Health Care Executive Convicted of Wire Fraud in Connection with Misbranding Allegations

October 7, 2009

On September 29, 2009, a former CEO of a biopharmaceutical company was convicted of a wire fraud felony for his role in the alleged creation and dissemination of false and misleading information about the efficacy of a drug marketed by the company.  The indictment of this executive by the Department of Justice (the "DOJ"), and his eventual conviction, represent important developments in the burgeoning enforcement efforts currently underway in the health care industry.  Given recent trends in health care compliance enforcement, and in particular the government’s focus on holding individuals accountable, companies and executives alike should prepare for continued scrutiny.

The Proceedings 

The company, InterMune, Inc., allegedly marketed and sold the drug Actimmune as a treatment for idiopathic pulmonary fibrosis ("IPF"), despite the fact that Actimmune was not approved by the Food and Drug Administration as a safe and effective treatment for IPF.  According to the DOJ, the cost of Actimmune for one IPF patient for one year was approximately $50,000 and the vast majority of InterMune’s sales of Actimmune were for the off-label use of treating IPF.

In October 2006, InterMune entered into a Deferred Prosecution Agreement with the DOJ and agreed to pay nearly $37 million to resolve criminal charges and civil liability arising from its alleged off-label marketing of Actimmune.  InterMune also entered into a five-year Corporate Integrity Agreement with the Department of Health and Human Services ("HHS").

Despite the company’s resolution of these claims, the DOJ indicted InterMune’s former CEO about a year and half later, in March 2008, charging him with wire fraud (in violation of 18 U.S.C. § 1343), as well as misbranding under the Food, Drug, and Cosmetic Act (in violation of 21 U.S.C. §§ 331(K), 333(A)(2), 352(A)).  The government’s case primarily relied on an August 2002 press release issued by InterMune which publicly announced the results of a clinical trial of Actimmune for the treatment of IPF.  The DOJ alleged that the defendant had caused the issuance and distribution of this press release, which misstated the results of the clinical trial by suggesting that Actimmune helped IPF patients live longer.  According to the DOJ, the clinical trial had in fact failed.  

Last week, after a seven-week jury trial in California federal court, the defendant was acquitted of the misbranding charge but convicted of wire fraud.  The maximum statutory penalty for wire fraud is 20 years in prison, a $250,000 fine, and three years supervised release.  

Implications for Health Care Enforcement 

In bringing health care misrepresentation and fraud charges stemming from marketing statements, the DOJ has generally focused on companies and has rarely charged individuals.  But in this case, the DOJ diverged from its typical practice and charged an executive largely based on his role in preparing and disseminating a press release containing the alleged misrepresentation.

As the InterMune case illustrates, with the growing focus on health care compliance issues and the recent interest in controlling costs, health care companies and executives can expect to face increasing scrutiny in the months and years to come.  Given that in many corners, health care fraud is cited as a key factor in rising costs, the current Administration is under pressure to ensure that such fraud is dealt with swiftly and aggressively.  Case in point:  DOJ and HHS have created an interagency group–the Health Care Fraud Prevention and Enforcement Action Team–which is specifically tasked with combating health care fraud.  

The field of enforcement officials scrutinizing health care companies is expanding as well.  State attorneys general have become more active in the health care arena.  And HHS is increasingly mandating that Corporate Integrity Agreements require companies to retain one or more "compliance experts," similar to the corporate monitors often required by the DOJ as part of Deferred Prosecution Agreements.  Often times, these compliance experts are tasked with reporting directly to the Board of Directors.

Not only has the scope of prosecutorial scrutiny increased, but so has its intensity.  In 2007 and 2008, for example, the federal government collected almost $3 billion in settlements from health care companies.  And this number has risen markedly in 2009–with almost $4 billion collected in just the first three quarters of the year.  

But despite these fines, some government officials question their efficacy, fearing that companies may view these sums simply as a cost of doing business. It is therefore not surprising that prosecutors are seeking new ways to raise the stakes for the health care industry. By going after executives for criminal health care violations, and using creative approaches such as the invocation of the federal wire fraud statute in the InterMune case, the DOJ has made clear that it means business. More and more, health care executives are personally at risk. They can face not only hefty fines, but also imprisonment and criminal conviction. 

In this climate, it is more important than ever before that companies institute and maintain rigorous health care compliance systems and practices. With executives increasingly having "skin in the game," the dynamics of health care compliance are likely to shift. No doubt, given these trends, corporate executives have even more incentive to build the infrastructure necessary to mitigate compliance risk at their companies.

Gibson, Dunn & Crutcher LLP

The White Collar Defense and Investigations Practice Group of Gibson, Dunn & Crutcher LLP successfully defends corporations, senior corporate executives, and public officials in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies in almost every business sector. The Group has members in every domestic office of the Firm and draws on more than 75 attorneys with deep government experience, including numerous former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission. 

Our attorneys bring a unique breadth of experience and talent to handle complex health care enforcement matters, as well as to conduct delicate internal investigations in the health care arena. We have used that experience and perspective for a wide range of health care compliance counseling engagements, including, as examples, reviews of company protocols and policies concerning interactions with health care providers, conceptualizing and instituting needs assessment reviews for the utilization of physician-consultants, and conducting analyses of how compliance policies are effectuated in the field. Our practice is cross-disciplinary in nature, at times relying on experts in various areas to address issues such as health care privacy and data breaches, intellectual property licensing, and fair market value rates, including members of our Health Care and Life Sciences Practice Group.

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