The criminal prosecution of Purdue Pharma L.P. generated a blockbuster $600 million global settlement resolving government and private claims rooted in the company’s unlawful promotion of the painkiller OxyContin as a safer, less addictive alternative to other drugs.

Former Purdue Chief Executive Offic­er Michael Friedman, General Counsel Howard Udell and medical director Paul Goldenheim agreed in separate deals to give up $34.5 million in profits and to serve three years of probation. But each lost something more: effectively, the ability to work in the pharmaceutical and health care industries.

Now they are challenging the U.S. Department of Health and Human Services (HHS) sanction that banned them for 12 years — a period that their lawyers describe as unlawful and unprecedented. The closely watched case tests the power of the government to punish corporate executives absent evidence the officials were aware of misconduct among subordinates. A federal trial judge in Washington upheld the ban in December 2010.

Sidley Austin partner Carter Phillips on Dec. 6 tried to convince a panel of the U.S. Court of Appeals for the D.C. Circuit to vacate the sanction, arguing that government officials treated the executives unfairly. “This is an unprecedented action by HHS, and the effect is professionally fatal,” Phillips, who manages Sidley’s Washington office, said following the hearing. “So the industry is rightly concerned about both the nature of HHS’ authority to exclude in this situation and, if such power exists, how severe can the punishments be.”

Federal prosecutors insisted that the exclusion represented lawful agency discretion and that there was substantial evidence to support the lengthy exclusion from participating in federal health care programs — a status that renders them distinctly undesirable to health care and pharmaceutical companies.

An assistant U.S. attorney, Robin Meriweather, argued in a court brief in November that the executives failed “to prevent or properly correct Purdue’s fraudulent misbranding of its highly lucrative OxyContin product, despite their obvious control over and responsibility for the company’s conduct.”

The pro-business Washington Legal Foundation and the Pharmaceutical Research and Manufacturers Association support the Purdue executives. A ruling in favor of the government could cause executives to think twice about accepting a plea deal for a no-intent misdemeanor, the pharmaceutical group’s attorneys at Arnold & Porter said.

FRAUDULENT MARKETING

Friedman, Udell and Goldenheim, who were charged with misdemeanors in 2007, spent more than 50 years combined working at Purdue, the privately held Stamford, Conn.-based pharmaceutical company. Between 1996 and 2001, revenue from the sale of OxyContin was $2.8 billion, court records show.

Prosecutors in the U.S. District Court for the Western District of Virginia alleged that Purdue reaped millions of dollars from the fraudulent marketing and sale of the drug during that period. But the government turned up no evidence that the three charged executives knew about or participated in the misbranding scheme. Friedman, Udell and Goldenheim were sentenced in 2007 to three years of probation and ordered to perform 400 hours of community service.

Congress gave the Health and Human Services Department the power to exclude an untrustworthy person from participating in any health care programs, including Medicare and Medicaid. The government first sought to keep the Purdue officers out of the industry for 20 years. The length of the term was reduced through an administrative appellate process. “The length of the exclusion matches the sweeping and unprecedented nature of Purdue’s fraudulent misbranding,” Meriweather, the prosecutor, said in a D.C. Circuit brief in November. “To the extent they deem it onerous, the Purdue executives have only themselves to blame for the scope and gravity of their failure to exercise their executive responsibility.”

HHS has the legal authority to exclude a person convicted of a criminal offense “consisting of a misdemeanor relating to fraud” and other crimes, including the unlawful distribution of a controlled substance.

The problem, Carter told the D.C. Circuit judges, is that misdemeanor misbranding does not “relate to” fraud. Fraud, Carter argued, requires an intent to deceive. None of the executives, he continued, had any knowledge of the crimes that supervisors and employees were committing in promoting OxyContin to physicians. The executives’ lawyers, who also include a team from Hogan Lovells, said they searched more than 1,500 agency decisions and did not find an exclusion of more than four years for a misdemeanor. Some officials received double-digit exclusion periods in felony cases.

During the D.C. Circuit hearing, Senior Judge Douglas Ginsburg, who heard the case with Chief Judge David Sentelle and Senior Judge Stephen Williams, questioned how the government arrived at the 12-year exclusion term. “I don’t see how you get from the fact there have been previously long exclusions to the idea that it was warranted in this case,” Ginsburg told Meriweather.

The length of any ban, Meriweather said, is case specific and there is no formula. Ginsburg expressed concern. “I don’t see anything other than the air surrounding the 12 years,” he said.

INDUSTRY SUPPORT

Business, legal and pharmaceutical industry groups lined up in support of the Purdue officers, urging the appeals court to strike down the 12-year exclusion. Jones Day partner Michael Carvin is among the lawyers who worked on the case, representing the Washington Legal Foundation.

Amar Sarwal, chief legal strategist of the Association of Corporate Counsel, said in a brief that treating in-house lawyers as enforcement targets without proof of individual wrongdoing could undermine corporate compliance programs. “The specter of exclusion could encourage compliance officers to focus on their professional survival rather than implementing robust and effective compliance programs,” Sarwal wrote.

Arnold & Porter partner Lisa Blatt, who leads the firm’s appellate and Supreme Court practice, is lead counsel for the pharmaceutical association. Blatt, who declined to comment, said in court papers that the government’s assertion that it can impose a long exclusion absent individual culpability could have unintended consequences.

“If the officer’s guilty plea to a no-intent misdemeanor, without more, can form the basis for exclusion, officers could feel new pressure to contest allegations that otherwise might have been resolved through negotiation,” the pharmaceutical group’s brief said.

Phillips said an executive who might be willing to plead guilty to a misdemeanor with no jail time might not be willing to forfeit a professional career. The government, he said, should not have unbridled discretion to impose a ban of any length. “The whole idea that the U.S. could not find a single document or get a single witness to say that any of the executives had any knowledge of the wrongdoing — and yet HHS still felt the need to act this punitively — is deeply disappointing,” Phillips said. “And I hope the D.C. Circuit holds that the sanction cannot be justified under any standard of judicial review.”

Mike Scarcella can be contacted at mscarcella@alm.com.