The New Era of Responsible Corporate Officer Doctrine Enforcement

Virginia A. Gibson , David Newmann , Stephen A. Loney


August 29, 2012

For the most part, investigative subpoenas and inquiries from the Department of Justice (DOJ) and the Food and Drug Administration (FDA) are aimed at companies. But criminal and regulatory penalties for product misbranding or adulteration are by no means limited to corporate defendants. Federal officials are increasingly deploying an old but potent weapon against executives in FDA-regulated industries. Dating from a 1943 Supreme Court case, the responsible corporate officer (RCO) doctrine is being used to impose strict criminal liability on managers for corporate misconduct carried out on their watch, regardless of their prior knowledge or individual intent.

The Supreme Court planted the seeds for expansive individual liability almost 70 years ago in U.S. v. Dotterweich. Joseph Dotterweich was the president and general manager of Buffalo Pharmacal Company, a business that purchased drugs from a manufacturer, repackaged them for sale under its own label and distributed them across state lines. While the company was ultimately acquitted of Food and Drug Cosmetic Act (FDCA) charges for misbranding and adulteration, the FDCA extends liability to “any person guilty of adulterating or misbranding.” And the RCO doctrine arms federal authorities with the ability to prosecute individuals in management positions under these statutes without showing an act or individualized intent to commit a violation.

Dotterweich was convicted under this doctrine despite the fact that there was little evidence that he participated directly in any alleged misconduct. The Supreme Court nonetheless upheld Dotterweich’s conviction of a misdemeanor FDCA violation based on his position in the company and his ability to prevent the offending misconduct.

More than 30 years later, the Supreme Court built on the principles set forth in Dotterweich and applied the RCO doctrine in U.S. v. Park. In this case, John Park, the CEO of the national retail food chain Acme Markets, was held responsible for sanitation problems in his company’s warehouses throughout the country. The Court upheld Park’s conviction despite his lack of direct involvement in the management of individual warehouses or evidence of his personal knowledge of the warehouse conditions, where the evidence showed that the sanitation problems persisted after the FDA had issued warning letters addressed to Park in his capacity as CEO.

With Park, the RCO doctrine provided federal enforcement authorities a potent tool where an FDCA violation may trigger a strict liability charge against a company executive who had the authority to prevent underlying misconduct. The mere existence of a violation in the company proves a responsible officer’s failure to prevent it, even in the absence of direct participation in, knowledge of, or reckless disregard for underlying misconduct committed by subordinates.

This doctrine represented a significant departure from conventional criminal standards requiring government prosecutors to establish a criminal act and specific intent to commit a crime. Thus, life-science executives carry far more burden of responsibility for the condition and branding of their companies’ products than executives in other industries. Still, despite these rulings, the RCO doctrine remained sparsely utilized for decades.

The New Era of Enforcement

Recently, federal authorities—believing that penalties imposed on companies did not sufficiently impact day-to-day corporate culture—dusted off the Park and Dotterweich cases and put the RCO doctrine to work. One FDA official told the Philadelphia Inquirer in October 2010 that the FDA was “looking for cases” to apply the Park doctrine “as a tool to ‘change the corporate culture’ of firms.”

A prime example of the government’s increased pursuit of individual executives is U.S. v. Synthes, Norian, et al. In this case, the government accused a parent and subsidiary company of testing spinal repair products on patients without FDA approval, and a district court found that several Norian executives made false statements to the FDA to cover up the offending conduct. Four individual officers pled guilty to a Title 21 misbranding misdemeanor and, in late 2011, were sentenced to prison terms ranging from six to nine months and given fines of $100,000 each. The U.S. Attorney for the Eastern District of Pennsylvania commented that these sentences “should clearly put health-care industry executives on notice that when they violate the law and harm individuals for the sake of corporate profits, they will go to prison.”

But even if the executives are ultimately acquitted, the government’s new aim to pursue convictions under the RCO doctrine presents significant risk and expense for companies. In U.S. v. Schulte and Pham, for example, two former executives of Colorado Springs-based Spectranetics Corp. were acquitted of Title 21 felony charges in March 2012. But this came only after a long and costly process for the executives and the company. The DOJ and Office of the Inspector General initiated an investigation into Spectranetics’ alleged importation and marketing of unapproved medical devices in September 2008, and the company paid $5 million to resolve claims against it in December 2009.

Notwithstanding the company’s settlement, the United States advanced an RCO theory, along with false statement charges, against two executives indicted a year later. Those charges culminated in a protracted five-week jury trial in 2012 in which the individuals were vindicated on the RCO charges under Title 21, but the CEO was convicted of making false statements to the FDA during the inspection.

While the Spectranetics trial against individuals and their former employer unfolded in Colorado, another RCO trial was under way on the East Coast against another medical device manufacturer and three of its executives in U.S. v. Stryker. Even though that case fell apart after the second day of trial and the DOJ’s Massachusetts office dropped its charges against the individuals and accepted a misdemeanor guilty plea against the company, the costs were undoubtedly high.

It remains to be seen whether the recent outcomes in cases like Schulte and Stryker will do anything to slow the government’s efforts to alter corporate cultures by prosecuting individual executives under the RCO doctrine. But the verdict in Schulte shows that once the government focuses upon individuals in the corporate realm, it may use other charges to address a small part of the overall conduct of concern by using false statement or wire fraud statutes as a complement to the more controversial RCO theory. Juries in these few cases have shown the financial and legal risks attendant to the accompanying false statement charges.

In any event, executives in FDA-regulated companies are advised to remain mindful of the new risks posed by increased DOJ involvement in actions previously viewed as under FDA’s administrative domain.
Virginia "Ginny" A. Gibson is a partner at Hogan Lovells, an international law firm headquartered in London and Washington.
David Newman is a partner at Hogan Lovells, an international law firm headquartered in London and Washington.
Stephen A. Loney is an associate at Hogan Lovells, an international law firm headquartered in London and Washington.