D.C. Circuit Decision in Friedman v. Sebelius Overturns Exclusions of Three Purdue Pharma Executives

In the pharmaceutical industry, government investigations initiated by whistleblower qui tam complaints can—and often do—result in both civil and criminal charges against the company. In recent years, such investigations also have increasingly focused on individual corporate executives, either based on the executives’ participation in the misconduct or by virtue of their status as “responsible corporate officers” of the wrongdoing entity. Last week, three executives ensnared in one such investigation scored a key, albeit mixed, victory.

A decision by the D.C. Circuit Court in Friedman v. Sebelius overturned the exclusions of three Purdue Pharma executives from participation in federal healthcare programs, holding that the Department of Health and Human Services (HHS) acted arbitrarily in imposing extraordinarily lengthy exclusions. Notwithstanding this ruling, the court held that HHS has the authority to exclude individuals convicted of a misdemeanor if the conduct underlying the conviction is related to fraud, even if the individual is an executive that had no knowledge of the underlying fraudulent conduct.

Background on the Case

In 2007, Purdue Pharma L.P. and Purdue Frederick Company, Inc. paid $600 million to resolve charges that Purdue Frederick fraudulently misbranded OxyContin as less addictive and less subject to abuse and diversion than other pain medications. As part of the settlement, Purdue Frederick pleaded guilty to a felony misbranding charge. The settlement resolved potential civil liability for allegations that that, based on these misleading claims, Purdue knowingly caused the submission of false claims for OxyContin.

Prosecutors also charged three former senior executives of Purdue— the company’s President and Chief Operating Officer, Executive Vice President/Chief Legal Officer, and Vice President of Worldwide Medical Affairs—with misdemeanor violations of the Food, Drug and Cosmetic Act (FDCA) based on Purdue Frederick’s guilty plea for felony misbranding of OxyContin and the executives’ status as “responsible corporate officers.” HHS’s Office of Inspector General (OIG) subsequently excluded the three executives for 20 years on the ground that their convictions “related to” fraud in the delivery of a healthcare item — a ground for discretionary exclusion.

In an administrative appeal, the HHS Departmental Appeals Board (DAB) upheld the executives’ exclusion. Though the three executives did not admit personal knowledge of this fraud — rather, they admitted only that it had occurred and that they had been “responsible corporate officers” at the time — the DAB determined, nevertheless, that the there was evidence that the executives’ convictions had “related to” fraud. The DAB reduced the length of exclusion to 12 years, however, finding that the OIG had not demonstrated that the underlying conduct harmed any patients. The D.C. Federal District Court affirmed the DAB decision.

D.C. Circuit Opinion

On appeal, a sharply divided panel of the D.C. Circuit affirmed that the executives’ exclusion but remanded the case to the agency, holding that it failed to reconcile the lengthy 12-year term of exclusion with agency precedent.

The D.C. Circuit’s ruling is significant in at least two respects. First, a panel majority (Sentelle, CJ., Ginsburg, J.) held that misdemeanor misbranding, which requires no proof that a corporate officer know of, or have any involvement in, fraudulent misbranding, is nevertheless a conviction for a “misdemeanor relating to fraud” within the meaning of the exclusion statute. HHS may therefore exclude individuals convicted of such misdemeanors from participation in federal healthcare programs. Second, a different majority (Williams, Ginsburg, JJ.) held that the length of any exclusion is subject to review under the arbitrary and capricious standard. The government had argued that, unlike the Administrative Procedure Act, the statute providing for judicial review of DAB decisions (42 U.S.C. 405(g)) did not include the arbitrary-and-capricious standard. For that reason, the government contended, the court could not require the agency to compare the exclusion imposed here to exclusions imposed in other cases. The majority disagreed, holding that the agency had not explained how the 12-year exclusion here for a misdemeanor offense was justified by exclusions involving felonies and incarceration. As the majority noted, “Simply pointing to prior cases with the same bottom line but arising under a different law and involving materially different facts does not provide a reasoned explanation for the agency’s apparent departure from precedent.” The case will be remanded to OIG for further consideration. Sidley represented the former Purdue executives in the DC Circuit.