D.C. Circuit affirms OIG's broad, "circumstance-specific" approach to exclusions

Purdue Frederick Company's President, Executive Vice President and Chief Legal Officer and Vice President of Medical Affairs, who failed to prevent the company's fraudulent marketing of OxyContin as less addictive than other pain medications, each pleaded guilty in May 2007 to misdemeanor misbranding of a drug under the Food, Drug & Cosmetic Act (FDCA).

The factual basis supporting the guilty pleas did not include any admission on the part of the executives that they acted with intent to defraud, much less any culpable state of mind. Indeed, the factual basis relied on the executives each being a "responsible corporate officer (RCO)" when the company's sales representatives were misleading doctors about OxyContin's abuse potential. Over the years, the government increasingly has targeted healthcare executives under the RCO doctrine, which authorizes misdemeanor charges against those in a position of authority who do not prevent or correct FDCA violations.

Shortly after the convictions, the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) determined that the executives should be excluded from any participation in federal healthcare programs for 20 years. OIG exercised its exclusion authority on the basis that a conviction for misbranding of a drug constitutes a "misdemeanor relating to fraud" under 42 U.S.C. § 1320a-7(b). While the length of the exclusion was reduced to 12 years through the administrative appeals process, the executives subsequently appealed both the exclusion and its length of time to the U.S. Court of Appeals for the District of Columbia Circuit.

Categorical v. Circumstance-Specific Approach

In Friedman v. Sebelius (D.C. Cir., No. 11-5028, July 27, 2012), the executives argued that OIG did not have authority to exclude them for a "misdemeanor relating to fraud," when they neither were convicted of nor admitted to fraud or any other intentional misconduct. More specifically, the executives claimed that the charge of misbranding of a drug does not contain any element requiring evidence of fraud. The executives, therefore, argued that the court should adopt a categorical approach to exclusions that focuses around the crime of conviction. On the other hand, OIG maintained that the executives were appropriately excluded because the facts and circumstances underlying their convictions had a "factual nexus" or "relationship" to fraud -- namely, the misleading conduct by Purdue Frederick's sales representatives mentioned above.

In upholding the exclusions, the majority of the court held that the text, structure and purpose of the exclusion statute, viz., to protect federal healthcare programs from financial harm caused by untrustworthy providers, all indicated that OIG should consider the facts and circumstances underlying the conviction, rather than taking a categorical approach of simply looking at the crime of conviction. The court, not surprisingly, honed in on the phrase "relating to" in the exclusion statute and concluded that its inclusion in the statute was meant to be applied broadly for any conviction that has a "factual connection" to fraudulent conduct. However, a dissenting opinion filed in the case recommended that HHS define "relating to" in the exclusion statute to avoid the potential for arbitrary exclusion decisions. Additionally, while the executives lost the appeal on OIG's authority to exclude for their misbranding convictions, the court did reverse and remand on the basis that the 12-year exclusions imposed by OIG were "arbitrary and capricious" for want of a reasoned explanation for the length of the exclusions.


Friedman is instructive on at least two points affecting the healthcare industry. First, the government continues to use the RCO doctrine to prosecute healthcare executives, even though the executive may have not known about, or participated in, a particular offense under the FDCA. This highlights the government's expectation that upper management be actively involved in ensuring corporate compliance with federal healthcare laws and regulations. Second, Friedman is a warning to both individual healthcare targets and defendants (and the lawyers advising them) that a guilty plea, regardless of the crime of conviction or supporting factual basis, could potentially result in exclusion if the OIG finds that there is a factual connection to fraud. While it generally is in a prosecutor's best interest to efficiently resolve a case with a plea agreement, he or she is unlikely to interfere with OIG's exclusion authority and insert language in the plea agreement seeking to prevent exclusion. Therefore, Friedman reminds us of the need to work proactively with OIG prior to accepting a guilty plea to better assess whether an exclusion proceeding may occur subsequent to conviction.