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Banning Executives

From the WSJ:

The Department of Health and Human Services this month notified Howard Solomon of Forest Laboratories Inc. that it intends to exclude him from doing business with the federal government. This, in turn, could prevent Forest from selling its drugs to Medicare, Medicaid and the Veterans Administration. If the government implements its ban, Forest would have to dump Mr. Solomon, now 83 years old, in order to protect its corporate revenue. No drug company, large or small, can afford to lose out on sales to the federal government, a major customer.


The Health and Human Services department startled drug makers last year when the agency said it would start invoking a little-used administrative policy under the Social Security Act against pharmaceutical executives. This policy allows officials to bar corporate leaders from health-industry companies doing business with the government, if a drug company is guilty of criminal misconduct. The agency said a chief executive or other leader can be banned even if he or she had no knowledge of a company’s criminal actions. Retaining a banned executive can trigger a company’s exclusion from government business.

Debarment is obviously a very serious remedy.  The increased use of debarment in this context has been controversial, especially in cases in which the executive has not demonstrated that the debarred individual is actually complicit.  The WSJ story discusses the Forest Laboratories example along these lines in more detail:

According to Mr. Westling, “It would be a mistake to see this as solely a health-care industry issue. The use of sanctions such as exclusion and debarment to punish individuals where the government is unable to prove a direct legal or regulatory violation could have wide-ranging impact.” An exclusion penalty could be more costly than a Justice Department prosecution.

He said that the Defense Department and the Environmental Protection Agency, for example, have debarment powers similar to the HHS exclusion authority.

The Forest case has its origins in an investigation into the company’s marketing of its big-selling antidepressants Celexa and Lexapro. Last September, Forest made a plea agreement with the government, under which it is paying $313 million in criminal and civil penalties over sales-related misconduct.

A federal court made the deal final in March. Forest Labs representatives said they were shocked when the intent-to-ban notice was received a few weeks later, because Mr. Solomon wasn’t accused by the government of misconduct.

Forest is sticking by its chief. “No one has ever alleged that Mr. Solomon did anything wrong, and excluding him [from the industry] is unjustified,” said general counsel Herschel Weinstein. “It would also set an extremely troubling precedent that would create uncertainty throughout the industry and discourage regulatory settlements.”

The issue of debarment also arises in the antitrust context as a weapon in the toolkit of antitrust enforcement agencies prosecuting cartels.  Judge Ginsburg and I have argued, in Antitrust Sanctions, that the debarment remedy in that context, along with a shift toward individual responsibility and away from ever-increasing corporate fines, would result in a shift toward efficient deterrence.   In our case, we discuss debarment for the executive actually engaged in the price-fixing as well as officers and directors who negligently supervise the price-fixers (e.g., with failure to institute an antitrust compliance program).   Without safeguards to ensure that debarment is imposed in cases of actual wrongdoing or negligent supervision, and also in the cases of settlement, that there is a factual basis for debarment, imposition of these penalties runs the risk that enforcement agencies will have arbitrary power to banish executives that are disfavored for whatever reason.  If its application is properly constrained, however, debarment can be a more effective tool in prosecuting antitrust offenses and potentially other white-collar crime than ever-increasing corporate fines which are largely borne by shareholders.  I’ll refer interested readers to the Ginsburg & Wright link above for the more detailed case in favor of adding debarment to the cartel-enforcement toolkit, including a discussion of its application in the antitrust context in a variety of other countries as well as non-antitrust settings in the U.S.

Filed under: antitrust, corporate crime, corporate law, economics