violations committed by his company, which was sanctioned about a month earlier. In summary, the U.S. Department of Justice brought civil and criminal suits against Forest in 2009, alleging improper conduct ranging from off-label promotion to physician kickbacks. According to the government’s complaint, Forest allegedly marketed certain drugs for off-label pediatric use when they had been approved for adult use only by, among other things, disseminating positive study results on pediatric use while failing to disclose the negative study results for the same pediatric use. The government’s complaint alleged that Forest senior executives were complicit in the decision not to share the negative study results with internal or external audiences. In March 2011, Forest settled with the government for $313 million in both criminal and civil penalties. The government had not brought individual charges against a Forest officer or manager. The following month, however, OIG issued the 30-day show cause letter to Mr. Solomon. Unlike the previous examples of executive exclusion, he had not been individually charged with violating the FDCA. 

On August 5, 2011, OIG ceased its investigation after reviewing information provided by Mr. Solomon and information it had on file, and conducting discussions with Mr. Solomon’s attorneys. By foregoing exclusion, OIG demonstrated how the presumption of exclusion may be overcome; while documents are not yet public one can assume that OIG determined significant factors weighed against the action. Appar-ently relevant information countered the allegations and the government was given sufficient information to convince it not to exclude him, including that the risk to patients was low, the percentage of off-label promotion was low, that Mr. Solomon had limited involvement in the misconduct, and that he himself had proactively promoted compliance at Forest, strengthening the compliance program prior to the start of government investigations. 

Lessons for the Future 

While OIG’s motives or reasons for dropping its latest exclusion attempt may remain a mystery, the ramifications of merely sending the show cause letter are not. During the six-month investigatory period, shockwaves penetrated the industry, producing debates including what company officers and management can and should do. Perhaps OIG did not need to proceed to achieve its objective. 

The government’s movement to exclude an officer without having individually charged the executive with committing FDCA violations, as in Mr. Solomon’s case, should be a warning signal that the government doesn’t believe that hefty fines and penalties are solving its enforcement problem. The government is aware that rogue employees will perform illegal acts that place a company at risk from time to time, but is also focusing more acutely on individuals’ responsibilities in preventing and managing risks. To that end, the government, from a permissive exclusion perspective, will ultimately judge a company’s management on its implementation and execution of robust compliance policies and procedures to deftly detect and correct those illegal acts once they occur.  

References

1 42 U.S.C. § 1320a-7(b)(15)(A)(i).

2 42 U.S.C. § 1320a-7(b)(15)(A)(ii).

3 Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act, Department of Health and Human Services, Office of the Inspector General (Oct. 19, 2010).

Colleen Heisey is a partner in the Washington, D.C. office of Hunton & Williams LLP (www.hunton.com) in the Firm’s Food and Drug Practice. She can be reached at [email protected]. 

Dennis Chase Gucciardo, J.D. is an associate in the firm’s Food and Drug Practice.