The Department of Justice (DOJ) memo addressing “Individual Accountability of Corporate Wrongdoing” sent a shot across the bow of companies engaged in corporate misconduct – including life science companies engaged in health care fraud. Boards of Directors ignore the DOJ warning shot at the peril of the companies over which they exercise control.
As a Board member, consider the implications if –
your company’s CEO is indicted
your company’s CEO and VP of Sales are indicted
your company’s former CEO is sentenced to prison.
These are not worst-case scenarios contemplated by the world’s most robust succession plan. These are real-world situations faced by the Boards of Directors at Vascular Solutions Inc., Acclarent, Inc. and Otismed Corp., respectively.
What these cases all have in common are allegations of criminal violations of the misbranding provision of the Food, Drug and Cosmetic Act (FDCA).
While these may be particularly egregious violations, over the past decade numerous pharmaceutical and medical device companies have paid billions of dollars to settle health care fraud cases involving the misbranding of drugs and devices. Many of these companies also pleaded guilty to criminal violations of the FDCA.
Despite widespread civil and criminal enforcement at the corporate level, government officials have expressed concern that these enforcement actions have not had the desired deterrent effect on corporate wrongdoing.
The position staked out in the Department of Justice’s individual accountability memo is intended to address this perceived lack of effect. The memo stated:
“One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing. Such accountability is important for several reasons: it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions and it promotes the public’s confidence in our justice system.”
The DOJ memo enumerates “six key steps” aimed at focusing the Department’s enforcement attention on the individuals within corporations that bear responsibility for corporate wrongdoing. The six steps are:
- To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.
- Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
- Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
- Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires, and declinations as to individuals in such cases must be memorialized.
- Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
For the most part, the DOJ memo is introspective and focuses on the manner in which the Department intends to pursue and manage enforcement actions to ensure the active pursuit of individuals responsible for corporate wrongdoing.
The first step, however, is all about the corporate target and what it does – or fails to do – to facilitate the government’s access to facts identifying who actually committed – or authorized – the wrongdoing. Specifically, the memo stated:
“If a company seeking cooperation credit declines to learn of such facts or to provide the Department with complete factual information about the individual wrongdoers, its cooperation will not be considered a mitigating factor pursuant to [the United States Attorney’s Manual].”
A company’s and its Board’s initial inclination may be to protect company personnel and allow for the corporate entity to take the consequences of the individuals through which it acts. This may especially be the case if culpable individuals include the CEO, whose skills the Board may deem essential to the continued success and even existence of the company.
Nevertheless, to get any credit from the Department as it pursues its prosecution, the corporation and the Board must get past this initial inclination to protect individual wrongdoers.
The corporation and the Board also must already have taken the necessary steps to put in place the compliance infrastructure that will allow the company to thoroughly investigate and ascertain the facts surrounding any misconduct, including who was involved in authorizing and executing the wrongdoing. This fact finding is an essential element of an effective compliance program and the Board must recognize its evolving role in overseeing the effectiveness of the company’s compliance program.
If the Department of Justice is true to the proposition set out in its individual accountability memo, the life sciences industry can expect more individual prosecutions when companies misbrand their products or engage in other misconduct. Holding individuals accountable does more than just bring these individuals to justice. In the Department’s words, it also “incentivizes changes in corporate behavior.”
Boards of Directors should be the catalyst for such changes by making clear that their companies will internally investigate instances of wrongdoing and will not protect wrongdoers – including CEOs – from the consequences of their actions.