Individual Liability for Corporate Officers/Executives: Current Issues

1. Individual Liability for Corporate Officers/Executives: Current Issues LTC Legal and Operations Committee Thursday, January 17, 2013 Ellen L. Janos, Esq. M. Daria Niewenhous, Esq. Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.

2. Individual Liability for Corporate Officers/Executives: Current Issues Topics for Discussion • Reemergence of Responsible Corporate Officer Doctrine • OIG Activity: Mandatory and Permissive Exclusions • Corporate Integrity Agreements: Where We Are Headed • Considerations for Counsel

3. RCO Doctrine Basics • History • RCO Doctrine originates in food and drug regulation and enforcement of the FDCA • United States v. Dotterweich – Supreme Court 1943 • Buffalo Pharmaceutical Company shipping misbranded drugs; Dotterweich was its president and GM • No evidence that Dotterweich was aware of the misbranding • United States v. Park – Supreme Court 1975 • Acme Markets, Inc. shipping food contaminated by rodents; Park was its President and CEO • Supreme Court re-affirmed that the officer need not have knowledge

4. RCO Doctrine Basics • Synthes, Inc. (Charges, 2009; CIA, 2010; Sentencing, 2011) • Synthes, Inc. manufactures bone cement. FDA required that the label for the product note that it was not for spinal use. Synthes proceeded to initiate a "test market" for the cement in spinal surgery, training surgeons to use it for spinal surgery. Three patients died during surgery. • Four executives pled guilty to a misdemeanor • All were fined and sentenced to prison terms • RCO Doctrine has also been applied in the context of the enforcement of environmental laws, securities laws, and antitrust laws

5. RCO Doctrine Basics • More recently: • Perdue Frederick Company, Inc. (Friedman v. Sebelius) 2012 • Company marketed OxyContin with claims not approved by FDA. DOJ brought charges against the company and three executives – all pled guilty and paid fines • Three named executives weren't charged with having personal knowledge or with any personal intent to defraud the FDA or Medicare/Medicaid • OIG used permissive exclusion authority to exclude all three executives for 12 years—the length of the exclusion was overturned by the D.C. Circuit Court to be remanded to the DAB • One of the executives was Howard Udell – general counsel of Perdue – first instance of use of RCO Doctrine against a general counsel

6. RCO Doctrine Elements • The officer need not be responsible for the conduct giving rise to the action, it is enough that they are responsible for the corporation • Who can RCO reach? • A defendant who has, from his/her position, the responsibility and authority to prevent or promptly correct the violation and failed to do so • What is the standard of care? • Under the FDCA, the officer has duty to seek out and remedy violations and to implement measures that insure violations don't occur (Park) • What is the defense? • Objective impossibility is the only defense to the RCO Doctrine • Defendant must be "powerless to prevent or correct the violation" (Park)

7. RCO Enforcement Trends to Watch • Prosecution of Associate General Counsel of GSK • Lauren Stevens headed up response to FDA inquiries • Worked with outside counsel; signed submissions to FDA • Indicted for obstruction and making material false statements to the FDA • "Where facts and law allow, the Justice Department will pursue individuals responsible for illegal conduct just as vigorously as we pursue corporations" –Tony West, Assistant Attorney General • Stevens acquitted by judge at trial without sending to jury • "The defendant in this case should never have been prosecuted….” U.S. District Court Judge Roger Titus

8. OIG Activity: Mandatory and Permissive Exclusions • From the Testimony of Inspector General Levinson before Senate Committee on Finance March 2, 2012 • Exclusion is one of the most powerful tools in the OIG arsenal • Removal of untrustworthy individuals promotes program integrity • Exclusion of individuals who are responsible either directly or because of their positions of responsibility influences corporate behavior • Exclusion will be used once OIG has determined that an individual or entity has engaged in fraud or abuse or provided substandard care • When there is evidence that an executive knew or should have known of the organization’s underlying criminal misconduct, OIG will operate with a presumption in favor of exclusion of that executive

9. OIG Mandatory Exclusion Authority • Bases for mandatory exclusion: • Conviction of program related crimes • Conviction relating to patient abuse • "Any individual or entity that has been convicted under Federal or State law, of a criminal offense relating to neglect or abuse of patients in connection with the delivery of a health care item or service." • Felony conviction relating to health care fraud • Felony conviction related to controlled substances

10. OIG Permissive Exclusion Authority • OIG has permissive authority to exclude from participation in federal healthcare programs, any individual: • who has a direct or indirect ownership or control interest in a sanctioned entity and who knows or should know of the action constituting the basis for the conviction or exclusion; or • who is an officer or managing employee of such an entity. • No knowledge requirementfor officers or managing employees; knowledge requirement for directors Section 1128(b)(15) of the Social Security Act

11. OIG Permissive Exclusion Authority • OIG Guidance - October 2010 • “Exclusions under section 1128(b)(15) are derivative in nature and based upon the individual’s role or interest in a company that is excluded or is convicted of certain offenses.” • Owners – if evidence supports that there was knowledge, OIG will “operate with a presumption in favor of exclusion.”

12. OIG Permissive Exclusion Authority • Officers and managing employees – no knowledge requirement. In the absence of evidence of knowledge (or that the officer or managing employee should have known) of the misconduct, OIG will consider in exclusion decision: • Circumstances of misconduct and seriousness of the offense • Individual’s role in sanctioned entity • Individual’s action in response to the misconduct • Information about the entity • Previous convictions or liability • Size and structure

13. OIG Permissive Exclusion Authority • Pleasant Care Corporation • 2009 – Permanent exclusion of Emmanuel Bernabe, President and Chairman of Pleasant Care. • Pleasant Care nursing homes provided care that failed to meet professionally recognized standards. • IG Daniel R. Levinson (from press release): “This settlement reflects our commitment to ensuring that executives who are ultimately responsible for care furnished in nursing homes are held accountable when those homes fail to provide quality care. It is critical that boards and management make compliance with professionally recognized standards of care a priority for all levels of their organizations.”

14. OIG Exclusion Authority: What's Next • Proposal to Strengthen Exclusion Authority • Medicare Anti-Fraud Measures Act • Would expand Permissive Exclusion Authority of OIG to: • Allow OIG to exclude individuals who have left the company at the time of the conviction • Allow OIG to exclude affiliated entities of sanctioned entities

15. Corporate Integrity Agreements:Where We Are Headed • Recent CIAs • Focus on the compliance roles and responsibilities of board members • Each member of the board must sign a resolution • Reasonable inquiry into compliance activities • Summarizes the compliance committee's review and oversight of the company's compliance program • Quality of care oversight • Program meets federal program requirements

16. Corporate Integrity Agreements:Where We Are Headed Board Member Certification • "The Board of Directors has made reasonable inquiry into the operations of the [company] compliance program including the performance of the Chief Compliance Officer and the Compliance Committee. The Board of Directors has also provided oversight on quality of care issues. Based on its inquiry and review, the Board of Directors has concluded that, to the best of its knowledge, [company] has implemented an effective compliance program to meet Federal health care program requirements and professionally recognized standards of care."

17. Corporate Integrity Agreements:Where We Are Headed • Recent Pharma CIAs • Focus is on the compliance roles and responsibilities of individual executives and managers • Key business heads must monitor and oversee activities within their areas of authority • Key business heads must annually certify that their business unit is in compliance with federal health care program requirements

18. Corporate Integrity Agreements:Where We Are Headed Certification of Managers "I have been trained on and understand the compliance requirements as they relate to [department or functional area], an area under my supervision. My job responsibilities include ensuring compliance with regard to the [insert name of the department or functional area] with all applicable Federal health care program requirements, FDA requirements, obligations of the Corporate Integrity Agreement, and [company] policies, and I have taken steps to promote such compliance. In the event that I have identified potential issues of noncompliance with these requirements, I have referred all such issues consistent with [company] processes for reporting potential misconduct for further review and follow up. Apart from those referred issues, I am not currently aware in [insert department name] of any violations of applicable Federal health care program requirements, FDA requirements, or the obligations of the CIA. I understand that this certification is being provided to and relied upon by the United States.”

19. Corporate Integrity Agreements:Where We Are Headed • Potential impact on executive compensation • Clawback Provisions • Recoupment of bonuses for significant misconduct of individual • Recoupment for misconduct of subordinates

20. Corporate Integrity Agreements Where We Are Headed • Recent OIG CIA Roundtables (February 2012; August 2012) • Feedback on CIA implementation and best practices • Participants liked Board engagement • Participants liked integration of compliance activities into business functions beyond the compliance department • e.g. appointment of deputy compliance officers within individual business units • e.g. including compliance related requirements as part of performance plans for all employees • Importance of fostering culture of compliance

21. Indemnification: Why Bother? • Objective Impossibility Defense – High Bar • Statutory indemnification • Mandatory versus permissive • Timing of indemnity demands • Limited roles • Written agreements • Indemnity • Advancement of expenses • Fees on Fees • Vesting of rights

22. D&O Insurance Policies: They are Not Created the Same • Well over 150 different forms • An insurer may have multiple forms and endorsements with varying language and coverage • Highly manuscripted and negotiated • Industry specific forms and endorsements • Review insurance together with indemnification

23. D&O Insurance Policies:They are Not Created The Same • A Sampling of Key Provisions • Who is an insured? General counsel or risk manager? • Who defends you and controls the litigation? Your attorney? • What is a claim? Regulatory investigations? • Healthcare-specific exclusions? False Claims Act? Bodily injury? • Excess policies must also be examined

24. Considerations for Counsel • Client Education • Counsel should make sure that the client's directors, officers and leadership team are aware of and understand- • RCO Doctrine • OIG exclusion authority and the potential consequences to them personally • Policies and practices that the client has in place to assure corporate compliance • Indemnification provisions • D&O Coverage