Appellate Court Affirms Prison Sentences in DeCoster Egg Case

Transcription

1 Hogan Lovells US LLP Columbia Square 555 Thirteenth Street, NW Washington, DC T F MEMORANDUM From: Joseph A. Levitt Douglas A. Fellman Cate Stetson Brian D. Eyink Date: August 1, 2016 Re: Appellate Court Affirms Prison Sentences in DeCoster Egg Case The U.S. Court of Appeals for the Eighth Circuit has affirmed prison sentences for two senior food company executives as responsible corporate officers for the sale of adulterated shell eggs to the public. 1/ The decision reinforces the prevailing view that a responsible corporate officer at a food company can face criminal liability even without a specific intent or knowledge to violate the law. The defendants were convicted and sentenced to three months in prison for misdemeanor violations of the Federal Food, Drug, and Cosmetic Act (FFDCA), 21 U.S.C. 331(a). On appeal, they argued that their convictions were unconstitutional on the ground that mens rea an intent to violate the law is a necessary predicate for conviction under Section 331(a). Invoking the U.S. Supreme Court s decision in United States v. Park, 421 U.S. 658 (1975), a splintered panel of the Eighth Circuit disagreed, with the majority holding that a corporate officer is held accountable not for others acts or omissions, but for his or her own failure to prevent or remedy the conditions which gave rise to the charges. In this way, the majority explained, the FFDCA punishes neglect where the law requires care. Judge Gruender authored a concurring opinion, clarifying that he joined the majority opinion to the extent it held that Park required a finding of at least negligence not some lesser standard. Judge Beam dissented, offering his view that the convictions violated due process, because criminal liability under the FFDCA requires a guilty mind or at least negligence. Because this is the first major appellate decision in the food area since Park, it warrants a careful review and understanding of what it does and does not mean for food companies. Background In recent years, food companies associated with foodborne illness outbreaks and large-scale recalls have had far more to worry about than recalls and potential Food and Drug Administration (FDA) follow-up. The U.S. Department of Justice (DOJ) has been active in investigating food companies for alleged criminal wrongdoing associated with outbreaks and recalls, maintaining that under the socalled Park Doctrine, responsible corporate officers can be held criminally liable for the conduct of their companies even if they harbored no specific intent to violate the law and had no personal 1/ The decision, United States v. Austin DeCoster, No (8th Cir., July 6, 2016), is attached and is also available here:

2 involvement in the conduct resulting in the recall. The media has been widely reporting on the increase in recent years of DOJ investigations into food companies and their senior officials, including criminal charges against those officials; the criminal convictions of individuals from the Peanut Corporation of America (PCA) and Jenson Farms are two recent examples (although PCA involved a felony conviction, not a misdemeanor). DOJ investigations are lengthy processes and often result in plea agreements, so judicial decisions remain infrequent. That is why a few decades have passed between the Supreme Court s decision in Park and the Eighth Circuit s rare and recent ruling upholding the three-month prison terms handed down to Jack and Peter DeCoster, executives with the former Quality Egg, LLC. The DeCosters were prosecuted under the Park Doctrine for failing to prevent a widespread Salmonellosis outbreak linked to eggs produced by their company. The court s split decision the three-judge panel generated a majority opinion, a concurrence, and a dissent demonstrates that the area of corporate officer liability under the FFDCA continues to evolve but that courts will uphold prison terms for company officials in Park Doctrine prosecutions without evidence of an intent to violate the law. Park Prosecutions Under the Park Doctrine, a corporate official can be held criminally liable for violations of the FFDCA in areas of the company under the official s control, even if the official did not intend for the violations to occur or was not aware of the violations. The Park Doctrine is named for the 1975 Supreme Court case United States v. Park, but originated decades earlier, with the 1943 decision in United States v. Dotterweich, 320 U.S. 277 (1943), in which the Court upheld the conviction of the president of a company that was repackaging misbranded drugs. In Park, the government prosecuted Acme Markets, a national food retailer, and Park, its CEO, for violating the FFDCA by allowing food to be stored in rodent-infested warehouses. Even though Park claimed he relied on a subordinate to remedy the problem, the Supreme Court explained that, as CEO, Park was ultimately responsible under the corporation s by-laws for overseeing sanitation. Relying on Dotterweich, the Court held that strict criminal liability applied to corporate officials whose failure to exercise authority led to a violation of the FFDCA: Park could be criminally liable for FFDCA violations because he had the final responsibility for ensuring compliance with the FFDCA and failed to do so. Although FDA and DOJ generally did not pursue Park Doctrine prosecutions in the decades following Park, in recent years, FDA and DOJ have increasingly made it a priority to hold senior corporate officials responsible for their companies operations, and the Park Doctrine has featured heavily in those efforts. The DeCoster Case Jack and Peter DeCoster were senior executives with Quality Egg, LLC, which produced shell eggs. Jack DeCoster owned the company, and Peter, his son, served as the company s chief operating officer. Quality Egg operated six farm sites with 73 barns and five million egg laying hens in Iowa. The company also owned and operated several egg production companies in Maine. In 2008, Salmonella tests conducted at the Maine facilities came back positive. The DeCosters hired consultants, including a poultry disease specialist and rodent control export, and succeeded in eliminating Salmonella from their Maine facilities. The company also started testing their Iowa facilities periodically for Salmonella. Some of the tests came back positive in 2006, and the positive test results increased in frequency through During this period, Quality Egg did not test eggs or divert eggs from the market, despite receiving multiple positive environmental test results for Salmonella. The company claimed to have - 2 -

3 implemented the same safety measures it used in Maine, but the precautions failed to eradicate Salmonella in its Iowa facilities. 2/ In August 2010, federal and state officials determined that a Salmonellosis outbreak had originated at Quality Egg's facilities in Iowa. According to the Centers for Disease Control and Prevention (CDC), 1,939 reported illnesses eventually were associated with this outbreak. 3/ In response, Quality Egg recalled eggs that had been shipped from five of its six Iowa farm sites between May and August The government then instituted a criminal investigation, which revealed that Quality Egg had falsified records about food safety measures; had bribed a U.S. Department of Agriculture (USDA) inspector to release eggs for sale that had been retained for failing to meet minimum quality standards; had misled state regulators and retail customers by changing the packing dates of its eggs; and had not undertaken minimal efforts to test eggs (conducting only a single egg test in 2009) or to prevent introducing adulterated eggs into commerce after receiving positive barn tests. DOJ s investigation culminated in the company and the DeCosters entering guilty pleas in federal district court in the Northern District of Iowa. Quality Egg pled guilty to three charges: (1) a felony violation of 18 U.S.C. 201(b)(1) for bribing a USDA inspector; (2) a felony violation of 21 U.S.C. 331(a) for introducing misbranded eggs into interstate commerce with intent to defraud and mislead; and (3) a misdemeanor violation of 21 U.S.C. 331(a) for introducing adulterated eggs into interstate commerce. The DeCosters each pled guilty to misdemeanor violations of 21 U.S.C. 331(a) as responsible corporate officers under the FFDCA. In their plea agreements, the DeCosters stated that they had not known that the eggs were contaminated at the time of shipment but stipulated that they were in positions of authority to detect, prevent, and correct the sale of contaminated eggs. Before sentencing, however, the DeCosters argued that imprisonment would be unconstitutional because the district court lacked constitutional authority to impose a sentence of incarceration in a case premised on a responsible corporate officer violation. The district court rejected the DeCosters arguments and entered judgment against them, imposing criminal fines of $100,000 and three-month terms of imprisonment on both DeCosters, plus restitution and probation. The court determined that, although the DeCosters had no actual knowledge that the eggs they sold were infected, the record demonstrated that their safety and sanitation procedures were "egregious," that they ignored the positive Salmonella environmental test results by not testing their eggs, and that they knew that their employees had deceived and bribed USDA inspectors. According to the district court, the record supported the inference that the DeCosters had created a work environment where employees not only felt comfortable disregarding regulations and bribing USDA officials, but may have even felt pressure to do so. The district court accordingly concluded that this was not a case involving a mere unaware corporate executive. The Eighth Circuit s Decision The DeCosters appealed the district court s sentence, arguing that it violated the Due Process Clause and the Eighth Amendment. Specifically, they argued that sentencing corporate executives 2/ During this period, FDA was finalizing and implementing its Shell Egg Rule, which was designed to reduce the risk of Salmonella Enteritidis (SE) in eggs. The rule was finalized in July 2009 and took effect July 2010 for large operations like Quality Egg. The Shell Egg Rule requires periodic testing of barns and diversion of eggs from SE-positive barns. The rule was not in effect for most of the time period in question. 3/ CDC, Multistate Outbreak of Human Salmonella Enteritidis Infections Associated with Shell Eggs (Final Update),

4 to a prison term without showing that the executives themselves committed any wrongful acts violates the Constitution. They argued that the FFDCA establishes a vicarious liability offense that is, it criminally punishes one person (an executive) for the actions of another (an employee) and that courts have required a finding that the accused personally participated in or knew of the company s violation to impose a prison sentence based on vicarious liability. The DeCosters also argued that imprisonment for any term under these facts constituted cruel and unusual punishment under the Eighth Amendment. The majority of the three-judge panel rejected the appellants arguments and affirmed the district court s judgment. Citing Park, the majority explained that the FFDCA punishes neglect where the law requires care. Under the FFDCA, according to the panel, a corporate officer is held accountable not for others acts or omissions, but rather for his or her own failure to prevent or remedy the conditions which gave rise to the charges. Even if the DeCosters did not actually know that the distributed eggs had Salmonella, they can be held liable because they should have known of the risks posed by the insanitary conditions at their facilities in Iowa and failed to exercise reasonable oversight. Unless the DeCosters could prove that they were powerless to prevent Quality Egg from violating the FFDCA, they can be held criminally liable for the company s violations. Pointing to the DeCosters control over selecting barns for testing and rodent control, among other operations, the panel concluded that the DeCosters were far from powerless to prevent the shipment of adulterated eggs. The conviction and punishment thus did not violate due process. The majority also held that the three-month imprisonment did not violate the Eighth Amendment, as the penalty was relatively small and not grossly disproportionate given the record in this case. Judge Gruender concurred, noting that his participation in the majority was conditioned on an assumption that he understood underlay the decision namely, that Park actually requires a showing that the responsible corporate officer was negligent in preventing the adulteration from occurring. In Judge Gruender s view, the record included ample evidence supporting a finding that the DeCosters acted at least negligently. Judge Beam dissented, offering his view that the FFDCA requires proof of the defendant s intent or knowledge before criminal liability can attach. The majority responded to this dissent by stating that Congress has not required awareness of some wrongdoing in order to hold corporate agents accountable for violating the FFDCA, because the FFDCA regulates services and products which affect the health and well-being of the public. Implications for Food Companies The Eighth Circuit s decision presents several key takeaways for food company executives: imprisonment is a real possibility, especially in egregious cases; historical patterns of conduct and FDA inspection findings are important in determining outcomes; and company culture can play an important role in a criminal case. First, the DeCoster decision is a reminder that the Park Doctrine presents a real risk of criminal liability for company executives. The decision cements the prevailing view that DOJ does not need to prove specific intent or knowledge to prosecute a company executive under the FFDCA s responsible corporate officer concept. In addition, the decision demonstrates that at least one federal appellate court was unwilling to overturn a prison sentence imposed following a misdemeanor guilty plea under Park. Second, the decision demonstrates that courts and prosecutors will consider historical patterns of conduct when evaluating criminal sentences. The DeCosters argued on appeal that the district court s judgment was among the harshest on record for an FFDCA case. However, the court determined that the sentence was appropriate, placing significant weight on findings from the FDA s - 4 -

5 investigation of Quality Egg s facilities, which included live and dead rodents and frogs in the egg laying areas, feed areas, conveyer belts, and outside the Iowa facilities. In addition, Quality Egg allegedly falsified records, misrepresented its safety practices, and bribed a USDA official. These findings no doubt influenced both the court s analysis and DOJ s initial decision to bring criminal charges against the DeCosters. And relatedly, given the number of aggravating facts in this case, this decision does not control the question of criminal penalties against senior food company officials in future cases where the facts are far less egregious. Finally, the Eighth Circuit placed significant weight on the company s compliance culture. For example, the court found significant the district court s observation that the DeCosters had created a work environment where employees not only felt comfortable disregarding regulations and bribing USDA officials, but may have felt pressure to do so and noted that an employee had been reprimanded for not concealing certain items during an inspection. The Eighth Circuit s decision is an important reminder that a food company can mitigate the risk of criminal liability by instilling a companywide culture that emphasizes compliance and safety. Although DOJ retains significant discretion in choosing when to open and pursue criminal investigations, company culture can play an important mitigating or aggravating role. * * * We will continue to monitor developments in FDA enforcement and DOJ prosecutions of food companies and company officials. Please do not hesitate to contact us with any questions