Friedman v. Sebelius, 11–5028.

• Decision Date: 27 July 2012
• Docket Number: No. 11–5028.,11–5028.
• Citation: 686 F.3d 813
• Parties: Michael FRIEDMAN, et al., Appellants v. Kathleen SEBELIUS, in her Official Capacity as Secretary, Department of Health and Human Services and Daniel R. Levinson, in his Official Capacity as Inspector General, Department of Health And Human Services, Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

686 F.3d 813

Michael FRIEDMAN, et al., Appellants

v.Kathleen SEBELIUS, in her Official Capacity as Secretary, Department of Health and Human Services and Daniel R. Levinson, in his Official Capacity as Inspector General, Department of Health And Human Services, Appellees.

No. 11–5028.

United States Court of Appeals,District of Columbia Circuit.

Argued Dec. 6, 2011.

Decided July 27, 2012.

Appeal from the United States District Court for the District of Columbia (No. 1:09–cv–02028).

Carter G. Phillips argued the cause for appellants. With him on the briefs were Matthew D. Krueger, Joseph R. Guerra, Anand H. Das, Jonathan L. Abram, and Jonathan L. Diesenhaus.

Lisa S. Blatt, Jeffrey L. Handwerker, and Dirk C. Phillips were on the brief for amicus curiae Pharmaceutical Research and Manufacturers of America in support of appellants.

Amar D. Sarwal was on the brief for amicus curiae Association of Corporate Counsel in support of appellants.

Michael A. Carvin, Daniel J. Popeo, and Richard A. Samp were on the brief for amicus curiae Washington Legal Foundation in support of appellants.

Robin M. Meriweather, Assistant U.S. Attorney, argued the cause for appellees. With her on the brief were Ronald C. Machen Jr., U.S. Attorney, and R. Craig Lawrence, Assistant U.S. Attorney.

Before: SENTELLE, Chief Judge, WILLIAMS and GINSBURG, Senior Circuit Judges.

Opinion for the Court by Senior Circuit Judge GINSBURG.

Opinion concurring in part, dissenting in part, and dissenting from the judgment filed by Chief Judge SENTELLE.

Opinion dissenting in part, concurring in part, and concurring in the judgment filed by Senior Circuit Judge WILLIAMS.

GINSBURG, Senior Circuit Judge:

Michael Friedman, Paul Goldenheim, and Howard Udell were executives at the Purdue Frederick Company when it misbranded a drug, to wit, the painkiller OxyContin, a schedule II controlled substance. The Company was convicted of fraudulent misbranding, a felony, whilst the executives were convicted under the “responsible corporate officer” doctrine of the misdemeanor of misbranding a drug. Based upon their convictions, the Secretary of Health and Human Services later excluded the individuals from participation in Federal health care programs for 12 years, pursuant to 42 U.S.C. § 1320a–7(b). They sought review of the Secretary's decision in the district court, arguing section 1320a–7(b) does not authorize their exclusion and, in any event, the Secretary's decision was unsupported by substantial evidence and was arbitrary and capricious because she failed to give a reasoned explanation for the allegedly unprecedented length of their exclusions. The district court granted summary judgment for the Secretary.

We hold the statute authorized the Secretary's exclusion of the three executives but her decision was arbitrary and capricious for want of a reasoned explanation for the length of their exclusions. We therefore reverse the judgment of the district court and direct it to remand the matter to the Secretary for further proceedings.

I. Background

The Appellants were senior corporate officers at Purdue when the Company developed and marketed OxyContin. According to the Information initiating the criminal cases against the Appellants and the Company, the “misbranding” occurred when unnamed employees at Purdue, “with the intent to defraud or mislead, marketed and promoted OxyContin as less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications.” United States v. Purdue Frederick Co., 495 F.Supp.2d 569, 571 (W.D.Va.2007). Purdue pleaded guilty to felony misbranding, in violation of 21 U.S.C. § 331(a) and § 333(a)(2). Id. at 570. Pursuant to the plea agreement, the district court put the Company on probation for five years, fined it $500,000, and imposed other monetary sanctions totaling approximately $600 million, of which approximately $160 million was earmarked for restitution to Federal and State health care agencies, which had been large buyers of the misbranded drug. Id. at 572. At the same time, the Appellants pleaded guilty to misdemeanor misbranding, in violation of 21 U.S.C. § 331(a) and § 333(a)(1), for their admitted failure to prevent Purdue's fraudulent marketing of OxyContin; each was sentenced to do 400 hours of community service, fined $5,000, and put on probation for three years. The sentencing court also ordered the Appellants to disgorge compensation they had received from Purdue totaling approximately $34.5 million.

Under the “responsible corporate officer” (RCO) doctrine, a “corporate agent, through whose act, default, or omission the corporation committed a crime” in violation of the Food, Drug, and Cosmetic Act may be held criminally liable for the wrongdoing of the corporation “whether or not the crime required ‘consciousness of wrongdoing’ ” by the agent. United States v. Park, 421 U.S. 658, 670, 95 S.Ct. 1903, 44 L.Ed.2d 489 (1975). Criminal liability under the RCO doctrine extends “not only to those corporate agents who themselves committed the criminal act, but also to those who by virtue of their managerial positions or other similar relation to the actor could be deemed responsible for its commission.” Id. A corporate officer may therefore be guilty of misdemeanor misbranding without “knowledge of, or personal participation in,” the underlying fraudulent conduct. Id. The Appellants, as part of their plea agreements, admitted having “responsibility and authority either to prevent in the first instance or to promptly correct” the misrepresentations certain unnamed Purdue employees made regarding OxyContin and thereby, under the RCO doctrine, admitted being guilty of misdemeanor misbranding.

Several months after the Appellants had been convicted, the Office of the Inspector General (OIG) of the Department of Health and Human Services determined the Appellants should be excluded from participation in Federal health care programs for 20 years, pursuant to 42 U.S.C. § 1320a–7(b)(1) and (3).^* The OIG based the length of the Appellants' exclusion upon three aggravating factors listed in the Department's published regulations—the conduct underlying the convictions lasting more than one year, the amount of the financial loss, and the significant adverse physical or mental impact upon program beneficiaries. See42 C.F.R. § 1001.201(b)(2)(i)–(iii); id. § 1001.401(c)(2)(i)–(ii).

The executives appealed the OIG's determination to an Administrative Law Judge and ultimately to the Departmental Appeals Board, to which the Secretary had delegated authority to review decisions to exclude an individual. During the pendency of the appeal to the ALJ, the OIG reduced the length of the exclusion to 15 years because the Appellants had assisted law enforcement authorities to combat abuse of OxyContin, a mitigating factor. The ALJ affirmed the 15–year exclusion as being within a “reasonable range.” The DAB affirmed that decision, interpreting the statute to authorize the exclusion of an individual convicted of a misdemeanor when the facts underlying that conviction have a “nexus or common sense connection” either to fraud or to the distribution of a controlled substance. The DAB found the Appellants' “misdemeanor misbranding offense” had the requisite connection to fraud because “[t]he actual misbranding that resulted in [their] conviction was the [Company's] fraudulent misbranding of OxyContin.” The DAB further reduced the length of the exclusion to 12 years on the ground the “ALJ's finding that [the Appellants'] crimes had an adverse impact on program beneficiaries and others is not supported by substantial evidence” becausethere is no evidence the misbranded Oxycontin had any adverse effect.

The Appellants sought review in the district court, which held the statute authorized their exclusion because, “by its plain terms, section 1320a–7(b)(1) appears to permit the exclusion of anyone convicted of an offense ‘having a connection with or reference to’ fraud or financial misconduct in the delivery of a health care item or service.” Friedman v. Sebelius, 755 F.Supp.2d 98, 107–08 (D.D.C.2010) (quoting Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992)).^* The district court upheld the length of the exclusion because it concluded the DAB's application of the aggravating and mitigating factors was supported by substantial evidence. Id. at 117.

II. Analysis

We review the judgment of the district court de novo. Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 916 (D.C.Cir.2009) (“In reviewing HHS's actions on appeal from the district court, this court addresses the issue de novo, without deference to the decision of the district court” (internal quotation marks and citation omitted)). We are to uphold the Secretary's decision to exclude the Appellants if it was “based on substantial evidence in the record and correctly applie[d] the relevant legal standards.” Rossello v. Astrue, 529 F.3d 1181, 1184 (D.C.Cir.2008) (internal quotation marks and citation omitted); see also42 U.S.C. § 1320a–7(f) (providing for review pursuant to 42 U.S.C. § 405(g) of the Secretary's decision to exclude an individual); id. § 405(g) (“The findings of the [Secretary of Health and Human Services] as to any fact, if supported by substantial evidence, shall be conclusive”). We will defer to the Secretary's reasonable interpretation of the statute she administers. Sullivan v. Everhart, 494 U.S. 83, 88–89, 110 S.Ct. 960, 108 L.Ed.2d 72 (1990) (applying Chevron deference in reviewing per § 405(g) Secretary's interpretation of the Social Security Act).

The Appellants contend section 1320a–7(b)(1) does not authorize their exclusion because misdemeanor misbranding is not a “misdemeanor relating to fraud.” They also argue that, even if the statute authorizes their exclusion, the Secretary's decision to exclude them for 12 years was unsupported by substantial evidence and was arbitrary...