Yates Memo: FDA and DOJ to Continue Pursuing Civil and Criminal Penalties Against Individuals Engaged in Corporate Misconduct

Oct 15, 2015   

Thursday October 15, 2015

On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a Memorandum to the U.S. Department of Justice (“DOJ”) staff outlining changes to DOJ policies on criminal and civil enforcement of responsible individuals in corporate criminal investigations. The new Memorandum directs DOJ staff to focus on holding individuals accused of corporate misconduct accountable for their actions in all civil and criminal corporate investigations moving forward.

Although the DOJ’s stated policy to aggressively pursue individuals involved in corporate misconduct is a recent development, the authority empowering the Government to take such action has always existed. For instance, in the food and drug realm, the U.S. Supreme Court ruled in 1975 that corporate officials may be held strictly liable for violations committed by the corporate entity if they stood in a responsible relationship to the violation. United States v. Park, 431 U.S. 658, 674-77 (1975). In United States v. Park, a corporate officer was convicted for holding for sale adulterated or misbranded food, a misdemeanor violation of the federal Food, Drug, and Cosmetic Act (“FDCA”)(21 U.S.C. § 301 et seq.). The Supreme Court held that the FDCA imposes on senior corporate executives an unwavering “duty to implement measures that will insure that violations will not occur.”

Since 1975, the jurisprudence in this area of law has continued to develop, as courts have held corporate officials in a wide range of FDA-regulated industries responsible where the corporate official had the power to prevent or correct a violation of law but failed to do so, regardless of whether they had any personal knowledge of the violation. In 2011, the FDA published guidelines and criteria it intends to follow in investigating or recommending corporate officer prosecutions under the Park Doctrine. As we explain in further detail below, DOJ and FDA have recently pursued criminal convictions against individual officers and employees of companies responsible for introducing adulterated and misbranded products into interstate commerce.

Although we focus in this article on FDA-regulated industries, the Yates Memorandum clearly establishes that the Government’s focus on individual liability for corporate wrongdoing will spread to many other regulated industries, including financial services, import and export, and tax, and we expect the Yates Memorandum to be put to the test in the ongoing Volkswagen investigation. The DOJ’s focus on individual culpability, coupled with its recent turn toward aggressive prosecution, sends a strong signal to regulated industries that the number of civil and criminal claims against individuals will continue to rise. Below, returning our focus to FDA-regulated industries, we explain the history of the Government’s authority to prosecute responsible corporate officers and analyze the Government’s recent criminal enforcement actions against individuals.

DOJ Memorandum Regarding Individual Accountability for Corporate Wrongdoing

As explained above, Deputy Attorney General Sally Quillian Yates recently issued a Memorandum to DOJ personnel detailing the DOJ’s new policies and efforts to crack down on individual liability for corporate wrongdoing. In a speech discussing the new policy, Deputy Attorney General Yates stated:

Crime is crime. And it is our obligation at the Justice Department to ensure that we are holding lawbreakers accountable regardless of whether they commit their crimes on the street corner or in the boardroom. In the white-collar context, that means pursuing not just corporate entities, but also the individuals through which these corporations act.

When applied in the context of FDA-regulated industries, the DOJ’s Memorandum expands upon the Government’s already-existing authority under the FDCA to prosecute individuals for corporate wrongdoing. Under the FDCA, in addition to felony misbranding and adulteration violations which may be charged based upon the specific intent of the defendant, corporate officers and executives may be found strictly liable for the criminal actions of others within the organization, even in the absence any personal wrongdoing, negligence, or knowledge of either wrongdoing or negligence.

Section 333 of the FDCA sets forth the Government’s criminal enforcement powers. This section provides two tiers of liability for FDCA offenses: misdemeanors and felonies. First, the FDCA authorizes the Government to pursue a misdemeanor charge for engaging in any act prohibited by the FDCA, regardless of whether the person or entity had criminal intent to do so. Specifically, the essential elements of a misdemeanor offense under the FDCA are that a defendant (1) distributed, or caused the distribution of, a food, drug, device, or cosmetic in connection with interstate commerce as outlined in the statute, and (2) the food or drug was adulterated or misbranded. (For more information, please review the U.S. Attorneys’ Civil Resource Manual here.) This misdemeanor provision creates a “strict liability” offense, which means that the Government need not prove that the defendant intentionally broke the law in order to secure a conviction. Under the FDCA, a misdemeanor carries the possibility of up to a year in jail and a fine of no more than $1,000, or both. Once an individual or entity has been convicted for a misdemeanor offense under the FDCA, any subsequent violation of the statute could result in felony charges. Equally as importantly, following a misdemeanor criminal conviction, the Government may impose collateral consequences, including exclusion of corporate executives from participation in federal programs, payment of significant fines, or debarment. (For more information about collateral consequences of the Park Doctrine, please read our previous blog here.)

Second, the Government may pursue felony charges against those who commit a violation of the FDCA “with the intent to defraud or mislead.” According to the DOJ’s U.S. Attorneys’ Civil Resource Manual, an intent to defraud or mislead can be established by demonstrating a fraud upon either the ultimate consumer of the product, or upon the FDA, or both. For example, courts have held that a seller of violative products acts “with the intent to defraud” within the meaning of section 333 of the FDCA if he or she takes affirmative steps to evade detection by, and thus mislead, regulatory authorities. See, e.g., United States v. Andersen, 45 F.3d 217, 220 (7th Cir. 1995)(“The FDA represents the public, and a deliberate attempt to mislead the FDA should be considered as clearly a fraud as are attempts to mislead customers or other individuals.”) Courts have also held that schemes to circumvent the requirements of the FDCA constitute schemes to defraud the FDA. See United States v. Bradshaw, 840 F.2d 871, 874 (11th Cir.), cert. denied, 488 U.S. 924 (1988). In one example of a scheme to defraud the FDA, a defendant prevented a legitimate inspection by the FDA and prepared and maintained false records. By preventing a legitimate inspection by the FDA, the defendant interfered with the FDA’s governmental function and undermined the FDA’s important statutory responsibilities. See DOJ’s U.S. Attorneys’ Civil Resource Manual.

The Yates Memorandum essentially directs the Government to consider the applicability of the FDCA’s misdemeanor and felony provisions and the Park Doctrine in all investigations where an individual may be accountable for corporate wrongdoing. This Memorandum directs the Government to take certain actions intended to ensure that individuals suspected of corporate misconduct will be held accountable for their actions in all civil and criminal corporate investigations moving forward. The “six key steps” outlined in the DOJ Memorandum are as follows:

  1. To be eligible for anycooperation credit, corporations must provide to the DOJ all relevant facts about the individuals involved in corporate misconduct.
  2. Both criminal 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, no corporate resolution will provide protection from criminal or civil liability for any individuals.
  5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitation expires and declinations as to individuals in such cases must be memorialized.
  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 the individual’s ability to pay.

These policies send a clear message that, in the course of investigating corporations, the DOJ will investigate and pursue criminal charges or civil claims against individuals. As we explain below, companies and employees in allindustries should take notice, as the DOJ’s new enforcement policies suggest that criminal prosecutions will be initiated against individuals working in all other regulated industries.

Examples of DOJ’s Recent Criminal Enforcement Against Individuals in FDA-Regulated Industries

Adulterated Cantaloupe

In 2014, a federal court sentenced Eric and Ryan Jensen, the owners of a cantaloupe farm, to serve five years of probation, with the first six months in home detention, for introducing adulterated food into interstate commerce. The Jensens were required to complete 100 hours of community service and pay $150,000 in restitution. The DOJ’s investigation confirmed that the cantaloupe from Jensen Farms were contaminated with listeria monocytogenes (“listeria”) and linked to 33 deaths and 147 hospitalizations. The FDA issued a Warning Letter to Jensen Farms stating that several environmental swabs from various surfaces and locations throughout their facility and multiple samples of cantaloupe taken during an inspection had tested positive for listeria. The cantaloupe products were, therefore, adulterated within the meaning of the FDCA. Thereafter, the FDA recommended the case to DOJ for prosecution.

Adulterated Peanuts

On September 21, 2015, the DOJ announced the sentencing of corporate officials at the Peanut Corporation of America (“PCA”), who were found guilty of introducing misbranded and adulterated food into the market, as well as other charges related to the sale of salmonella-tainted peanuts and peanut products. (For additional information about this sentence, please read the DOJ’s announcement here and the New York Times’ coverage here.) An outbreak of salmonella in 2008, which resulted in nine deaths and affected 714 others, was eventually linked to a peanut paste produced by PCA. In 2009, the FDA conducted an inspection of PCA’s plant in Blakely, Georgia, and issued a Form 483 describing several observations of FDCA violations. These observations included the failure to (1) manufacture foods under conditions and controls necessary to minimize the potential for growth of microorganisms and contaminations; (2) maintain equipment and containers in a manner that protects against contamination (e.g., no evidence equipment was cleaned after salmonella was isolated from processed peanut paste); and (3) perform mechanical manufacturing steps to protect food against contamination.

At trial, the Government produced evidence that PCA company officials fabricated certificates of analysis for shipments of peanut products showing they were free of pathogens, even where the products had not been tested or tested positive for pathogens. In that case, a federal judge sentenced Stewart Parnell (the former owner and president of PCA), Michael Parnell (a food broker who worked on behalf of PCA), and Mary Wilkerson (an employee who held various positions at PCA’s Blakely, Georgia plant) to terms of twenty-eight, twenty, and five years in prison, respectively. Mr. Parnell’s 28-year prison sentence is regarded as the toughest penalty ever given for a corporate official in a food poisoning outbreak.

Adulterated Dietary Supplements

Less than one week after the sentencing of PCA’s corporate officials, the DOJ sentenced Barry Steinlight, the owner of a dietary supplement company, Raw Deal, Inc. (“Raw Deal”), to serve a 40-month prison term for conspiring to commit wire fraud in relation to a scheme in which his company sold diluted and adulterated dietary supplements.

On October 4, 2012, the FDA issued a Warning Letter to Mr. Steinlight stating “serious violations of the dietary supplement CGMP regulations in 21 CFR, Part 111 “were discovered during a FDA inspection. According to the FDA, those violations caused Raw Deal’s dietary supplements to be adulterated within the meaning of the FDCA because the products were prepared, packed, or held under conditions that did not meet current good manufacturing practices.

In 2013, FDA issued a second Warning Letter to Mr. Steinlight stating that the dietary supplements manufactured by Raw Deal were adulterated because “ingredients used to manufacture the products have been substituted wholly or in part.” In that letter, FDA described how certain products contained maltodextrin or white rice powder but these ingredients were not declared in the formulations provided to customers. The Warning Letter also included examples of how substituting maltodextrin for ingredients in a formula altered the composition of the products and rendered them adulterated. One such example described that Raw Deal had substituted 95.6 percent of the ingredients by weight with maltodextrin and white rice powder, grossly shrinking the percentage of declared ingredients from 100 percent to a mere 4.4 percent of the batch by weight. Raw Deal does not appear to have taken corrective actions to address the deficiencies identified in the FDA’s Warning Letters.

Consequently, on December 17, 2014, the DOJ filed a criminal information charging Mr. Steinlight with one count of wire fraud in furtherance of a conspiracy to introduce adulterated and misbranded products into interstate commerce in violation of 18 U.S.C. § 371. The criminal information filed against Mr. Steinlight reflects deficiencies in manufacturing similar to the ones identified in the FDA’s 2013 Warning Letter. By pleading guilty, he admitted that as early as 2009, he directed Raw Deal employees to add various less expensive fillers, including maltodextrin and brown and white rice flour, to supplements packaged by Raw Deal for its customers. For example, Mr. Steinlight reviewed a customer’s order for 25 kilograms of Odorless Garlic powder and directed Raw Deal employees to fill the order with four kilograms of garlic powder, 10.5 kilograms of white rice flour, and 10.5 kilograms of maltodextrin. The adulterated product was shipped to the customer with a certificate of analysis that failed to list white rice flour or maltodextrin as ingredients.

In pleading guilty, Mr. Steinlight admitted to engaging in the overt acts described above, including adulterating supplements by adding fillers to customer products without their knowledge or consent. He also admitted to directing employees to create certificates of analysis that falsely certified that certain products were “kosher” or “organic,” and to alter an ingredient list provided to FDA in the course of a facility inspection. Upon entering a plea agreement with Mr. Steinlight, the Government agreed that it would not initiate any further criminal charges against him for causing the distribution of adulterated and misbranded products by Raw Deal between 2009 and November 2013.

Mr. Steinlight’s criminal sentence is the latest in a series of criminal cases brought by FDA and DOJ against individuals whose acts resulted in the introduction of violative products into interstate commerce. In the past year and a half alone, there has been a groundswell of highly publicized cases involving the sale and distribution of adulterated food. These cases demonstrate the Government’s willingness to not only investigate companies for violations of the FDCA but also prosecute and sentence responsible individuals for their roles in these violations. 

Enforcement Trend: FDA and DOJ’s Joint Efforts to Aggressively Pursue Civil and Criminal Liability

Since early 2014, the FDA appears to be taking a progressively assertive approach to prosecuting individuals for their roles in defrauding or misleading consumers in cases of adulterated or otherwise violative products. In these cases, the FDA has demonstrated its willingness to take significant action against companies that do not adequately remediate issues identified in administrative documents, such as Warning Letters or Form 483 observations. The FDA has also shown its commitment to investigating whether corporate officials have the requisite intent to trigger misdemeanor or felony prosecution.

In each of the cases described above, the FDA took administrative action notifying the company of deficiencies in their manufacturing or handling processes that resulted in adulterated food prior to taking any judicial action. The FDA also conducted thorough investigations of the company and the responsibility of each of the individual corporate officials. However, the obvious difference between the Jensens’ cases and those against Mr. Steinlight and the corporate officials of PCA is the degree of the criminal offense charged against the respective defendant. The Jensens were charged with misdemeanor crimes, whereas Mr. Steinlight and the corporate officials of PCA were charged with felony crimes. In a statement released by U.S. Attorney John Walsh, the prosecution only recommended probation in the Jensens’ case “because of the defendants’ unique cooperation, including their willingness to meet with Congress and their willingness to meet with and be confronted by the victims of their misconduct. […] In short, they have done everything we have asked of them to mitigate the damage done.”

In the cases against the corporate officials of PCA and Mr. Steinlight, the DOJ found evidence that the individuals intended to defraud or mislead consumers or the FDA. For example, the DOJ produced evidence that the corporate officials of PCA fabricated certificates of analysis for shipments of peanut products. Similarly, Mr. Steinlight was found guilty of falsifying certificates of analysis to consumers by intentionally omitting fillers in the ingredient declarations. Moreover, Mr. Steinlight was found guilty of directing employees to provide the FDA with formulations that had been altered to conceal the use of fillers in their dietary supplements. All of these actions demonstrated an intent on the part of the corporate officials to defraud consumers and the FDA about adulterated products.

In both the PCA and Jensen cases, the adulterated food products were blamed for dozens of deaths and hundreds of hospitalizations and illnesses. In the information against Mr. Steinlight, however, there is no mention of any adverse events or fatalities linked to the consumption of the adulterated dietary supplements. The FDA’s willingness to escalate its administrative investigation of Mr. Steinlight to criminal prosecution suggests that the FDA intends to take a hardline against individual corporate officials whose companies violate the FDCA, even in cases where there are no reported deaths or adverse reports. In speaking about the criminal sentences in the PCA case, Principal Deputy Assistant General Benjamin C. Mizer summed up the recent shift in FDA and DOJ’s prosecutorial efforts:

The Department of Justice will continue to work aggressively with its partners to ensure that the American people are protected from food that is adulterated or misbranded within the meaning of the Food, Drug, and Cosmetic Act and pursue any person who fails to abide by the vital food safety protections in the law.  We are dedicated to using all the tools that we have at our disposal to ensure that the processors and handlers of our food have the public’s safety forefront in their minds. 

Conclusion

The FDA and DOJ’s actions in the last year and a half send a strong signal to regulated industry that FDA intends to strictly enforce the FDCA and its related regulations, and is willing to aggressively pursue criminal charges against individual corporate officials, even if the individual corporate officials have not engaged in or been aware of any wrongful activity or negligence within their companies. The DOJ’s recent Memorandum empowers the Government to prioritize these types of cases and to expend their investigative and prosecutorial resources in order to hold individuals accountable for their roles in corporate misconduct. Based on its recent enforcement in this area and DOJ’s new Memorandum, the DOJ has made clear their intentions to relentlessly hold individuals accountable for wrongdoing, and show no signs of relenting any time in the near future.

As a result, regulated industry should be vigilant in ensuring that their practices and operations are compliant with all applicable regulations and policies. These changes in the regulatory climate should also serve as a wakeup call to individual corporate officials. Individual corporate officials should be prepared for their actions and decisions to be heavily scrutinized by the Government, as well as the possibility of civil and criminal enforcement action.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, food and drug law, anti-money laundering, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense, and litigating against the Food and Drug Administration and U.S. Department of Justice. If you seek further information regarding the steps which you or business must take to remain compliant and mitigate your risks of enforcement action, you can reach an attorney by emailing us atcontact@fidjlaw.com or by calling us at 305-350-5690.