October 16, 2012

D.C. Circuit Invalidates Lengthy Exclusion

Holland & Knight Government Contracts Blog
Steven D. Gordon

A recent decision by the D.C. Circuit underscores the large amount of discretion that federal agencies have in determining the length of a debarment or exclusion imposed on a government contractor or program participant.  At the same time, the decision demonstrates that there are at least some boundaries on that discretion.

The decision, Friedman v. Sebelius, 686 F.3d 813 (D.C. Cir. 2012), involved several senior officers of a pharmaceutical company who were excluded from participation in Federal health care programs based on their convictions for the misdemeanor offense of misbranding a drug.  Their company had fraudulently marketed and promoted OxyContin as less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications.  The officers denied any knowledge of, or personal participation in, the fraudulent conduct.  But they pleaded guilty under the "responsible corporate officer" doctrine because they had the responsibility and authority either to prevent in the first instance or to promptly correct the misrepresentations.

The Department of Health and Human Services (HHS) may exclude an individual from participating in Federal health care programs who has been convicted of a misdemeanor relating to the unlawful manufacture or distribution of drugs.  The length of this exclusion is 3 years, unless the Secretary determines in accordance with published regulations that a shorter period is appropriate because of mitigating circumstances or that a longer period is appropriate because of aggravating circumstances.  In this case, HHS initially excluded the officers for 20 years.  Appeals within the agency resulted in this period being reduced to 12 years.

The D.C. Circuit ruled that the 12-year exclusion was arbitrary and capricious because the agency failed to explain its departure from the agency's own precedents.  Never before had the agency excluded anyone for more than ten years based upon a misdemeanor, and the longest exclusion that the agency's appeal board had ever approved was four years.  The court expressed no opinion on whether a 12-year exclusion could be justified, but ruled that the agency had not provided a justification.  It sent the matter back to the agency for reconsideration.

Courts will review debarments or exclusions imposed by federal agencies but will not overturn them unless they violate the Administrative Procedure Act by being "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."  Where the agency action is based on the relevant factors and establishes a rational connection between the facts found and the decision made, the court will affirm it and will not substitute its judgment for that of the agency.  See Shane Meat Co., Inc. v. U.S. Dept. of Defense, 800 F.2d 334 (3d Cir. 1986).  Thus, a court upheld a five-year, as opposed to a three-year, debarment where there was no clear error of judgment by the agency or failure to consider relevant factors.  Burke v.  EPA, 127 F.Supp.2d 235 (D.D.C. 2001).

On the other hand, courts will vacate debarments and send them back for reconsideration when agencies have failed to consider relevant factors.  For example, one court vacated a debarment where the agency debarring official had failed to address in any detail the substantial mitigating factors that the respondent raised, or to explain why he gave them so little weight.  The absence of such an explanation made it impossible for the court to evaluate whether there was a rational connection between the facts of the case and the debarring official's decision to impose debarment.  Canales v. Paulson, 2007 WL 2071709 (D.D.C. 2007).  In another case, a court granted relief where the debarring official improperly imputed misconduct to the respondents and failed to explain why he did not consider the mitigating evidence presented by them.  Feinerman v. Bernardi, 558 F.Supp.2d 36 (D.D.C. 2008).

In summary, federal agencies have considerable latitude in determining the period for which an individual or company will be excluded from participating in federal contracting or other federal programs.  If an agency fails to consider relevant factors, the courts may intervene and require the agency to reconsider the matter.  But the courts are reluctant to second-guess agency judgments about the length of an appropriate exclusion in a given case.

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