Exclusion from Federal Programs - U.S. Court of Appeals Overturns 12-Year Ban Against Purdue Executives

Exclusion from participation in federal contracts or programs is a longstanding civil sanction that agencies often bring to bear after an individual or company is convicted under various U.S. federal criminal laws.  Last November, in a memorandum to the heads of all executive departments and agencies, the Director of the Office of Management and Budget cited one form of exclusion, suspension and debarment, as "a powerful tool" in ensuring responsible conduct by federal contractors and grantees.

While exclusions of various types are used throughout the federal government, it is unusual for federal courts to overturn exclusion decisions by executive departments.  But on July 27, in Friedman v. Sebelius, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit did just that, in reversing a decision by the U.S. Department of Health and Human Services (HHS) to exclude three corporate executives from participation in federal health-care programs.

Friedman involved three executives at the Perdue Frederick Company, which manufactured the painkiller OxyContin.  Perdue Frederick was convicted of a federal felony, misbranding of OxyContin, and the three executives were convicted under the “responsible corporate officer” doctrine -- a legal doctrine under the Food, Drug and Cosmetic Act that reportedly is seeing increased use by enforcement authorities -- of a federal misdemeanor, misbranding of a drug.  Based on their convictions, the Secretary of HHS, Kathleen Sebelius, excluded them from participation in Federal health care programs for 12 years, pursuant to a federal statute that permits the Secretary to exclude individuals or entities convicted under federal or state law of a misdemeanor relating to controlled substances.

On appeal, Senior Circuit Judge Douglas Ginsburg, writing for the Court, held that the statute authorized the Secretary’s exclusion of the three executives, but that her decision was "arbitrary and capricious for want of a reasoned explanation for the length of their exclusions" (page 3), particularly because her decision failed "to explain its departure from the agency’s own precedents" (page 26).  The Court remanded the decision to the U.S. District Court for the District of Columbia with instructions to remand it to HHS "for further consideration consistent with this opinion" (page 27).

In strict terms, the decision directly applies only to HHS, because the decision is based on a statute empowering the HHS Secretary.  Nonetheless, its application of the "arbitrary and capricious" standard should send a clear signal to other departments and agencies that they will need to adhere to, or carefully to explain departures from, their own precedents in future debarment or exclusion proceedings.