In my last post, I explained the broad regulatory scheme maintained by the Food and Drug Administration and how the agency and the Department of Justice have been increasingly going after corporate executives in companies that have allegedly violated the Food, Drug, and Cosmetic Act (FDCA) and related statutes. That new focus is part of a greater FDA and DOJ effort to ratchet up enforcement, by seeking exceptionally severe penalties for violations of the FDCA and related statutes. For that reason, I wanted to follow up by providing a glimpse of what is really at stake for these individuals and their companies when faced with the possibility of being charged with criminal actions. The result may be more than merely having to admit wrongdoing, and the penalties can be draconian.
The DOJ has various methods to seek redress and damages for criminal acts concerning food, drugs, dietary supplements, medical devices, and other articles regulated by the FDA. Those methods exist notwithstanding civil remedies such as injunctions, seizures, and condemnations. Such methods are exacted through plea agreements and convictions at trial. Although the crimes being investigated and/or charged may relate to a product or article regulated by the FDA, the U.S. Attorney’s Office is not limited to prosecuting under FDCA theories. The U.S. Court of Appeals for the Third Circuit has stated, “there is no indication that Congress intended that all conduct that is independently violative of the mail fraud statute must instead be prosecuted under the Food, Drug and Cosmetic Act. Rather, the government has some discretion to choose to prosecute defendants under one of two overlapping statutes so long as there is no discrimination against any class of defendants and assuming, as is the case here, that the conduct alleged violates either statute.” United States v. Poet, 315 F. App’x 389, 393 (3d Cir. 2009). There are, thus, other statutes under which the DOJ can bring charges, and those other statutes may permit imposition of a harsher penalty than the FDCA violation. Consider the following provisions of the FDCA, the federal Mail Fraud statute, and the False Claims Act, which are commonly used as bases for charges concerning food, drugs, dietary supplements, and other FDA-related articles.
Under the FDCA, criminal violations that involve an adulterated or misbranded product, device, or other article, will likely be punishable by incarceration time and fines. Under 21 U.S.C. § 333, a misdemeanor conviction carries the possibility of up to a year in jail and a fine of no more than $1,000, or both. 21 U.S.C.A. § 333(a)(1). For felony violations, a defendant faces up to three years in prison and a fine up to $10,000. 21 U.S.C.A. § 333(a)(2). For a “device,” which can be an instrument, apparatus, machine or related article, component, part, or accessory, a single violation carries a fine between $15,000 to $1 million per violation. 21 U.S.C.A. § 333(f)(1)(A). Criminal acts concerning devices that continue for a prolonged period of time and that satisfy certain other criteria can reach up to $10 million depending on the facts at issue.
The Mail Fraud statute is exceptionally broad, and a person can commit mail fraud in a number of ways. Generally, however, to prove someone committed this offense, the government must prove three elements beyond a reasonable doubt: (1) the defendant’s knowing and willful participation in a scheme or artifice to defraud, (2) with the specific intent to defraud, and (3) the use of the mails in furtherance of the scheme. See United States v. Poet at 391. The penalty for a single violation of the Mail Fraud Statute includes imprisonment for up to 20 years. If the violation “affects a financial institution,” the maximum penalty becomes up to 30 years in prison. 18 U.S.C.A. § 1341.
The DOJ also proceeds under the False Claims Act at 31 U.S.C. § 3729, which protects against attempts to defraud the federal government. Charges under this statute that concern FDA-regulated subjects are often brought when reimbursement claims are submitted to the federal government through programs such as Medicare and Medicaid. The False Claims Act prohibits a person from making, or conspiring to make, a false record, claim, or statement concerning the federal government. The penalty for a single violation is a fine from $5,000 to $10,000, plus three times the amount of damages which the Government sustains because of the act of that person. 31 U.S.C.A. § 3729.
The majority of cases actually charged are resolved through plea agreements. This is an oft-used route because it not only limits liability for the offending party, but also formally (and publically) causes the accused to accept responsibility. A plea may also allow the government to more easily secure compensation for all victims affected as well as ensure that the illegal conduct stops. The decision to enter a plea is not easy for a company or an individual despite that they may face more serious penalties after conviction at trial. The U.S. government has secured billions of dollars in corporate remuneration for citizens as well as for both federal and state governments. See e.g. DOJ Press Release for Eli Lilly & Co. Plea for Zyprexa, which involved a $1.415 billion total settlement ($515 million criminal fine $800 million settlement with federal government and states, and asset forfeiture of $100 million); DOJ Press Release for Eli Lilly & Co. Plea for Evista, which involved a $6 million criminal fine; an additional $6 million forfeiture, and $24 million in equitable disgorgement; and DOJ Press Release for Abbott Labs for Depakote, a $1.5 billion settlement that included a $700 million fine and forfeiture along with $800 million in settlements with the federal and various state governments. Examples of sentencing memorandums in similar cases can be seen in here and here.
Not all cases, though, end by plea. For example, in United States v. Hunter, 445 F. App’x 998, 1000 (9th Cir. 2011), the U.S. Court of Appeals for the Ninth Circuit affirmed the conviction of the defendant for selling smuggled HGH (human growth hormone) and counterfeit Botox drugs that she received from China, as well as for identity theft crimes. The investigation at issue was the result of a combined action of the U.S. Immigration and Customs Enforcement (ICE), the Food and Drug Administration; U.S. Customs and Border Protection (CBP); the U.S. Postal Inspections Service’s Identity Theft and Economic Crime (ITEC) Task Force; and the Social Security Administration. The U.S. Attorney’s Office for the Central District of California was responsible for the actual prosecution. Ms. Hunter was convicted by jury and received 4 years in prison. In United States v. Ellis, 326 F.3d 550, 553 (4th Cir. 2003), the FDA had initially investigated the defendant for manufacturing and selling GHB, which was a party drug known for its euphoric effects. The DOJ charged the defendant with three criminal counts related to the manufacture, sale, and introduction of an adulterated and misbranded drug. The jury convicted the defendant of two misdemeanor counts and one felony count, and the court sentenced him to approximately one year in jail.
As illustrated above, the DOJ may seek a range of substantial penalties for criminal violations arising out of the FDCA and other statutes. The financial penalties alone can be a crippling blow to any company, and in some circumstances, result in decades-long incarceration orders, including a virtual life sentence. Over the years the federal government appears to adhere to a bias. Large companies, particularly pharmaceutical companies, often enter plea agreements with the federal government wherein large dollar amounts are paid but jail time is avoided. The executives of smaller companies, by contrast, are more apt to serve time in prison in addition to the payment of fines (and those fines ordinarily represent a much larger percentage of net income than the fines paid by larger concerns).
