Time for Supreme Court Review of Corporate “Status Crime” Legal Doctrine

Cross-posted by Forbes.com at WLF contributor site

Two weeks ago in Friedman v. Sebelius, a divided U.S. Court of Appeals for the District of Columbia Circuit largely upheld what amounts to the lifetime exclusion of three senior pharmaceutical executives from any further involvement in the industry.  Their offense:  pleding guilty to misdemeanor charges that they were executives of Purdue Frederick Co., at a time when (unbeknownst to them) some company employees engaged in the improper promotion of Purdue Frederick drugs.

Criminal prosecution of corporate executives not shown to have a guilty state of mind (or even to have acted negligently) has long been controversial.  Such prosecutions—under what is known as the “Responsible Corporate Officer” (RCO) doctrine—have twice survived constitutional challenges in the Supreme Court by razor-thin 5-4 margins in 1943 and 1975.  The Supreme Court reasoned that the RCO doctrine allows society to make a strong statement regarding its disapproval of corporate misbehavior without unduly punishing largely blameless senior executives, because penalties in RCO cases “commonly are relatively small, and conviction does no grave danger to the person’s reputation.”  Morisette v. United States.  There is serious reason to question whether the lifetime exclusion largely upheld by the D.C. Circuit fits the Supreme Court’s definition of a “relatively small” penalty.  In light of federal officials’ determination to bring more such prosecutions, the Supreme Court ought to revisit the RCO doctrine and decide whether it is being applied in a manner that comports with due process of law.

Purdue Frederick in 2007 pleaded guilty to felony charges that marketing personnel improperly promoted OxyContin.  At the same time, the three executives pleaded guilty to misdemeanor charges that they were responsible corporate officials at the time that the improper promotion took place.  They were fined and ordered to perform 400 hours of community service.  Only later did HHS’s Office of Inspector General (OIG) decide to pile on; it initiated proceedings to exclude them from participation in federal health programs for 15 years (later reduced to 12 years during administrative appeals).  Given the executives’ advanced ages, that exclusion effectively rendered them unemployable in the health care world for the rest of their lives.  The only basis for the exclusions was their misdemeanor convictions.

The focus of the D.C. Circuit’s decision was whether the terms of the federal statute permitting exclusion had been satisfied.  In his dissent, Judge Williams made a powerful argument that the misdemeanor pleas in this case were insufficient under the statute to justify any exclusion, let alone a lifetime exclusion.  The most glaring deficiency in the majority’s decision, however, was its failure to give serious consideration to the executives’ due process argument.  The majority disposed of that argument in two sentences, concluding that the lifetime exclusion did not raise “any significant concern with due process.”  The majority opined, “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.”

Nowhere does the majority acknowledge that an RCO conviction signifies nothing more than a finding that a defendant was a senior corporate executive at the time that corporate employees engaged in wrongdoing.  The executives in this case had no knowledge of the improper drug promotion, and they “failed to prevent a fraud against the Government” only in the sense that the misconduct would not have occurred had they serendipitously fired the offending employees before those employees had an opportunity to act.  Moreover, the Government’s exclusion—which was based solely on the misdemeanor plea—cannot reasonably be termed a mere “refus[al] to deal” with certain individuals, given that its practical impact is to render the three executives unemployable.  The lifetime exclusion from their profession is inconsistent with the Supreme Court’s understanding that RCO prosecutions will lead to “relatively small” penalties and therefore do not violate due process constraints.

In light of the Government’s willingness to seek severe penalties for those convicted of RCO offenses, the time is ripe for the Supreme Court to re-examine due process limitations on such convictions.  Should the D.C. Circuit deny a rehearing petition in the case of the Purdue Frederick executives, the Washington Legal Foundation (which participated in lower court proceedings) intends to support efforts to persuade the Supreme Court to review the case.

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