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DOJ Files Unprecedented Criminal Charges Against Opioid Distributor and Two Executives

Client Alert

Author: Callan G. Stein

DOJ Files Unprecedented Criminal Charges Against Opioid Distributor and Two Executives

On April 23, federal prosecutors announced the first-ever felony charges against a drug distributor — Rochester Drug Co-Operative, Inc. (RDC) — and two of its executives for illegally distributing opioid painkillers. The case involves familiar-sounding allegations, but carries felony charges in place of the hefty civil fines that had been used to resolve these types of cases against opioid distributors in the past.

The allegations against RDC and the two executives — CEO Laurence Doud and former operations manager William Pietruszewski — focused heavily on the defendants’ alleged knowledge of their own failings, coupled with their refusal to take appropriate action. The government accused RDC and its executives of failing to take sufficient steps to monitor the company’s pharmacy customers, including failing to perform due diligence of customers even after RDC was advised by a consultant and by outside counsel that failing to do so constituted a violation of the Controlled Substances Act and DEA policies.

The criminal charges also include allegations that the defendants repeatedly ignored “red flags” that indicated when a pharmacy customer was improperly dispensing opioids. RDC created these “red flags” to help satisfy its compliance obligations, and RDC set them out in its own internal policies, which it presented to the DEA as evidence it was complying with its monitoring obligations. Yet, according to the government, the defendants turned a blind eye to customers whose opioid sales were “red flagged” for, among other things, purchasing only opioids from RDC, dispensing opioids in quantities higher than accepted medical standards, accepting a high percentage of cash payments for opioids, dispensing opioids to out-of-area or out-of-state patients, and filling opioid prescriptions from practitioners acting outside their scope of practice. Rather than file suspicious order reports to the DEA regarding these customers, the government claims RDC and its executives opted to doing nothing and preserve the profits being generated by these “scofflaw pharmacies.”

The allegations against RDC and its two executives are serious. And the felony charges signal a stark escalation by the DOJ in prosecuting distributors and other nonpractitioners in the fight against opioid abuse. Below are three key takeaways from the RDC case that could impact every opioid distributor and some manufacturers, including recommendations on how they can mitigate their own enforcement risk.

1. The government is looking to make good on, and expand, its promise to criminally prosecute individuals related to the opioid crisis.

In February 2018, then-Attorney General Jeff Sessions announced the creation of a new task force to fight the prescription opioid crisis. In doing so, he promised to “aggressively deploy and coordinate all available criminal and civil law enforcement tools to reverse the tide of opioid overdoses,” including by targeting and prosecuting “individuals who are contributing to the opioid-epidemic.” To date, the individuals targeted have primarily been prescribers (including the Appalachian Regional Prescription Opioid Strike Force’s recently announced charges against 60 individuals involving more than 350,000 opioid prescriptions), though with the recent verdict in the Insys case and now this prosecution of two RDC executives, the DOJ appears to be expanding that target base to include nonpractitioner individuals, including employees of opioid manufacturers and distributors.

The RDC case, in particular, presented the DOJ with a unique opportunity to make good on Attorney General Sessions’s promises. Although RDC’s revenues exceed $1 billion annually, that figure pales in comparison to those of larger distributors operating across the country. RDC’s relatively small size, and the specific allegations directly tying RDC’s executives to the company’s sale of opioids to “red-flagged” customers, provided the DOJ with a tailor-made case to test the limits, and ultimately expand the scope, of individuals whom it felt it could prosecute for allegedly improper opioid sales.

Recommendations: While it is important for every company operating in the opioid industry to ensure it is appropriately monitoring (and, when necessary, reporting) its customers for questionable opioid sales practices, the RDC case suggests that the DOJ may target some of the smaller and midsized opioid distributors and, to a lesser degree, manufacturers for investigations and enforcement actions. As was the case with RDC, those smaller companies are inherently more likely to generate the type of direct communication between compliance personnel and company executives. Through the RDC case, the DOJ has demonstrated its willingness to prosecute individual executives who are informed of opioid distributions and diversion issues with customers but act to preserve profits instead of curtailing sales.

To mitigate this risk, companies and their executives should consider implementing policies that (1) outline the chain of communication from the compliance department to the individuals who have authority to take action, (2) document the investigative steps the compliance department must take to verify customer complaints before elevating the issue, and (3) offer clear directives on the type of action to be taken when complaints are verified, including when a company should completely shut off sales to a problematic customer.

2. The government continues to use statistics to identify and highlight allegedly improper opioid sales and distribution to great effect.

Time and again, we see federal prosecutors rely on statistics to highlight what they believe to be improper opioid sales and distribution, often to great effect and impact with a jury and in the court of public opinion. The RDC case is no exception. In all three charging documents — not to mention the press release announcing the charges — the DOJ highlighted the fact that RDC received approximately 8,000 “orders of interest” from its customers, yet reported only four as suspicious orders to the DEA. Moreover, when announcing the criminal charges against RDC and its two executives, the DOJ was quick to point out RDC’s recent 800 percent increase in oxycodone sales (just under 5 million tablets in 2012 to more than 42 million in 2016) and its 2,000 percent increase in fentanyl sales (more than 60,000 doses in 2012 to more than 1.3 million in 2016).

Recommendations: Statistics like those cited by the DOJ in the RDC case are not, in and of themselves, evidence of any wrongdoing, criminal or otherwise. Nonetheless, and as the DOJ well knows, they make for compelling sound bites in media coverage and before a jury. These statistics are also easy entry points on which the initiation of an investigation can be based. Given the increase in opioid-related scrutiny and prosecutions, opioid manufacturers and distributors would be wise to monitor their own statistics internally to identify anomalies that could put them on the government’s radar, or areas that could be exploited by federal prosecutors should an investigation take place.

Especially where opioids sales have increased significantly, distributors and manufacturers should analyze the number of prescriptions they are filling versus the number of suspicious reports they are making to ensure no troubling trends have emerged that could draw criminal or civil suspicion. If this self-monitoring reveals any such trends or anomalies, the company should then conduct an investigation to determine if any remedial action should be taken.

3. The government is focused on ensuring opioid compliance programs are implemented and followed.

When the DOJ announced the charges against RDC, the special agent in charge of the investigation, Ray Donovan, did not mince words, stating that the charges “should send shock waves throughout the pharmaceutical industry, reminding them of their role as gatekeepers of prescription medication.” These comments directly link the criminal charges to the alleged compliance failures by RDC and its two executives.

The charging documents allege a litany of compliance failures by RDC, starting with RDC’s failure to hire a dedicated chief compliance officer and ending with the RDC compliance department taking no action in response to numerous complaints it received about several of its customers’ improper opioid sales. These, and many of the other allegations against RDC, are consistent with the DOJ’s ongoing focus on the sufficiency of corporate compliance programs when evaluating whether to bring criminal charges. That focus recently culminated in the release of updated guidance on how the DOJ uses corporate compliance programs to evaluate the propriety of bringing criminal charges against corporations and/or corporate executives.

Here, there are two primary themes running through the alleged compliance failures by RDC that the DOJ identified in the charging documents. The first theme is the DOJ’s belief that RDC’s dedication to compliance was not commensurate with its operations or the inherent risks involved in the distribution of opioids. For example, in deciding to charge RDC and two executives, the DOJ was clearly moved by the fact that, despite RDC’s more than $1 billion in yearly revenue, the company chose not to hire a dedicated compliance officer but instead burdened an existing full-time employee with those added duties.

The second theme is the substantial disconnect the DOJ alleged between what RDC said it would do in its compliance program (which appeared robust on paper) and what RDC actually did (or, more accurately, allegedly did not do) once it was put in place. For example, a persistent allegation is that the RDC compliance department repeatedly alerted the company’s CEO that many of its large customers were dispensing opioids in a manner that allowed them to be easily diverted, but that each time the CEO directed RDC to continue supplying those customers.

Recommendations: These compliance failings by RDC clearly bothered the DOJ and contributed to its willingness to bring unprecedented criminal charges. Companies and individuals operating in the opioid space should recognize that they already have a target on their backs as far as government regulators are concerned. They should, therefore, take extra precautions to ensure that, in both appearance and reality, they are complying with the updated DOJ guidance on corporate compliance programs, including committing sufficient resources to the compliance function. Hiring a dedicated compliance officer, whose compensation is in no way tied to product sales, is a good first step.

In addition, those same companies and individuals should recognize that the implementation of a compliance program signals only the beginning of a company’s compliance obligations, not the end. It is not enough to implement a compliance program and largely ignore it, as RDC is alleged to have done. Indeed, the new DOJ guidance on corporate compliance programs explicitly cautions companies against utilizing such so-called “paper programs.” Companies operating in the opioid industry should pay attention to alerts and recommendations raised by their compliance department and, most importantly, take appropriate action when issues are identified. As is evident from the RDC case, the government is unwilling to give a company credit for merely uncovering issues if it does not take appropriate action in response.

Cal Stein is a partner in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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