by Jamie Reeves
In November lawyers in the U.S. Attorney’s office and the Department of Justice made comments that seem to demonstrate that the government will increasingly seek to hold individual directors and officers accountable for bad corporate behavior. Gerald Sullivan, Assistant United States Attorney, U.S. Attorney’s office has warned that the government will follow the conduct to identify the party responsible for non-compliance, whether that’s a corporate officer or even an employee out in the field. He’s commented that non-compliance can often be traced back to the executive suite. Corporate Board Member asked Joshua T. Buchman and Michael W. Peregrine, partners, McDermott Will & Emery LLP, if directors should be concerned with the heightened focus on the corporate officer doctrine.
Corporate Board Member: What steps can directors and officers can take in light of this increasing reliance on the Responsible Corporate Officer Doctrine?
Michael W. Peregrine: First, the Responsible Corporate Officer Doctrine is not a new concept, but we are seeing a broader policy perspective on behalf of a number of different governmental agencies to attribute to the C-suite and to the boardroom responsibility for preventable harm to the corporation or to the public. This is not the beginning of some broad effort by the government to seek strict liability for every possible violation of law. This is limited in its approach to matters, which Josh is going to describe more. But number one, we have to look at it in a balanced manner. It’s a dinging cymbal, not a clanging bell. So we don’t want to overreact. That being said, we want officers and directors to clearly understand that there is some shift, there is a momentum and on certain types of civil or criminal matters the government is definitely seeking to hold individuals responsible through those kind of strict liability principles.
Number two is understanding that this is real, it’s not alarmist, it’s out there. Number three, this is not just the Department of Justice in the context of medical devices or pharma. The IRS is heavily involved in responsible corporate officer proceedings in the context of pursuing the C-suite for payroll tax violations. The SEC, for example, has historically had this kind of concept in disclosure violations. It’s not just the Department of Justice, this is becoming an enforcement tool used by a variety of federal, and in certain cases, states.
Joshua T. Buchman: The thing to keep in mind is that the doctrine has been applied, generally speaking, in criminal cases in which the underlying criminal offense is a strict liability misdemeanor. There are two Supreme Court cases going back to 1943 and 1975 that basically created and endorsed the doctrine and all the courts of appeal that have addressed it since then have cited those cases. But what we’re talking about is strict liability offenses, primarily under the various environmental laws and under the Food, Drug and Cosmetic (FDA) Act. The two most recent examples are both FDA cases involving misbranded medical devices or drugs. And basically the criminal statutes under which the executives were prosecuted are misdemeanor strict liability crimes, meaning that there is not intent element to the offense, which is important because the prosecutors essentially say if you were responsible for, or in a position of responsibility at a company such that your position would afford you the ability to prevent or do something about these corporate violations of the law, then you could be held responsible for the corporation’s violation of law despite having no knowledge that it was taking place and no intent that the corporation did anything wrong. That’s the most concerning aspect of this doctrine—people will be pursued under the criminal laws of this country without any requirement that they have knowledge of the criminal conduct or that they intended to violate the law.
CBM: What message do these cases send to board members?
MP: Number one, this is not just a one-off concept. Number two, people are actually pleading guilty and in the OxyContin case the executive officers paid major penalties. Third, the general counsel in [the OxyContin case] was indicted, which brings a little bit different picture into all this. If it becomes practice where the general counsel or compliance officer is considered by the government to be a responsible person, you are going to see a tremendous focus upstream. The board must be prepared for an increase in the level of reporting up the ladder of potential violations of the law by corporate employees to come to the general counsel’s attention. They’re not going to be willing to sit on this or deal with it themselves. They’re going to want it off their plate and they’re going to be more aggressive in doing something. Board members and executives need to know that it’s not a slap on the wrist. They will receive increased reporting from their general counsel who will not want to be tagged with this responsibility. But the good news is you can substantially increase the board’s emphasis on the compliance program’s effectiveness. Boards and senior leadership can take steps to make sure that the tone at the top is clear and unambiguous, that education is strong, and that compensation is structured for compliance.
Continued...