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Michael Friedman, et al v. Kathleen Sebelius

December 13, 2010


The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge


Plaintiffs Michael Friedman, Paul Goldenheim, and Howard Udell seek review of a final decision of the Secretary of the Department of Health and Human Services ("the Secretary" or "the Department") excluding them from participation in Medicare, Medicaid, and all other federal health care programs for twelve years. The Secretary's exclusion decision was based on plaintiffs' misdemeanor guilty pleas to charges that they served as "responsible corporate officers" of the Purdue Frederick Company during a five-and-a-half-year period in which that company has admitted to marketing misbranded drugs with "the intent to defraud or mislead" in violation of the Food, Drug, and Cosmetic Act ("FDCA"), 21 U.S.C. §§ 331(a), 333(a). Plaintiffs seek reversal of the Secretary's exclusion decision, arguing that their pleas under the "responsible corporate officer" doctrine do not reflect any personal wrongdoing and that excluding them from participation in all federal health care programs is therefore inconsistent with the text and purpose of the exclusion statute. For the reasons set forth below, the Court disagrees and affirms the Secretary's decision.



The facts in this case are largely undisputed. In the fall of 2001, the United States Attorney's Office for the Western District of Virginia began investigating the marketing and sale of OxyContin, a prescription pain medication manufactured and distributed by the Purdue Frederick Company ("Purdue"). (AR 733)*fn1 OxyContin is a controlled-release form of oxycodone approved by the Food and Drug Administration ("FDA") in 1995 to treat moderate to severe pain when a continuous, around-the-clock painkiller is needed for an extended period of time. Due in part to its potential for abuse and dependence, OxyContin has been classified as a Schedule II controlled substance by the DEA.*fn2

Over the next four years, government prosecutors conducted hundreds of interviews and reviewed millions of documents detailing Purdue's aggressive campaign to increase the sale of OxyContin. (AR 743) The investigation revealed that "[b]eginning on or about December 12, 1995, and continuing until on or about June 30, 2001, certain Purdue supervisors and employees, 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." (AR 2225-26) Company representatives made these claims despite the fact that Oxycontin's approved new drug application "did not claim that OxyContin was safer or more effective than immediate-release oxycodone or other pain medications," and the company "did not have, and did not provide the FDA with, any clinical studies demonstrating that OxyContin was less addictive, less subject to abuse and diversion, or less likely to cause tolerance and withdrawal than other pain medications." (AR 2224)

Based on these findings, the government filed criminal charges against Purdue and three of the company's senior executives in May 2007. The company was charged with misbranding*fn3 a drug with intent to defraud or mislead, a felony under the FDCA. See 21 U.S.C. §§ 331(a), 333(a)(2).*fn4 The three executives-Friedman, Goldenheim, and Udell*fn5 -were charged with misbranding OxyContin as "responsible corporate officers," a misdemeanor under the FDCA. See 21 U.S.C. § 333(a)(1) (rendering "any person" who violates the misbranding provision criminally liable); United States v. Park, 421 U.S. 658, 667-76 (1975) (explaining that, under the "responsible corporate officer" doctrine, liability under the Act extends to any person with "responsibility and authority either to prevent in the first instance, or promptly to correct, the violation complained of," regardless of whether that person was aware of or intended to cause the violation).

As part of a global settlement of the government's claims against Purdue, the company and plaintiffs entered guilty pleas to violating the FDCA. See United States v. Purdue Frederick Co., 495 F. Supp. 2d 569 (W.D. Va. 2007) (approving plaintiffs' plea agreements). The company also agreed to pay a total of $600 million in monetary sanctions, "reported to be one of the largest [sanctions] in the history of the pharmaceutical industry."*fn6 Id. at 572. Plaintiffs agreed to disgorge a total of $34.5 million, all of which was to be paid to the Virginia Medicaid Fraud Control Unit's Program Income Fund.*fn7 Plaintiffs were also sentenced to three years' probation, 400 hours of community service, and a $5,000 fine. (AR 2390-91)

As part of their plea agreements, plaintiffs also agreed that the Court could accept an "Agreed Statement of Facts" ("Statement") prepared by the parties as the "factual basis" for their guilty pleas. (AR 2195, 2204, 2213) The contents of the Statement are critical to the Court's analysis of plaintiffs' instant claims.

The Statement sets forth a detailed account of Purdue's misbranding of OxyContin, explaining that company supervisors and employees repeatedly misrepresented the drug's addictiveness and potential for abuse and diversion in an effort to "defraud or mislead" the medical community. (AR 2256-65) Although the Statement specifies that none of the individual corporate officers had "personal knowledge" of all of the matters described in the statement, it acknowledges that Friedman, Goldenheim, and Udell were "responsible corporate officers" of Purdue during the relevant time and therefore "had responsibility and authority either to prevent in the first instance or to promptly correct certain conduct resulting in the misbranding" of OxyContin. (AR 2254, 2265-66) The Statement also notes that during the relevant time period, Purdue received approximately $2.8 billion in revenue from the sale of OxyContin. (AR 2253)


Although the plea agreements wrapped up the government's criminal investigation of the misbranding of OxyContin, that was not the end of the matter. On November 15, 2007, the Inspector General of the Department ("the I.G.") notified plaintiffs that as a result of their recent convictions, the Department was considering whether to exclude them from participation in all federal health care programs, including Medicare and Medicaid. (AR 2469-74) As described in more detail below, these notices were issued pursuant to 42 U.S.C. § 1320a-7(b), which permits the Secretary to exclude individuals convicted of certain crimes from participation in federal health care programs.*fn8 The notices cited two specific subsections of section 1320a-7(b) as the basis for plaintiffs' potential exclusion: (1) subsection (b)(1), which permits the Secretary to exclude individuals convicted of "a misdemeanor related to fraud . in connection with the delivery of a health care item or service," and (2) subsection (b)(3), which permits the exclusion of individuals convicted of "a misdemeanor relating to the unlawful manufacture, distribution, prescription, or dispensing of a controlled substance."

After considering information filed by plaintiffs in response to the exclusion letters, the I.G. issued formal notices of exclusion to plaintiffs on March 31, 2008.*fn9 (AR 2395-2406) The Department also exercised its discretion under section § 1320a-7(c)(3)(D) to increase the period of exclusion from three years to twenty years based on its consideration of certain aggravating factors. See 42 U.S.C. § 1320a-7(c)(3)(D).*fn10 Specifically, the I.G. found that an increase was warranted because the acts that resulted in plaintiffs' convictions (1) were committed over a period of one year or more; (2) had a significant adverse financial impact on health care program beneficiaries; and (3) had a significant adverse physical or mental impact on one or more program beneficiaries or other individuals.

After an unsuccessful attempt in this Court to enjoin the I.G.'s exclusion decision, see Friedman v. Leavitt, No. 08-cv-586 (D.D.C. Dec. 5, 2008) (Urbina, J.) (dismissing on grounds of failure to exhaust administrative remedies), plaintiffs exercised their right to appeal the I.G.'s exclusion decision to an administrative law judge ("ALJ"). See 42 U.S.C. § 1320a-7(f). While their appeal was pending, the I.G. considered additional mitigating evidence submitted by plaintiffs regarding their cooperation with federal and state law enforcement officials. Based on this evidence, the I.G. issued revised notices of exclusion that reduced the period of exclusion from twenty to fifteen years. (AR 2463-68)

On January 9, 2009, the ALJ affirmed the I.G.'s decision to exclude plaintiffs from participation in all federal health care programs for fifteen years, finding that plaintiffs' convictions rendered them eligible for exclusion under both section 1320a-7(b)(1) and (b)(3). (AR 1-15) The ALJ also concluded that based on the aggravating and mitigating factors identified by the I.G., a fifteen-year period of exclusion was within the "reasonable range." (AR 15)

Plaintiffs appealed the ALJ's decision to the Departmental Appeals Board ("DAB"), which issued a final decision on August 28, 2009.*fn11 (AR 16-46) The DAB sustained the exclusions, flatly rejecting plaintiffs' argument that section 1320a-7(b) was not intended to reach individuals convicted of misdemeanors under the "responsible corporate officer" doctrine. The DAB refused to adopt plaintiffs' characterization of themselves as no more than innocent third parties to the misbranding, finding instead that they "bear a measure of culpability and blameworthiness" for the misbranding because "they had, but failed to exercise, the duty and responsibility, and the power and authority, to learn about and curtail the fraudulent activities of Purdue employees." (AR 31-32)

The DAB did, however, reduce the length of plaintiffs' exclusions from fifteen to twelve years, concluding that the record did not contain substantial evidence to support the I.G.'s finding that the acts underlying plaintiffs' convictions had a significant adverse physical or mental impact on program beneficiaries. (AR 40-42) Although neither the plaintiffs nor the DAB disputed the I.G.'s contention that substantial harm befell those who abused or became addicted to OxyContin, the DAB found that the record did not establish "the casual connection between that harm and the misbranding that occurred." (AR 40-41) The DAB therefore reduced the period of exclusion by three years. (AR 44-45)

Having exhausted their administrative remedies, plaintiffs again turned to this Court for review. On October 28, 2009, plaintiffs filed a complaint against the Secretary*fn12 seeking a declaratory judgment that the Secretary's final exclusion order was "contrary to law, arbitrary and capricious, an abuse of discretion, and not supported by substantial evidence, in violation of the Administrative Procedure Act, 5 U.S.C. § 706."*fn13 (Complaint ΒΆ 1.) Plaintiffs also asked this Court to issue an order vacating the exclusions or, in the alternative, to remand the exclusions to the Department for further administrative review. After ...

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