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When Is The CEO Liable For Kickbacks Of Employees And Contractors?

doctor accepting kickback

As the CEO of a health care company, you know that health care regulations are a minefield.  You may even have an internal or external compliance officer to make sure that the company does not inadvertently break the law.  And, you know that paying kickbacks in exchange for patient referrals breaks federal law and, most likely, the law of your state as well.

But what happens if one of your employees or independent contractors does violate federal laws and regulations, as well as the rules and guidelines set out by the company, and provide kickbacks to doctors in exchange for referring patients to your company?  Could you be civilly or criminally liable for their actions?

A. CEO Liability in General

In general, CEOs are not responsible for the actions of employees or contractors.  Even though you control the company, you are, after all, also an employee of the company.  Note that we are not talking here about whether the company could be liable for the actions of the employee or contractor – in many situations, it will be.  But the CEO’s personal liability is another matter entirely.  Most courts will find that unless an officer or director of the company had personal involvement in the bad acts of others who worked for the same company, that person cannot be held accountable for those legal violations in a civil action brought by a private citizen.

A slightly different result may occur in a shareholder derivative suit.  In this type of case, company shareholders sue on behalf of the company for the wrongful actions of executives and directors that harm the stock value.  You may be found liable for the drop in the company’s value resulting from illegal kickbacks if those kickbacks are discovered and the company is prosecuted for them.  In most cases, the shareholders will need to prove either that you were actually aware of the bad acts or willfully turned a blind eye to the marketing strategies employed by the employees or contractors, or that you failed to put appropriate compliance safeguards in place to prevent such actions.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

Attorney-at-Law & Founder

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Lynette S. Byrd
Lynette S. Byrd

Former Federal Prosecutor

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Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

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Subodh Chandra
Subodh Chandra

Former Federal Prosecutor

Local Counsel

Elizabeth K. Stepp
Elizabeth K. Stepp

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Roger Bach
Roger Bach
(Non-Lawyer)

Former Special Agent, OIG

Dennis A. Wichern
Dennis A. Wichern
(Non-Lawyer)

Former Special Agent-in-Charge

Chris Quick
Chris Quick
(Non-Lawyer)

Former Special Agent, FBI

Kevin M. Sheridan
Kevin M. Sheridan
(Non-Lawyer)

Retired Supervisory Special Agent, FBI

Ray Yuen
Ray Yuen
(Non-Lawyer)

Former Supervisory Special Agent, FBI

Gamal Abdel-Hafiz
Gamal Abdel-Hafiz
(Non-Lawyer)

Former Supervisory Special Agent, FBI

B. CEO Liability in Government Prosecutions

However, government investigations are different from a standard civil private lawsuit, and you should be concerned that you could face individual prosecution by the state or federal government, either civilly or criminally, if illegal kickbacks are being paid by others at the company. Government prosecutors have made a concerted effort in recent years to penalize individual officers for the actions of the company.  Most notably, if the CEO had knowledge of the individual’s actions, either before or after the violation, and did nothing to stop them, or if the CEO willingly turned a blind eye to the actions of others at the company that violated the law, that CEO can be prosecuted.

1. U.S. v. Park

An example of CEO liability in spite of his lack of involvement in the illegal activities is found in the 1975 U.S. Supreme Court case of U.S. v. Park, 421 U.S. 658 (1975).  In that case, brought under the Federal Food, Drug, and Cosmetic Act, Acme Markets was accused of exposing food shipments to rodent contamination.  The federal prosecutors criminally charged the company as well as its president and CEO, Mr. Park.  The company pled guilty, but Park went to trial and was convicted.  On appeal, Park argued that he did not have direct involvement in the conditions of the company’s warehouses and therefore could not be held responsible.  The Supreme Court disagreed, noting that respondent admitted that he was ultimately responsible for the entire operation of the company, including providing sanitary conditions for food sold to the public.  Moreover, evidence was adduced that the FDA had previously notified Park, via letter, of unsanitary conditions at one of the warehouses.  Finding it sufficient to introduce evidence that “the defendant had, by reason of his position in the corporation, responsibility and authority either to prevent in the first instance, or promptly to correct, the violation complained of, and that he failed to do so,” the Court upheld Park’s conviction.  421 U.S. at 673-74.

2. The Yates Memo

Although Park did not involve a health care company or health care fraud statutes, its reasoning has been used to hold individual executives liable for health care fraud.  In 2015, Deputy Attorney General Sally Yates issued the “Yates Memo,” which was later codified into the U.S. Attorney’s Manual.  That memo – and now, the manual under which federal prosecutors determine who to charge in civil or criminal cases – focused largely on increasing the numbers of individual company officers who will be investigated for and charged with illegal conduct.  The memo also requires that corporations, in order to be eligible for credit for cooperating with the government, must identify all individuals involved in corporate misconduct. Thus, your company may find it expedient to list you, the CEO, as a person with knowledge or the ability to prevent the kickbacks paid by a person ultimately under your supervision.  Moreover, the corporation may not pass a resolution in an attempt to shield you from such liability, as the federal government will not accept such corporate resolutions except in extraordinary circumstances.

3. Other Crimes

Finally, keep in mind that as soon as you become aware of a violation occurring at your company, regardless of whether it is committed by an employee or an independent contractor, you have a fiduciary duty to the company to take appropriate corrective action.  Not only will this help to protect you and the company from shareholder derivative suits, but it may protect you for being prosecuted for other crimes.  A common mistake made by executives is to try to hide or cover up the wrongdoing and fraud even after they become aware of it.  Destroying evidence is a crime.  Lying to federal prosecutors is a crime.  It is exceedingly important that you do neither, but instead hire counsel to help assist you in dealing with the ramifications of the kickbacks you have uncovered.

C. Protecting yourself from liability.

If you suspect or know that individuals employed or contracted by your company have been paying kickbacks to doctors in order to get their business, especially if that business is federally funded, you need to hire experienced, skilled attorneys immediately to protect yourself and the company.  In many cases, executives, directors, and company officers such as CEOs find that it is required, if a conflict may arise between the individual and the company, or simply preferable, to hire an attorney to represent them individually in addition to the attorneys that are hired to represent the company.  Remember that the company may be required to identify you to the federal government as a potentially responsible individual.

Additionally, even if you are not aware of any problems at your company related to illegal kickbacks, all health care companies must have a strong enforceable compliance program.  Instituting, updating, and enforcing this program may go a long way towards convincing the federal government that you took all appropriate actions to prevent illegal activities should an investigation ever materialize.

At Oberheiden, P.C., our senior attorneys are available to discuss compliance programs, audits of existing compliance measures, litigation against wrongdoers, or civil or criminal defense against government investigations. If you have concerns about potential kickbacks, contact us today. All initial consultations are free and 100% confidential.

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