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September 12, 2016 Articles

The Yates Memo and Big Pharma: Individual Prosecutions for Corporate Misconduct

The Yates Memo sends an unmistakable message to corporate decision makers.

By Dustin Aponte, Dr. Saul Helman, and Jennifer Mitchell

The U.S. Department of Justice (DOJ) caught the attention of corporate America in September of 2015 with the release of a memorandum by Deputy Attorney General Sally Q. Yates (Yates Memo) highlighting an apparent policy change aimed at holding individuals accountable for their roles in corporate crimes. See U.S. Department of Justice, Office of the Deputy Attorney General: Memorandum from Deputy Attorney General Sally Q. Yates, U.S. Dep’t of Justice, Office of the Deputy Attorney Gen., to All U.S. Attorneys et al., Individual Liability for Corporate Wrongdoing (Sept. 9, 2015).

Yates Memo Principles and Impact
The Yates Memo describes six key principles, which have been incorporated into the U.S. Attorneys’ Manual, to be considered by DOJ attorneys when investigating corporations for civil and criminal wrongdoing:

1. To qualify “for any cooperation credit, corporations must provide to the [DOJ] allrelevant facts” relating to the individuals responsible for the misconduct.

2. “[C]riminal and civil corporate investigations should focus on individuals from the inception of the investigation.”

3. “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.”

4. “Absent extraordinary circumstances” or approved departmental policy, the DOJ will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.

5. DOJ attorneys should not resolve matters with a corporation “without a clear plan to resolve related individual cases” and should “memorialize” any “declinations as to individuals in such cases.”

6. “Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual's ability to pay.”

Most of these provisions are not a departure from established DOJ policies but rather describe best practices already employed among DOJ attorneys. Nevertheless, the lack of substantive novelty should not distract from the gravity of the articulated policy shift and its potential impact on the way organizations and their counsel approach the management of government or internal investigations. Indeed, revisions to the manual now clearly indicate that corporations must identify “all individuals involved in or responsible for the misconduct,” as well as provide “all facts relating to that misconduct” as a prerequisite to receiving cooperation credit. U.S. Dep’t of Justice, U.S. Attorneys’ Manual 9-28.700 (“The Value of Cooperation”) (2015). This shift effectively increases the pressure on organizations to disclose misconduct early in an investigation or risk the loss of any potential cooperation credit.

There has also been a notable movement in ensuring appropriate checks and balances on the prosecutor’s accountability to pursue individuals responsible for corporate misconduct. Now, if charges are brought against a corporation, the responsible individuals are also expected to be charged. Any decision to waive such charges should be “memorialized and approved by the United States Attorney or Assistant Attorney General whose office handled the investigation.” Id. at 9-28.210 (“Focus on Individual Wrongdoers”).

During a speech at New York University Law School in 2014, then U.S. Attorney General Eric Holder, discussing the prosecution of institutions for financial fraud, emphasized the importance of investigating individuals for corporate wrongdoing, noting that it (1) enhances accountability because “corporate misconduct must necessarily be committed by flesh-and-blood human beings”; (2) promotes fairness because “when misconduct is the work of a known bad actor, or a handful of known bad actors, it’s not right for punishment to be borne exclusively by the company, its employees, and its innocent shareholders”; and, last (but arguably most importantly), (3) has the extreme deterrent effect of criminal prosecution. As noted by Holder,

[f]ew things discourage criminal activity at a firm—or incentivize changes in corporate behavior—like the prospect of individual decision-makers being held accountable. A corporation may enter a guilty plea and still see its stock price rise the next day. But an individual who is found guilty of a serious fraud crime is most likely going to prison.

Eric Holder, U.S. Attorney Gen., Remarks on Financial Fraud Prosecutions at NYU School of Law (Sept. 17, 2014).

Deputy Attorney General Yates has driven home the intent of the policy changes in statements subsequent to the release of the Yates Memo, reflecting upon the themes of accountability, fairness, and deterrence: “Americans should never believe, even incorrectly, that one’s criminal activity will go unpunished simply because it was committed on behalf of a corporation.” Sally Quillian Yates, Deputy Attorney Gen., Remarks at New York University School of Law Announcing New Policy on Individual Liability in Matters of Corporate Wrongdoing (Sept. 10, 2015). Thus, more than just communicating a shift in policy or a reiteration of established tactics, the Yates Memo sends an unmistakable message to corporate decision makers that they cannot hide behind the corporate veil of limited liability for personal criminal misconduct and involvement in corporate wrongdoing.

The Landscape of Recent Criminal Prosecutions in the Pharmaceutical Industry
Though not specifically or exclusively targeted at life sciences companies, the Yates Memo has spurred a substantial amount of debate by organizations regarding likely effects of potential prosecution within this industry.

Historically, many of the most notable government investigations in the pharmaceutical industry involved civil and criminal charges and generally resulted in large civil and criminal settlements without assignments of any personal accountability. For example, GlaxoSmithKline was hit with a $3 billion fine in 2012: $1 billion of that amount was for criminal charges, including off-label promotion and failure to disclose safety data; and $2 billion was for civil charges, including paying kickbacks to physicians, making false and misleading statements concerning the safety of Avandia, reporting false best prices, and underpaying rebates owed under the Medicaid Drug Rebate Program. In 2013, Johnson & Johnson paid $2.2 billion for off-label promotion/kickbacks associated with Bextra, Geodon, Zyvox, and Lyrica; and Abbott Laboratories paid $1.5 billion in 2012 for off-label promotion of Depakote.

It is widely speculated that the pursuit of criminal investigations against individuals is less of a priority due to the difficulty of substantiating a claim and the expense of prosecuting with little ability to recoup damages. The return on investment for DOJ and U.S. Department of Health and Human Services’s Office of the Inspector General (OIG) investigations of healthcare fraud from 2012 to 2014 was $7.70 for every $1.00 spent—a staggering figure in comparison to any anticipated monetary return resulting from individual liability. See U.S. Dep’t of Justice & U.S. Dep’t of Health & Human Servs., Annual Report of the Departments of Health and Human Services and Justice: Health Care Fraud and Abuse Control Program FY 2014 (Mar. 19, 2015). However, although relatively rare, criminal investigations of individuals involved in corporate misconduct have occurred and can involve individuals representing all levels of the corporate hierarchy, from first-line sales associates to executive leadership.

One of the more analyzed cases in recent years is United States v. Caronia, 703 F.2d 149 (2d Cir. 2012). The case involved the prosecution of a sales representative, Alfred Caronia, under the misbranding provisions of the Federal Food, Drug, and Cosmetic Act (FDCA),21 USC § § 331(a), (k); 331(a)(1), for off-label promotion. Caronia was convicted in district court for conspiracy to introduce a misbranded drug into interstate commerce, but his conviction was overturned by the U.S. Court of Appeals for the Second Circuit, which concluded that the misbranding provisions of the FDCA do not prohibit a pharmaceutical company’s truthful off-label promotion and that “the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved product.” Caronia, 703 F.2dat 16.

More recently, on October 29, 2015, the DOJ issued an indictment charging former Warner Chilcott president W. Carl Reichel with conspiring to pay kickbacks to physicians, including overseeing a strategy to conduct unnecessary medical education events with the intent of supplying high-prescribing physicians with excessive perks. Specifically, Reichel was accused of establishing a “sales strategy of providing remuneration to HCPs, in the form of free dinners, speaker payments, and food” and was part of a conspiracy “providing the sales representatives with virtually unlimited expense accounts to take HCPs out for free dinners,” among other allegations. United States v. W. Carl Reichel Indictment, Case No. CR010324, at 4–5 (Oct. 29, 2015). Prior to Reichel’s indictment, several other Warner Chilcott employees, including three district managers, had either been charged or pleaded guilty to offenses including conspiracy to commit healthcare fraud and violations of the Health Insurance Portability and Accountability Act relating to an alleged prior-authorization scheme.

The charges against Reichel were issued in conjunction with a guilty plea by Warner Chilcott for felony healthcare fraud, resulting in an agreement to pay $125 million to resolve criminal and civil liability associated with illegal marketing of drugs. In a manner reflective of the tone conveyed in the Yates Memo, U.S. Attorney Carmen M. Ortiz for the District of Massachusetts, the prosecutor on the case, underscored that “[t]oday’s enforcement actions demonstrate that the government will seek not only to hold companies accountable, but will identify and charge corporate officials responsible for the fraud.” Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Warner Chilcott Agrees to Plead Guilty to Felony Health Care Fraud Scheme and Pay $125 Million to Resolve Criminal Liability and False Claims Act Allegations (Oct. 29, 2015).

Arguably, much of the investigation and collaboration that led to the Reichel indictment occurred before the release of the Yates Memo. However, the prosecution of Reichel may be the first case that demonstrates the determination of the DOJ in pursuing individual accountability involving corporate misconduct in the pharmaceutical industry. Whether the aggressive approach taken by the DOJ is an effect of shifting priorities or the egregiousness of the allegations in the Warner Chilcott case is unknown, but the actions of the DOJ should serve to put other life sciences companies on notice when it comes to preventing corporate misconduct and appropriately handling internal investigations of any complaints.

The Value of Cooperation Credit
The DOJ’s increased focus on individual accountability for corporate misconduct and the heightened threshold of requisite actions required by companies in order to earn cooperation credit place tremendous new pressures on organizations to turn in individual actors. Critical decision points include determining appropriate disclosures, unraveling privileged and nonprivileged communications, and engaging individuals and corporate counsel at earlier stages of an investigation to preserve discretion regarding what information to disclose. Furthermore, the relevant DOJ provision assumes that misconduct actually occurred and may affect an organization’s ability to receive cooperation credit if the investigation uncovers no misconduct.

Life sciences executives and counsel may understandably have a cynical viewpoint regarding the actual value of cooperation credit considering the potential pitfalls and liability. According to the DOJ, cooperation credit depends on a number of factors, including timeliness, diligence, thoroughness, and the proactive nature of the cooperation, as well as speed of the internal investigation. U.S. Dep’t of Justice, U.S. Attorneys’ Manual 9-28.700 (“Value of Cooperation”) (2015). Without certain and quantifiable benefits, organizations should be cautious about being too forthcoming before developing a clear understanding of the facts. Conducting an inadequate or hasty internal assessment and submitting impulsive disclosures to the government may be counterintuitive to the organization’s investigation strategy and may result in incomplete, uninformed, or otherwise inaccurate facts that could significantly impact the organization’s ability to later settle or litigate any charges. The role of corporate investigators and the process of conducting an internal investigation need to be clearly defined with trained investigators, ensuring completeness of the process. The evaluation of any corrective action and any disciplinary action must reflect consistency in application.

In previous years, the DOJ and OIG have not been subtle in using the power of exclusion to force heavy settlement fees and mandated ongoing independent audits. Now it appears that they have another tool to entice individuals and organizations to be as proactive and accommodating as possible, at times contrary to their own rights and interests.

Regardless of the ultimate impact of the Yates Memo, leadership in pharmaceutical companies should be proactive about assessing their healthcare compliance programs, ensuring that appropriate controls exist and accountability is embedded in all aspects on the business. The tone of compliance in organizations stems from the leadership and should be consistently reinforced to create a positive, effective, and sustainable compliance program and culture. At the end of the day, leadership in any organization needs to be informed and be confident that their compliance program is managed in a manner that identifies pertinent risks and efficiently detects, corrects, and prevents healthcare compliance fraud and abuse.

Keywords: litigation, healthcare, compliance, DOJ, pharmaceutical, life sciences, Yates Memo

Dustin AponteDr. Saul Helman, and Jennifer Mitchell work with Navigant Consulting, Inc.

Navigant Consulting is the Litigation Advisory Services Sponsor of the ABA Section of Litigation. This article should be not construed as an endorsement by the ABA or ABA Entities.

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