July 29, 2014

Pin the Blame on the Corporate Officer: Senators Introduce Hide No Harm Act

Three Senate Democrats recently introduced a bill that seeks to hold company executives of a product maker or seller criminally liable for knowingly "failing to inform and warn of serious dangers" associated with a product. Sens. Richard Blumenthal (D-CT), Bob Casey (D-PA) and Tom Harkin (D-IA) introduced the Hide No Harm Act of 2014 (S.2615) last week in the wake of revelations that General Motors (GM) executives failed to issue a recall despite knowing there were serious problems with ignition switches on GM vehicles. The bill was referred to the Senate Judiciary Committee. Although the Hide No Harm Act has yet to move through Congress, it signals yet another attempt by some in the federal government in recent years to hold corporate officers criminally responsible for corporate misconduct. Product manufacturers, particularly leadership, should take heed.

What's in the Hide No Harm Act of 2014?

Under the proposed legislation, a "business entity and any responsible corporate officer" must comply with certain reporting requirements after acquiring "actual knowledge of a serious danger associated with a covered product (or component of a covered product), covered service or business practice." The act requires a verbal report of any serious danger associated with a product to the appropriate federal agency within 24 hours of acquiring knowledge of the danger and a written report no later than 15 days after acquiring knowledge of the danger. In addition, the act requires that a warning be provided "as soon as practicable" to employees and other individuals, such as consumers, that may be affected by a serious danger associated with a product.     

The penalties for knowingly violating the act's reporting requirements include a fine and/or jail time of up to five years. Notably, any fine levied under the act must be paid from the corporate officer's personal assets, and the act provides whistleblower protection to employees that take it upon themselves to report information about a serious danger associated with a product.              

Recent Government Efforts to Hold Corporate Officers Criminally Liable

The federal government has increased its efforts in recent years to hold corporate executives and officers criminally responsible for corporate misconduct. For example, in November 2010, former GlaxoSmithKline vice president and associate general counsel Lauren Stevens was indicted during a 2002 investigation by the FDA that centered on whether the company had improperly promoted the antidepressant Wellbutrin for weight loss — an off-label use not approved by the FDA. Stevens was indicted for allegedly making false statements and withholding responsive documents from the FDA. Although Stevens ultimately was acquitted, the indictment illustrates the government's recent focus on placing blame for misconduct on corporate officers.  

Similarly, in February 2013, the federal government indicted three former officers of Peanut Corporation of America, including its CEO Stewart Parnell, alleging that they misled consumers about the presence of salmonella in peanut products that led to a salmonella outbreak causing more than 700 illnesses and nine deaths in 2008 and 2009. The government also alleges Parnell and other officers knew the company was shipping contaminated peanuts and lied to the FDA following the outbreak. The three officials have been charged with mail and wire fraud, the introduction of adulterated and misbranded food into interstate commerce with the intent to defraud or mislead, and conspiracy. Trial began the week of July 28, 2014.

The U.S. Consumer Product Safety Commission (CPSC) also has shown an increased willingness to seek penalties against company executives individually for a company's violations of consumer product safety laws enforced by the CPSC. For example, the president of LM Import-Export Inc., Hung Lam, was sentenced by a federal district court judge in June 2013 to 22 months in federal prison, three years of supervised release and a $10,000 fine for pleading guilty to conspiracy to traffic and smuggle in banned children's products that contained lead and small parts. In lauding the sentence, CPSC Chairman Inez Tenenbaum said, "This result demonstrates how serious we are about protecting American consumers from dangerous products and defending our consumer product safety laws." In another instance, the CPSC brought an administrative action against Craig Zucker, the CEO of Maxfield & Oberton Holdings LLC, after his company refused to stop selling magnets as instructed by the CPSC. The company refused on belief that the magnets contained clear safety warnings and did not cause harm when used as intended. In response, the CPSC attempted to require Zucker to personally conduct a recall and provide refunds from his personal assets to all consumers who purchased the magnets. Although a settlement was reached in May 2014 and the claims never reached a decision, this example illustrates the CPSC's aggressive approach of late.      

Drug and device manufacturers should pay particular attention to the government's increased efforts to hold corporate officers criminally responsible for misconduct. Despite already significant regulation of pharmaceutical and medical device companies under the False Claims Act and the Food, Drug and Cosmetic Act (FDCA), the FDA recently revived the long dormant Responsible Corporate Officer (RCO) Doctrine, also known as the Park Doctrine after the seminal U.S. Supreme Court opinion in United States v. Park, 421 U.S. 658 (1957). Under the RCO/Park Doctrine, a corporate executive can be found criminally liable for a company's violation of the FDCA. This is true even if there is no evidence that the officer or executive knew or should have known about the violations or misconduct and did not play any role in the violations. The executive may be held liable for FDCA violations committed by others as long as the executive was in a position of responsibility with the authority to prevent or promptly correct misconduct but failed to do so. See e.g., United States v. Norian Corp., Case No. 09-cr-403-LDD (E.D. Pa. 2010) (sentencing three former executives to nine months in prison and $100,000 in fines where bone cement used to treat compression of the spine was promoted off-label without the executives' knowledge for use during surgery and resulted in the death of three patients); United States v. Stryker, Case No. 09-cr-10330-GAO (D. Mass. 2012) (charging executives of a medical device company with mail and wire fraud, conspiracy to defraud the FDA, and misbranding where a bone surgery device was allegedly promoted for an off-label use). A first offense is considered a misdemeanor. Penalties may include fines, jail time and in the pharmaceutical context, the potentially career-ending consequence of exclusion from participation in federal health care programs. A repeat offense is considered a felony. 

Implications for Product Makers and Sellers

Defiant or careless employees can expose an entire company to significant potential liability. It is essential for a company to have strong and independent compliance programs to avoid, or at least decrease, potential liability for corporate executives. Moreover, a company's corporate officers must learn and understand the regulatory environment that their companies operate in, and corporate officers should focus on continually improving corporate compliance programs. Such programs should be aimed at preventing violations, and should they occur, ensure prompt reporting of violations to corporate officers and appropriate federal agencies.   

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