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July 25 — Drug and device industry executives should pay close attention to a recent Eighth Circuit ruling upholding prison sentences for corporate executives for food and drug law misdemeanors ( United States v. DeCoster, 2016 BL 216013, 8th Cir., Nos. 15-1890, 1891, 7/6/16 ).
On July 6, the U.S. Court of Appeals for the Eighth Circuit upheld three-month prison terms for Austin and Peter DeCoster, executives of Quality Egg LLC, a commercial farm in Iowa, for a misdemeanor food safety crime. The DeCosters had pleaded guilty in 2014 to shipping Salmonella-tainted eggs that sickened thousands of people.
The majority's imposition of jail terms for the two Quality Egg LLC executives for a non-intent, strict liability crime should concern life sciences corporate officers, not just food company executives, lawyers told Bloomberg BNA.
Although the DeCosters asserted that their three-month sentences were unconstitutional, in a 2-1 decision, Judge Diana E. Murphy, writing the majority opinion for the appeals court, said the “relatively short” three-month sentences imposed on the DeCosters didn't violate either their Eighth Amendment or their due process rights.
Law professor Patricia J. Zettler told Bloomberg BNA that the courts' rationale for imposing and upholding prison sentences in this case “would apply equally to medical products executives guilty of similar criminal conduct that raises similarly grave public health concerns.” Zettler is an associate professor at Georgia State University College of Law in Atlanta.
Indeed, the Pharmaceutical Research and Manufacturers of America, a Washington lobbying group representing the drug industry, filed an amicus brief in the case. In its brief, co-authored with the U.S. Chamber of Commerce, PhRMA warned that jailing corporate officers for non-intent crimes would lead executives to make decisions out of fear rather than based on sound business principles.
In its brief, PhRMA also said sending executives to jail deterrence “merely because a violation happens on their watch” accomplishes little in the way of deterrence.
“The fact that the Pharmaceutical Research and Manufacturers of America (PhRMA) submitted an amicus brief in support of the DeCosters highlights that this case, and its ultimate outcome, is of interest to life sciences corporate officers,” Zettler said.
Jail terms for such strict liability offenses could become more frequent, Cory Andrews, senior litigation counsel at the Washington Legal Foundation, a public interest law firm with a free-market orientation, said.
“Food and Drug Administration officials give every indication they view the draconian penalties imposed in this case, which include prison terms, as a model for similar cases,” Andrews said.
Like PhRMA, the WLF also filed an amicus brief in the case supporting the DeCosters. The WLF urged the appeals court to reject the DeCosters' jail sentences.
Unlike most criminal statutes, the Federal Food, Drug, and Cosmetic Act (FDCA) is a strict liability statute. That means it doesn't include a “mens rea” or criminal intent requirement on the part of a defendant, so entirely unintentional—even unknowing—conduct can lead to liability.
The DeCoster case shines a spotlight on the interplay between the strict liability nature of food and drug law violations and its interplay with the “responsible corporate officer” (RCO) doctrine.
Under the RCO doctrine, also known as the Park doctrine, certain individuals with key corporate oversight responsibilities can be held responsible for fraud and abuse at their companies even if they didn't have any personal knowledge of the fraud.
The RCO doctrine grew out of two decisions, United States v. Dotterweich, 320 U.S. 277 (1943) and United States v. Park, 421 U.S. 658 (1975). The U.S. Supreme Court, in those two cases, upheld executives' liability for employees' violation of misdemeanor public welfare statutes that lacked an intent requirement.
In DeCoster, the majority opinion said the DeCosters were criminally liable for failing to prevent or remedy “the conditions which gave rise to the charges against them.”
And that conclusion should worry drug and device company executives, some defense lawyers say.
“As a practical matter, the majority's opinion should give further pause to corporate officers in heavily regulated industries as it sanctions prison sentences for executives despite the lack of mens rea,” Ty E. Howard of Bradley Arant Boult Cummings LLP in Nashville, Tenn., told Bloomberg BNA. Howard is a former state and federal prosecutor.
“The majority suggests that the defendants' liability was not ‘vicarious' because it stemmed from their ‘failure to prevent' the conditions that gave rise to the charges, rather than solely due to the acts or omissions of others,” Howard said.
Similarly, a concurrence filed by Judge Raymond W. Gruender found that the DeCosters acted negligently, he said.
But, Howard said, “Those distinctions, particularly in a large corporation with diffuse operations, seem particularly difficult to draw and will provide little comfort to executives.”
In addition, the majority's conclusion in DeCoster that the “relatively short” jail terms wouldn't “gravely damage” the DeCoster's reputations may not apply in the case of corporate executives in the life sciences field.
“[T]he majority assumes that a misdemeanor conviction and incarceration for less than a year would not subject a defendant ‘to any burden beyond the sentence imposed,'” Maura K. Monaghan, a lawyer with Debevoise & Plimpton LLP in New York, told Bloomberg BNA. “For life science executives, that may not be true.”
That's because, in the health care field, executives convicted of a misdemeanor under the Park Doctrine may be subject to exclusion from federal health-care programs such as Medicare, she said.
“The Inspector General for the Department of Health and Human Services may use the RCO conviction as the basis to exclude the RCO from participation in federal health care programs for a lengthy period of time, as happened with the Purdue Pharma executives in 2007,” Monaghan said.
In 2007, Purdue Pharma LP settled claims that it had unlawfully misbranded the drug OxyContin. The company paid $600 million, and pleaded guilty to a felony misbranding charge. Three former senior executives also pleaded guilty to misdemeanor misbranding under the Park doctrine in connection with this matter.
After their guilty pleas, the Department of Health and Human Services excluded all three executives for 12 years.
“Such exclusions effectively make it impossible to continue working in the health-care industry and thus may impose a severe burden for many years,” Monaghan said.
Some lawyers say that the DeCoster decision might affect defendants' willingness to enter into plea agreements.
Howard said the DeCoster case “may lead to fewer plea agreements and stipulated facts in Park prosecutions.”
Zettler observed that the government didn't seek a prison sentence in the DeCoster case but instead left that to the discretion of the court.
“To the extent there was an assumption that, in such circumstances, a court would not use its discretion to impose prison time on executives who plead guilty, this decision raises questions about the validity of that assumption, and may change the dynamics of plea negotiations,” she said.
Monaghan agreed. “Given the risk of prison, some defendants may have a stronger incentive to risk trial rather than accept a plea agreement—particularly if they can establish that they were far removed from the violation and had no reason to know about it,” she said.
Howard observed that even though the plea agreement in the DeCoster case “contained a limited and benign factual recitation” of events, the DeCosters received jail time anyway.
The district court “seemed more swayed by heated government arguments” in the case than by the plea agreement, Howard said. Indeed, in the plea agreement, the DeCosters didn't admit to knowing about the Salmonella contamination.
“To the extent executives and their attorneys relied on limited or ‘sanitized' facts in a plea agreement to limit their sentencing exposure without more formalized limitations, DeCoster suggests that such reliance may be misplaced,” Howard said.
Strict liability crimes under the FDCA have been around for decades, but the number of prosecutions for such offenses has been rising.
Jennifer L. Bragg, a defense attorney with Skadden, Arps, Meagher & Flom LLP in Washington, told Bloomberg BNA that there has been an enforcement uptick. Bragg was an assistant chief counsel with the FDA's office of chief counsel from 1998 to 2003.
“Broadly speaking, there is an increased desire by the federal government to hold individuals responsible when there is wrongdoing within an organization,” Bragg said.
The focus on individual liability in food safety and other corporate prosecutions gained steam as a result of a Justice Department memorandum on corporate prosecutions. That directive, issued by Deputy Attorney General Sally Q. Yates in 2015, urged assiduous investigation of alleged corporate misconduct in “seeking accountability from the individuals who perpetrated the wrongdoing.”
The directive, which has come to be known as the Yates Memo, provides powerful incentives for prosecutors to focus even more on individual prosecutions, Howard said.
Indeed, the Justice Department has said “they're going after individuals and they're going to climb the corporate chain as far as they can,” Rena Steinzor, a professor at the University of Maryland School of Law in Baltimore, told Bloomberg BNA.
Moreover, because proving criminal intent, especially in corporate fraud cases, can be very hard because conduct is diffused throughout an organization, prosecutors may view FDCA cases as especially attractive, Howard said. Not only do such cases require a much lower standard of proof, but they also have the ability to reach high-level executives through the Park doctrine, he said.
The prosecution trend—and its relationship to the responsible corporate officer doctrine—has the food and drug industries worried.
The FDA “is obviously seeking to test the outer boundaries of Park doctrine liability,” the WLF said in its amicus brief in the DeCoster case. “This disturbing trend marks a radical shift in the government’s reliance on strict liability offenses,” it said.
“Bootstrapping a strict liability misdemeanor offense in order to deprive business defendants of their basic liberty is not only fundamentally unfair, but it will impose unjustified risks on the larger business community,” the WLF said. “If this trend continues, it will become intolerably risky to be an executive in the food and drug industries in the United States.”
Nonetheless, it's not all bad news for corporate defendants, Monaghan said.
Although the majority decision affirms the government’s interpretation of Park as not requiring a responsible corporate officer to be aware of the food and drug law violation, the particular situation in DeCoster is likely to be different from scenarios at larger corporate enterprises.
The majority opinion, Monaghan observed, identified a direct connection between the DeCosters and the relatively small food company they operated. By contrast, she said, “If the government is trying to prosecute a pharmaceutical CEO as a result of wrongdoing that occurred at the other end of a far-flung corporate enterprise, the CEO may have a strong argument that the government has no basis to bring a criminal prosecution solely because of the CEO’s position at the company.”
The DeCoster decision, she said, does “offer new avenues of defenses for executives who are charged as RCOs.”
Two out of the three judges on the appeals court panel “rejected the notion that an RCO can be convicted and imprisoned just by virtue of his or her place in the corporate hierarchy,” she said.
The dissent, filed by Judge C. Arlen Beam, said the evidence in the case failed to show the “guilty mind” on which prison sentences must be based.
Meanwhile, Gruender's concurrence “seemed to base its affirmance on the district court’s conclusion that the DeCosters were actually, personally culpable,” the WLF's Andrews said.
Gruender said he would have reached a different result had there been no evidence of negligence on the part of the DeCosters.
According to Monaghan, the views of the concurring and dissenting judges in DeCoster “may be helpful to future RCO defendants who can establish that they did not know about an FDCA violation and did not act negligently or with a ‘guilty mind.' ”
“As a matter of legal doctrine, that view—that a prison term requires proof of actual blameworthiness—should be welcomed by all industry executives who are named as defendants in cases where the Responsible Corporate Officer Doctrine is the only legal theory of criminal prosecution,” Andrews said.
Legal experts are divided on how the Eighth Circuit's ruling will ultimately play out and how far-reaching the effects of the Eighth Circuit's DeCoster ruling will be.
In Steinzor's view, “the case is not going to have a lot of precedence.”
“It's a complete outlier,” she said, noting that the DeCosters pleaded guilty in the case.
The DeCosters, Steinzor said, weren't hapless senior executives who didn't know what was going on at their company. Indeed, she said, the DeCosters admitted that they received multiple test results showing Salmonella contamination at their facilities.
The DeCosters' company, Quality Egg, pleaded guilty to the charge of bribing a public official to approve the shipment of tainted eggs.
“It's almost like they sterilized it; they stripped out all the facts and just presented the legal issues,” she said of how the DeCosters presented their case.
The fact that each of the three judges on the panel wrote a separate opinion in DeCoster shows that the decision may not shed much new light on the limits of the responsible corporate officer doctrine, Zettler, Howard and Monaghan said.
“Because each judge wrote a separate decision, I think it would be a stretch to say that this decision provides significant new clarity about the responsible corporate officer doctrine,” Zettler said.
“It remains unsettled whether a Park prosecution resulting in a jail sentence requires a guilty mind, negligence, or something less than negligence but more than pure vicarious liability,” Howard said.
And Howard said, the three opinions' differing analyses of the legal and policy issues with responsible corporate officer prosecutions generally and such prosecutions under the FDCA show just how unsettled this area of law is.
“The decision does not provide any additional clarity on what the government must show because the majority decision reflected the government’s interpretation of Park and the concurring and dissenting opinions had different ideas about what the government must show,” Monaghan said.
“Given the different opinions, and the facts of this case, I don’t think we can draw solid conclusions about precisely what state of mind is necessary to impose a prison sentence,” Zettler said.
“That said, this decision does offer hints,” she said. “It certainly seems to suggest that the case for a prison sentence is stronger when there is evidence of at least negligence, and weak when there is no evidence of any mens rea.”
It's also unclear whether the appeals court may rehear the case.
The DeCosters have until Aug. 3 to file a petition for rehearing—before the three-judge panel or the entire membership of the U.S. Court of Appeals for the Eighth Circuit.
“Particularly because each of the three Eighth Circuit judges on the panel wrote a separate opinion, it would not surprise me at all if the DeCosters seek en banc review and/or petition the Supreme Court,” Zettler told Bloomberg BNA.
But Monaghan said the likelihood of such review is low. “While the defendants may attempt to continue pursuing their appeal, their case is unlikely to be heard en banc or by the Supreme Court,” she said.
“The scope of the Park doctrine is most likely to be revisited by the Supreme Court in a case in which the RCO can establish that he or she had no reason to be aware of the FDCA violation, but still was sentenced to prison,” she said.
Meanwhile, industry groups are pursuing legislative efforts to abolish strict liability from all federal law, including the FDCA.
Two bills introduced in Congress in late 2015, S. 2298, also known as the Mens Rea Reform Act of 2015, and H.R. 4002, the Criminal Code Improvement Act of 2015, would supply a default criminal intent standard for federal criminal offenses that currently don't speak to what state of mind is needed to convict a defendant of a crime. Sen. Orrin Hatch (R-Utah) introduced S. 2298 and Rep. James Sensenbrenner (R-Wis.) introduced H.R. 4002.
An industry coalition, including PhRMA and the U.S. Chamber of Commerce, is backing the legislative efforts, Steinzor said. She said the coalition is likely using the loss in DeCoster as a way to boost the bills pending in Congress.
“They want to be able to go to Congress and say, ‘The courts aren't helping us so you need to do something.' ”
The bills would “basically get rid of strict liability, even for public welfare offenses,” Steinzor said.
Neither bill has made it to a floor vote.
To contact the editor responsible for this story: Brian Broderick at email@example.com
The Eighth Circuit decision is at http://src.bna.com/gz1.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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