On September 9 2015 Deputy Attorney General Sally Yates released a memo outlining several changes that the Department of Justice (DOJ) will implement "to ensure that individual accountability lies at the heart of [its] corporate enforcement strategy". The DOJ's new emphasis on identifying the individuals who drive corporate misconduct promises to alter how it executes corporate investigations. Although the memo was touted in the press as an attack on Wall Street executives, its impact will be at least as great on the life sciences industry.
In general terms, the new DOJ policy will:
- substantially complicate the ability of life sciences companies to maintain privilege over internal investigations and maintain joint-defence relationships with targeted executives; and
- force boards of directors more frequently to consider establishing special committees to oversee government investigations in which senior managers are targeted.
In addition, life sciences companies will face additional specific challenges:
- Prosecutors pressured to charge individuals will likely rely more heavily than in the past on the Park doctrine, which does not require specific evidence of culpable criminal intent; and
- Government efforts to obtain damages from individuals under the False Claims Act could fundamentally alter the dynamics of False Claims Act investigations, converting them into even more complex, quasi-criminal matters.
The Yates memo has implications that are particularly salient for life sciences companies. First, prosecutors under pressure to convict corporate officials will seek avenues that maximise the chances of a successful conviction. In the context of alleged violations of the Food, Drug and Cosmetic Act, prosecutors are now more likely to resort to the Park doctrine, under which senior corporate officials can be held liable for their companies' violations of the Food, Drug and Cosmetic Act based merely on their status as 'responsible corporate officers'. This vehicle is likely to be particularly attractive to prosecutors because, as the Yates memo points out, large corporations often feature "diffuse" responsibility and fragmented decision making, making the establishment of individual liability particularly demanding.
If the Yates memo spurs additional Park prosecutions, it will further inspire a movement that has been gaining momentum. Public officials have been calling for enhanced use of this doctrine for several years. For example, in 2010 then-Food and Drug Administration (FDA) Commissioner Hamburg announced that the FDA was considering whether to "increase the appropriate use of misdemeanor prosecutions, a valuable enforcement tool, to hold responsible corporate officials accountable". Further, in May 2015 Senators Orrin Hatch and Martin Heinrich addressed a letter to Attorney General Lynch requesting that the DOJ wield the Park doctrine more frequently against supplement manufacturers "as part of a focused-deterrence and selective targeting strategy against current and would-be transgressors".
The DOJ appears to be responding. In December 2014 a co-owner of Main Street Family Pharmacy, which had produced contaminated drugs, pled guilty to a misdemeanour because he "was responsible for, and actively directed" the pharmacy's compounding activities. Neither the DOJ nor the FDA press release set forth any allegations that the co-owner had been personally involved in the misconduct. Further, in April 2015 two food industry executives received prison sentences after their products caused a salmonella outbreak. This case, United States v DeCoster, is currently on appeal to the Eighth Circuit. The defendant executives are raising constitutional challenges to the government's ability to impose prison sentences (as opposed to financial penalties) for violations of the Food, Drug and Cosmetic Act in which corporate executives were unaware of the alleged misconduct.
False Claims Act
A second consequence of the Yates memo for life sciences companies relates to the False Claims Act. The memo applies to both civil and criminal investigations, and the DOJ specifically notes that its "position on 'full cooperation' under the False Claims Act, 31 USC Section 3729(a)(2), will be that, at a minimum, all relevant facts about responsible individuals must be provided". The False Claims Act offers companies an opportunity to pay reduced damages if three elements are met:
- The company gives investigating officials "all information known" about the violation(s) within 30 days of when such information was "first obtained";
- The company "fully cooperate[s]" with any government investigation into the violations; and
- At the point that the company provides the information, no criminal prosecution, civil action or administrative action has already commenced under the False Claims Act and the company has no "actual knowledge of the existence of an investigation into such violation."
The Yates memo greatly expands the nature and amount of information that must be provided in order to gain the advantages of this provision.
More significantly, the Yates memo threatens to alter the DOJ's historical policy of rarely seeking damages from individuals under the False Claims Act. If the DOJ begins routinely to seek damages from individuals under the False Claims Act, such cases may change dramatically. They would become much more like criminal investigations, with companies and their counsel focused not only on their own liability, but also on the potential personal liability of their executives. As such, the defence of such cases may require a larger circle of counsel, with the attendant need to coordinate (or not) on everything from priorities for factual development to the substance of government communications. When companies seek to resolve False Claims Act allegations through settlement, other issues – such as the equitable allocation of damages between the company and any responsible employees – will arise as well. Finally, the directive in the Yates memo that corporate cases not be resolved until a "clear plan" to resolve any pending individual cases has been outlined may protract corporate investigations, complicating the ability of companies to settle matters on their preferred timeline.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.