Under the Responsible Corporate Officer Doctrine, corporate officials can be held liable for misconduct in which they did not participate and of which they have been entirely unaware, based on their responsibility for the corporation itself. As shown in a July 27, 2012 opinion from the District of Columbia Court of Appeals (here), a misdemeanor conviction based on the Responsible Corporate Officer doctrine can not only result in criminal penalties but can also include “career-ending” consequences, in the form of a lengthy ban from participating in governmental programs. Although the appellate court struck down the specific disbarment at issue in the case, it upheld the government’s right to impose the ban.
As discussed below, this case serves as a reminder of the significant exposures corporate executives face under the Responsible Corporate Officer Doctrine.
Purdue Frederick Company was accused of fraudulent misbranding of the painkiller OxyContin. Among other things prosecutors alleged that unnamed employees of the company marketed OxyContin as less addictive and less harmful than other painkillers. The company ultimately pled guilty to felony misbranding. Among other things, monetary sanctions of about $600 million were imposed on the company.
Under the Responsible Corporate Officer Doctrine, three Purdue executives – Purdue CEO Michael Friedman, general counsel Howard Udell, and medical director Paul Goldenheim—were accused of the misdemeanor of misbranding of a drug. The individuals pleaded guilty to misdemeanor misbranding, for (as the appellate court put it) “their admitted failure to prevent Purdue’s fraudulent marketing of OxyContin.” The individuals were sentenced to extensive community service, fined $5,000, and ordered to disgorge compensation totaling about $34.5 million.
Several months after the individuals’ conviction, the Department of Health and Human Services determined that the individuals should be excluded from participating in Federal health care programs for 20 years. During the individuals’ ensuing administrative appeals, the individuals managed to get the length of the disbarment reduced to 12 years. The 12 year disbarment ultimately was affirmed by a U.S. District Court, and the individuals appealed, arguing that the agency did not have the authority to impose the disbarment and also arguing that because the agency lacked a substantial basis for the length of the disbarment, its imposition was arbitrary and capricious and therefore invalid.
The July 27 Opinion
In a July 27, 2012 opinion written for a divided three-judge panel, D.C. Circuit Administrative Judge Douglas Ginsberg affirmed the agency’s authority to impose the disbarment, but agreed with the individuals that in this case the imposition of the 12-year disbarment “was arbitrary and capricious for want of a reasoned explanation for the length of their exclusions,” and the court remanded the case to the District Court for further proceedings. Chief Judge David Sentelle concurred in part and dissented in part, noting that he would have affirmed the length of the disbarment.
None of the three judges questioned the agency’s authority to impose disbarment. Judge Ginsberg’s opinion expressly rejected the individuals’ argument that the agency’s imposition of the disbarment for an offense lacking a mens rea element (that is, lacking a culpable state of mind) violated their constitutional rights to due process. Among other things, the individuals noted that the imposition of criminal penalties under the Responsible Corporate Officer Doctrine had been upheld in the past only because the “associated penalties commonly are relatively small, and conviction does no grave damage to an offender’s reputation.”
The appellate court rejected this constitutional argument, saying that “we do not think excluding an individual … on the basis of his conviction for a strict liability offense raises any significant concern with due process,” adding that “surely the Government constitutionally may refuse to deal further with senior corporate officers who could have but failed to prevent a fraud against the Government on their watch.”
The court did hold that the agency had failed to justify its imposition of a 12-year disbarment, noted that “we do not suggest that the appellants’ exclusion for 12 years based upon a conviction for misdemeanor misbranding might not be justifiable; we express no opinion on that question. Our concern here is that the [agency’s administrative review board] did not justify it in the decision under review.” Noting that no prior disbarment had exceeded ten years, the court concluded that the agency’s decision was “arbitrary and capricious with respect to the length of their exclusion because it failed to explain its departure from the agency’s own precedents.”
If nothing else, this case serves as a reminder of the power that the Responsible Corporate Officer Doctrine gives prosecutors to pursue criminal charges against corporate officials based on the misconduct of the officials’ subordinates in which the officials were not involved and of which the officials may have been entirely unaware. And even though the appellate court reversed the “career ending” disbarment that the agency had imposed on the corporate officials here, the appellate court emphasized that there was nothing inherently wrong with the length of the disbarment; the appellate court’s reversal was strictly based on the agency’s failure to explain the length of the disbarment.
Indeed, the appellate court expressly affirmed the agency’s authority to impose disbarment even in the case of strict liability offense that lacked any culpable state of mind. The court seemed entirely untroubled by concerns surrounding convictions under the Responsible Corporate Officer doctrine that these convictions involve the imposition of liability without culpability in the form of a guilty state of mind. (For more about concerns with imposing liability about culpability, refer to my prior post here).
To be sure, in connection with their pleas of guilty to misdemeanor misbranding, the individuals had expressly admitted that they had “responsibility and authority either to prevent in the first instance or to promptly correct” the misbranding activity. Their convictions and their admissions, as well as the seriousness of the underlying misconduct, may cast this case in a different light.
Nevertheless, I continue to find the willingness of courts and regulatory authorities to impose criminal convictions and “career restricting” penalties on officials who had no involvement in or even awareness of the misconduct to be troubling. The court itself noted that the justification for the strict liability imposition of criminal liability based on the Responsible Corporate Officer Doctrine was premised in part on the supposition that that the penalties involved were relatively small. There is nothing small about the type of career-ending disbarment the government sought to impose here. To the contrary, this case shows that the consequences for individuals convicted under the responsible corporate officer doctrine can be significant.
A July 2012 memo from Eric Reed of the Fox Rothschild law firm entitled “Even Without Knowledge or Participation, Corporate Officers Can Be Criminally Liable for Subordinates’ Misdeeds” (here) points out that this case “stands as a reminder” of several concerns about the Responsible Officer Doctrine, including that “ignorance of misconduct by subordinates is not always a defense for corporate officers.” This case also shows that “when violations occur, resolving regulatory or criminal charges may not conclude all liabilities for a particular occurrence” and in parallel administrative or agency proceedings “facts admitted or proved in an initial proceeding may bind in the later matters.”
One of the bedrock principles of our criminal justice system is that a prerequisite of liability should be a finding of culpability. Even if, as courts now seem comfortable in assuming, there are circumstances where the kind of strict liability imposed under the Responsible Corporate Officer Doctrine is appropriate, that type of liability should be rare and imposed sparingly. My concern, as I have noted elsewhere, is that the imposition of this type of liability is becoming increasingly common and is imposed far too often. As this case shows, the consequences for individuals on whom this type of liability is imposed can not only be substantial, but it can be career-ending. This deeply troublesome trend deserves far greater attention, and the constitutional concerns raised here deserve much closer consideration than they were given by this court.
Susan Beck’s July 30, 2012 article on the Am Law Litigation Daily about the D.C. Circuit’s opinion can be found here.
Goldman Sachs Settles Mortgage-Pass Through Securities Suit: The parties to the Goldman Sachs/ GS Mortgage Pass Through Certificates securities suit have reached an agreement to settle the case for $26.6125 million. The settlement is subject to court approval. In addition, as reflected on the parties’ July 31, 2012 motion for preliminary court approval of the settlement (here), the settlement is subject to a $1.3125 reduction if Stichting APB (which filed a separate action relating to the mortgage-pass through certificates) elects not to participate in the class settlement. The settlement fund is inclusive of $5.3 million for attorneys’ fees and expenses. The parties’ stipulation of settlement can be found here.
As noted in detail here, the case had in January 2011 survived in principal part the defendants’ motion to dismiss. The court had subsequently certified a plaintiff class. The defendants had sought leave to appeal the class certification to the Second Circuit. The defendants’ petition to the Second Circuit, which remained pending at the time the settlement was reached, has now been stayed pending approval of the settlement.
Alison Frankel has an interesting August 1, 2012 post on her On The Case blog about the GS Mortgage Pass-Through Certificates Settlement, in which she asks, among other things, whether the MBS cases are turning out to be a "bust" for the plaintiffs’ lawyers. As always, Frankel has interesting thoughts and observations on the topic. Her post can be found here. I should add that if your not reading all of Alison’s posts every single day, you are making a very serious mistake.
I have in any event added the Goldman mortgage pass-through certificate settlement to my list of subprime and credit crisis-related case resolutions, which can be accessed here.
Corrected Link: Yesterday, I wrote about the latest antitrust lawsuit to be filed in the wake of the emerging Libor scandal. Unfortunately, it appears that the link I originally put up on the site to the new case complaint was faulty. I have corrected the link. Readers who may have wanted to see the complaint but were unable to do so owing to the faulty link can see the complaint here. I apologize for the faulty link as well as any confusion the faulty link may have caused.