The 2009 PhRMA Code on Interactions with Health Care Professionals

The revised version of the Code “reflects and builds upon the standards and principles” set forth in the earlier Code published in 2002 (“2002 Code”), and seeks to remove the perceived tarnish that has developed on the industry's reputation in recent years. Id. at 3. The public has become increasingly skeptical of the relationship between doctors and drug companies. This cynicism has also been exhibited by several elected officials and even some doctors. For example, the Physician Payments Sunshine Act, introduced in the Senate 2007 and revised in 2008, seeks to provide “transparency in the relationship” between companies and doctors. S. 2029, 110th Cong. (1st Sess. 2007). Earlier in 2008, the House of Representatives followed suit and proposed an identical version of the Act. H.R. 5605 110th Cong. (2nd Sess. 2008). If passed, the Act would require companies to report all payments to physicians (be it cash, gifts, meals, trips or discounted products) on an annual basis. Id. As part of the disclosure, companies would be required to provide detailed information on every transaction including the physician's name and address as well as the value, date and description of the nature of the payment. In addition, companies would be required to submit an annual report summarizing the total amount of all expenditures under $25 including compensation, gifts, honorariums, speaking fees, consulting fees, travel, discounts, cash rebates or services. Id. Tracking such activity for purposes of reporting to a federal agency would undoubtedly be an expensive undertaking for the reporting corporation because the bill encompasses everything from a consulting fee valued at $5,000 to logo magnets costing 12 cents. To encourage full compliance, the Act calls for fines between $10,000 and $100,000 to be assessed each time a company fails to comply with the disclosure requirements.

Doctors have also joined in the call for change with the birth of organizations like “No Free Lunch,” a not-for-profit organization of health care providers who assert on their Web site that “drug companies, by means of samples, gifts, and food, exert
significant influence on provider behavior.” See http://www.nofreelunch.org/aboutus.htm. Another organization, National Physicians Alliance has applauded Congress' efforts to push for greater transparency, noting that public disclosure would force doctors and companies to “reflect on the ethics of their entanglements.” See http://npalliance.org/pages/s_2029_the_physician_payments_sunshine_act. In light of these developments, the revised Code is timely and should respond directly to many of the criticisms lodged at the industry on this topic.

Notable Changes Under the Revised Code

The revised Code is divided into numbered sections that set forth the new “do's and don'ts” of interacting with physicians with the overarching theme centering on the financial aspect of this relationship. In each instance, the revised Code identifies appropriate activities, the circumstances under which such activities should occur, and the necessary steps to ensure full disclosure. Similarly, the revised Code identifies inappropriate expenditures, such as meals provided solely for entertainment, the distribution of “non-educational” items, and “token” consulting/advisory agreements.

The revised Code contains several key changes. For example, sales representatives and their managers may not take doctors to lunch or dinner for an informational presentation. Any meals are to be provided to physicians in their offices or hospital facilities. Moreover, the meals are to be “modest” as judged by local standards and should be limited to an “occasional” occurrence.

The Code also prohibits the distribution of “reminder” items such as pens, coffee mugs and clipboards branded with the company name or a product logo. The Code rationalizes that the distribution of these non-educational items “may foster misperceptions that company interactions with healthcare professionals are not based on informing them about medical and scientific issues.” See Revised Code at 11. Sales representatives may, however, provide physicians with items such as medical textbooks and subscriptions to medical journals, as long as the value does not exceed $100. Additionally, distribution of medical equipment items that are not designed for patient education (e.g., stethoscopes) is no longer appropriate. However, the Code clarifies that items such as anatomical models are still permissible, but with the same monetary and frequency limitations.

The revised Code also removes the exception to the provision regarding entertainment and recreation events. The 2002 Code permitted such activities as long as they occurred in the context of an advisory board or consultant meeting. Under the revised Code, however, items such as theater tickets, passes to sporting events and vacations should not be offered under any circumstances to a health care professional who is not a salaried employee of the company.

Although companies may continue to sponsor Continuing Medical Education (CME) and third-party conferences, the revised Code now requires full disclosure of the company's contribution to the event, and a relinquishing of control regarding content, faculty and materials. Furthermore, companies may not pay the travel or lodging costs for non-faculty attendees. Companies may continue to sponsor speaker programs but the revised Code cautions that diligence should be exercised in the training and compensation of the speakers, as well as ensuring that the event complies with all applicable FDA regulations.

The revised Code also offers more detailed recommendations regarding consulting and advisory agreements between physicians and companies. While such agreements remain appropriate, the Code identifies several factors that demonstrate the necessity and validity of such arrangements including a written contract, clear identification of the purpose of the consultant's services, and detailed record-keeping. Companies must also cap the annual compensation to health care professionals who serve as consultants or advisers (although the Code does not specify a dollar amount). Another departure from the 2002 Code involves the location of consultant or advisory meetings. Any proposed location should be “conducive” to the purpose of the meeting and resorts are no longer appropriate venues.

The revised Code concludes with a question and answer section that further clarifies acceptable activities and prohibitions. For example, while a sales representative should not provide meals to a doctor outside of their office or hospital, a doctor may attend a company-sponsored speaker presentation at a restaurant. The sales representative may also attend, but only to assist with logistical arrangements and ensure compliance with FDA regulations. It should be noted that the restaurant prohibition does not extend to all company personnel. Employees other than sales representatives and their immediate managers may take a physician to a restaurant as long as the meal is modest, is not part of an entertainment or recreational activity, and occurs in a venue appropriate for an informational discussion.

The most significant change to the revised Code deals with compliance. Companies are encouraged to provide an annual certification that they have policies and procedures in place to foster compliance with the revised Code. Those companies that provide the certification will be identified by PhRMA on a public Web site. Notably, the certification must be signed by both the company's Chief Executive Officer and Chief Compliance Officer, similar to the requirements of the Sarbanes-Oxley Act. An external verification of the existence of a company's policies and procedures every three years is also recommended. In effect, a company must publicly announce its intent to comply with the revised Code then open its files to scrutiny so others can confirm this representation.

The revised Code does not specify what the certification of compliance should contain, i.e., a statement simply confirming the existence of policies and procedures or more detailed information relating to actual compliance. Similarly, at present, there is little information offered as to how the external verification should be conducted, but PhRMA intends to publish general guidance information to assist companies further in this area.

Adoption of the PhRMA Code by State Governments

When the Code was first promulgated in 2002, it received attention from both state governments and federal agencies. Since it was issued in July 2008, the revised Code has also received attention from public officials who have endorsed the industry's continued efforts to police itself. Indeed, Sen. Herbert Kohl (D-WI), one of the co-sponsors of the Physician Payments Sunshine Act, commented, “I'm encouraged by the industry's attempt to clean up its act.” Press Release, Senator Herb Kohl Reacts to Release of PhRMA's New Code of Conduct (July 10, 2008) available at (http://aging.senate.gov/record.cfm?id=300426).

California and Nevada previously incorporated the principles of the 2002 Code into state laws governing the conduct of pharmaceutical companies. California mandates that pharmaceutical companies update their “comprehensive compliance program” (as required by the statute) to reflect revisions to the PhRMA Code within six months of such revisions. CA Health & Safety Code ' 119402(b) 2008. Similarly, Nevada requires that a company's code of conduct be consistent with applicable legal standards and advises that compliance with the Code will satisfy the statute. Nev. Rev. Stat. ' 639.570 (2008). In addition, Massachusetts has recently passed a law requiring pharmaceutical companies to adopt a code of conduct that is “no less restrictive” than the revised Code. S. 2863, 2008 Leg., 185th Sess. (Mass. 2008). Of the three states, only Massachusetts sets forth the penalties for violations, assessing fines of $5,000 for each “transaction, occurrence or event.” Id. Even where penalties are not specifically identified, companies could risk revocation of the right to conduct business within the state if they are found to be in violation of a state's code of conduct. This prospect ' as remote as it may be ' should still be viewed as an expensive possibility that should be avoided. To date there have been no reported prosecutions for violations of CA Health & Safety Code ' 119402 (b) or Nev. Rev. Stat. ' 639.750, but companies have wisely chosen not to test the consequences of violating these statutes and several have made their annual statements of compliance publicly available. See, e.g., McKesson Corporation Comprehensive Compliance Program Pursuant to California Health & Safety Code ” 119400 –119402, available at http://www.mckesson.com/static_files/McKesson.com/CorpCommunity/mccp.pdf; P&GP Compliance with CA Health & Safety Code Sections. 119400-119402, available at http://www.pgpharma.com/pdf/PGP_Compliance_Policy.pdf; Allergan Comprehensive Compliance Program, available at http://www.allergan.com/responsibility/compliance.htm.

Adoption of the PhRMA Code by Federal Regulators

While no federal agency has formally adopted the Code, the Office of Inspector General (“OIG”) has previously endorsed the 2002 Code. In the context of discussing the prevention of healthcare fraud and abuse, the OIG referenced the “Anti-Kickback” statute, which provides for criminal prosecution as well as civil penalties against individuals or entities that among other things, “knowingly and willfully” solicit or pay bribes (in cash or in kind) for the purpose of inducing referrals of patients for drugs or services that are reimbursable under a federal health care program. 42 U.S.C.A. ' 1320a-7b (2008). The OIG noted, “pharmaceutical manufacturers and their employees and agents should be aware that the anti-kickback statute prohibits in the health care industry some practices that are common in other business sectors.” 68 Fed. Reg. 23731-01 at 23734 (May 5, 2003). Turning its attention to the company/doctor relationship, the OIG cautioned:

Any time a pharmaceutical manufacturer provides anything of value to a physician who might prescribe the manufacturer's product, the manufacturer should examine whether it is providing a valuable tangible benefit to the physician with the intent to induce or reward referrals. Id. at 23737.

The OIG explicitly referenced the 2002 Code, noting that it “provide[d] useful and practical advice for reviewing and structuring these relationships” and characterized compliance as a “good-faith effort” to comply with federal health care programs. Id. Specifically, OIG guidance opined:

[a]lthough compliance with the PhRMA Code will not protect a manufacturer as a matter of law under the anti-kickback statute, it will substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply with the applicable federal health care program requirements. Id.

With this in mind, manufacturers would be wise to heed OIG's recommendation that they “familiarize [their] sales force[s] with the minimum PhRMA Code standards and other relevant industry standards.” Id. at 23739. In light of the OIG's supportive statements in favor of the 2002 Code, companies should expect that the OIG will similarly embrace the revised Code.

Compliance with the revised Code may also benefit companies that find themselves the subject of a criminal investigation by the U.S. Attorney's office. The “McNulty Memorandum,” issued by Deputy Attorney General Paul J. McNulty in 2006, offers guidance to federal prosecutors on factors to consider when determining whether to prosecute a corporation. Memorandum from Paul J. McNulty, Deputy Att'y Gen., U. S. Dep't of Justice (Dec. 12, 2006) available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf. The memo devotes an entire section to corporate compliance programs and echoes the OIG's opinion that the mere existence of a corporate compliance program does not automatically absolve a corporation of responsibility for the criminal acts of its employees. The memo does, however, identify the “critical factors” in evaluating a company's compliance program, namely, whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives. Id. at 14. The McNulty Memo instructs prosecutors to determine whether the compliance program has been both designed and implemented effectively or if it is “merely a paper program.” Id. Consequently, should a company find itself under the microscope of a federal investigation, or worse yet, subject to a deferred prosecution or non-prosecution agreement (“DPA” and “NPA,” respectively), demonstrating good-faith compliance with the revised Code as well as other industry standards can be a significant benefit to the ultimate outcome.

What Are the Risks of Violating the Revised Code?

As discussed above, California, Nevada and Massachusetts have elevated the Code from voluntary industry standard to law, the violation of which may have criminal and civil repercussions. The federal government has not expressly adopted the Code, however, several activities banned under the 2002 Code are also illegal under the anti-kickback statute, e.g., gratuities to physicians for prescribing a particular drug. Aside from the legal ramifications, a company must also consider the public relations nightmare of an accusation in the media that it continued to distribute improper gifts or chose to hold its fall 2009 consultant meeting at the Four Seasons resort in Maui despite the revised Code's explicit ban on such activities.

Prior to the revised Code, it may have been possible to engage in an activity that was appropriate under the Code but might provoke an investigation by federal prosecutors under the anti-kickback statute. For example, under the 2002 Code, companies were permitted to compensate consulting physicians for attending meetings or conferences in this capacity. The OIG commented, however, that “compensating physicians as 'consultants' when they are expected to attend meetings or conferences primarily in a passive capacity is suspect.” 68 Fed. Reg. at 23738. While the tighter restrictions under the revised Code should decrease the likelihood of this scenario in the future, companies will wisely continue to comply with all federal and state regulations, including the anti-kickback statute in the first instance which should guarantee compliance with the Code on issues where there is overlap.

Implications of the Revised Code in Product Liability Cases

Evidence of a company's violations of industry standards are generally admissible ' but not dispositive ' on the issue of negligence. See W. Page Keeton, et al.: Prosser And Keaton on the Law of Torts ' 33 (5th ed. 1984); see also McComish v. DeSoi, 200 A.2d 116, 121 (N.J. 1964) (methods, practices or rules accepted and followed by “experienced men” admissible to compare tortfeasor's alleged conduct with required norm of “reasonable prudence”). Several courts have held that a failure to comply with industry regulations can be considered by the jury as evidence of negligence, but it does not constitute negligence per se because industry standards, unlike statutes or government regulations, are voluntary. See Delaware Elec. Coop., Inc. v. Duphily, 703 A.2d. 1202, 1209 (Del. 1997) (failure to adhere to National Electric Safety Code some evidence of negligence but not negligence per se); Jorgensen v. Horton, 206 N.W.2d 100, 103 (Iowa 1973) (defendant's violation of Associated General Contractors of America safety codes not evidence of negligence per se); Commonwealth, Transp. Cabinet, Dep't of Highways v. Babbitt, 172 S.W.3d 786, 795 (Ky. 2005) (failure to follow highway transportation association guidelines does not constitute evidence of negligence per se). At least one court has found, however, that if a government entity adopts the industry standards, violation of the standard can be evidence of negligence per se. See Knarr v. Chapman School of Seamanship, 2000 WL 433981, at *3 (E.D.Pa. 2000) (finding negligence per se where Coast Guard adopted regulations in question from American National Standard Institute for ladders installed on boats). But see Belk v. Wal-Mart Stores, Inc., 106 F.3d 389, 1997 WL 26579, at *6 (4th Cir. 1997) (under South Carolina law, employee's violation of company rules does not constitute negligence per se). Therefore, violation of the revised Code in California, Nevada and now Massachusetts would likely constitute negligence per se.

Unfortunately, the converse is not always true. Even in those situations where a state has adopted the revised Code, a company's adherence to the industry standard ordinarily will not provide a complete defense to civil liability. While compliance with state government or industry standards generally is evidence of the exercise of due care, in most situations a jury retains the power to decide that the government standard ' and certainly an industry standard ' was inadequate. Restatement (Third) of Torts: Product Liability '4. Still, the Code does provide industry standards for a “reasonable manufacturer” to observe when interacting with prescribing physicians, and, therefore, some measure of protection in product liability lawsuits. On the other hand, deviations from the revised Code ' even unintentional ones ' will almost certainly fuel arguments by plaintiffs that these unsanctioned “perks” were offered to co-opt the prescribing physicians and undermine the effectiveness of the labeled warnings. Although plaintiffs will still bear the burden of proving that the alleged “improper marketing” influenced the physician's prescribing decision, conduct in violation of the Code will place companies at a significant litigation disadvantage by contributing to the overall “big bad pharmaceutical company” storyline that plaintiffs use to inflame a jury's passions in pursuit of a bell-ringer verdict. In addition to personal injury claims, companies need to be vigilant against plaintiffs seeking redress for economic injuries under state consumer protection statutes. Several states permit the assessment of penalties or the recovery of damages against a defendant who has engaged in “unlawful conduct” in the context of unfair or deceptive trade practices. See, e.g., N.J.S.A. ' 56:8-19 (2008) (providing for treble damages and attorney's cost against a defendant found to have engaged in unlawful conduct under the statute); 815 ILCS ' 505-7 (2008) (assessing penalties up to $50,000 for each instance a defendant has engaged in conduct deemed unlawful under the statute). Arguments will exist in many states that activities within the company/doctor relationship are not within the coverage of consumer protection statutes. However, as more states adopt the revised Code as law, this claim could be added to the laundry list of allegations. Once the revised Code takes effect, plaintiffs may begin to argue that any dinners, trips or other prohibited activities should be considered unfair practices because they are used as part of a pattern and practice of encouraging physicians to promote unproven benefits to their patients. Most state consumer protection statutes already prohibit representations of nonexistent benefits of a product. See, e.g., Cal. Civ. Code '1770(a)(5)(2008); MD Com. Law ' 13-301(2)(i) (2008); Tenn. Code Ann. ' 47-18-104 (1977).

The reality in civil litigation is that a defendant manufacturer will never reach the bar set by the plaintiffs. Therefore, the company must focus on how it can be viewed as a “reasonable manufacturer” in the eyes of the jurors who will weigh, among other things, the company's compliance with the law and the industry's code of conduct.

The conclusion of this article will discuss compliance fundamentals.

Eric H. Sussman is the head of Regulatory Enforcement and White Collar Litigation in Kaye Scholer LLP's Chicago office. He is the former Deputy Chief of the Financial Crimes and Special Prosecutions Section, and former Food & Drug Administration Coordinator for the U.S. Attorney's Office for the Northern District of Illinois. Adrienne Gonzalez is an associate in the firm's New York office, and a member of the Product Liability Litigation and Counseling Group. The authors would like to thank Aaron Levine for his assistance.

In a continuing effort to provide the latest, most accurate information to physicians, many pharmaceutical manufacturers have been facing a growing public perception that their interactions with health care providers were inappropriate ' or in some cases even unethical. Seeking to remove any appearance of impropriety and reinforce the industry's mission of providing essential medical information, the Pharmaceutical Research and Manufacturers of America (“PhRMA”) recently issued a revised version of its Code on Interactions with Healthcare Professionals that took effect on Jan. 1, 2009 (“revised Code”). The revised Code imposes new “voluntary” restrictions on gifts, meals, distribution of educational items, sponsorship of conferences, and consulting agreements. It also sets forth strict new compliance requirements mandating that chief executive officers and chief compliance officers certify that their companies are implementing policies and procedures designed to foster compliance with the revised Code and verifying the existence of these policies and procedures through periodic outside audits. PhRMA's stated goal for the new Code is to promote “the highest ethical standards as well as all legal requirements.” 2009 PhRMA Code on Interactions with Healthcare Professionals, available at http://www.phrma.org/code_on_interactions_with_healthcare_professionals. Nevertheless, companies should be aware that by raising the bar for the industry, they may be taking on additional legal duties and litigation risks. Government regulators and plaintiffs' attorneys will inevitably take aim at these more restrictive standards and target those companies that fail to meet them.

The impact of the revised Code on a company's business practices will require a careful analysis and action plan to be successful. Failure to comply with the revised Code may have broad implications in terms of regulatory enforcement, product liability litigation and even consumer protection issues. In-house counsel and outside counsel must assess the criminal and civil implications of the revised Code and craft practical policies reflecting its principles. Any analysis should consider the question of how the revised Code might be used against the company in legal proceedings. However, the analysis should also include a discussion as to how the company can use the revised Code to its benefit in potential litigation. If implemented properly, these updated guidelines can help companies protect themselves against unwanted attention from state and federal regulators, as well as the usual character attacks employed by plaintiffs in civil litigation.

Background

The revised version of the Code “reflects and builds upon the standards and principles” set forth in the earlier Code published in 2002 (“2002 Code”), and seeks to remove the perceived tarnish that has developed on the industry's reputation in recent years. Id. at 3. The public has become increasingly skeptical of the relationship between doctors and drug companies. This cynicism has also been exhibited by several elected officials and even some doctors. For example, the Physician Payments Sunshine Act, introduced in the Senate 2007 and revised in 2008, seeks to provide “transparency in the relationship” between companies and doctors. S. 2029, 110th Cong. (1st Sess. 2007). Earlier in 2008, the House of Representatives followed suit and proposed an identical version of the Act. H.R. 5605 110th Cong. (2nd Sess. 2008). If passed, the Act would require companies to report all payments to physicians (be it cash, gifts, meals, trips or discounted products) on an annual basis. Id. As part of the disclosure, companies would be required to provide detailed information on every transaction including the physician's name and address as well as the value, date and description of the nature of the payment. In addition, companies would be required to submit an annual report summarizing the total amount of all expenditures under $25 including compensation, gifts, honorariums, speaking fees, consulting fees, travel, discounts, cash rebates or services. Id. Tracking such activity for purposes of reporting to a federal agency would undoubtedly be an expensive undertaking for the reporting corporation because the bill encompasses everything from a consulting fee valued at $5,000 to logo magnets costing 12 cents. To encourage full compliance, the Act calls for fines between $10,000 and $100,000 to be assessed each time a company fails to comply with the disclosure requirements.

Doctors have also joined in the call for change with the birth of organizations like “No Free Lunch,” a not-for-profit organization of health care providers who assert on their Web site that “drug companies, by means of samples, gifts, and food, exert
significant influence on provider behavior.” See http://www.nofreelunch.org/aboutus.htm. Another organization, National Physicians Alliance has applauded Congress' efforts to push for greater transparency, noting that public disclosure would force doctors and companies to “reflect on the ethics of their entanglements.” See http://npalliance.org/pages/s_2029_the_physician_payments_sunshine_act. In light of these developments, the revised Code is timely and should respond directly to many of the criticisms lodged at the industry on this topic.

Notable Changes Under the Revised Code

The revised Code is divided into numbered sections that set forth the new “do's and don'ts” of interacting with physicians with the overarching theme centering on the financial aspect of this relationship. In each instance, the revised Code identifies appropriate activities, the circumstances under which such activities should occur, and the necessary steps to ensure full disclosure. Similarly, the revised Code identifies inappropriate expenditures, such as meals provided solely for entertainment, the distribution of “non-educational” items, and “token” consulting/advisory agreements.

The revised Code contains several key changes. For example, sales representatives and their managers may not take doctors to lunch or dinner for an informational presentation. Any meals are to be provided to physicians in their offices or hospital facilities. Moreover, the meals are to be “modest” as judged by local standards and should be limited to an “occasional” occurrence.

The Code also prohibits the distribution of “reminder” items such as pens, coffee mugs and clipboards branded with the company name or a product logo. The Code rationalizes that the distribution of these non-educational items “may foster misperceptions that company interactions with healthcare professionals are not based on informing them about medical and scientific issues.” See Revised Code at 11. Sales representatives may, however, provide physicians with items such as medical textbooks and subscriptions to medical journals, as long as the value does not exceed $100. Additionally, distribution of medical equipment items that are not designed for patient education (e.g., stethoscopes) is no longer appropriate. However, the Code clarifies that items such as anatomical models are still permissible, but with the same monetary and frequency limitations.

The revised Code also removes the exception to the provision regarding entertainment and recreation events. The 2002 Code permitted such activities as long as they occurred in the context of an advisory board or consultant meeting. Under the revised Code, however, items such as theater tickets, passes to sporting events and vacations should not be offered under any circumstances to a health care professional who is not a salaried employee of the company.

Although companies may continue to sponsor Continuing Medical Education (CME) and third-party conferences, the revised Code now requires full disclosure of the company's contribution to the event, and a relinquishing of control regarding content, faculty and materials. Furthermore, companies may not pay the travel or lodging costs for non-faculty attendees. Companies may continue to sponsor speaker programs but the revised Code cautions that diligence should be exercised in the training and compensation of the speakers, as well as ensuring that the event complies with all applicable FDA regulations.

The revised Code also offers more detailed recommendations regarding consulting and advisory agreements between physicians and companies. While such agreements remain appropriate, the Code identifies several factors that demonstrate the necessity and validity of such arrangements including a written contract, clear identification of the purpose of the consultant's services, and detailed record-keeping. Companies must also cap the annual compensation to health care professionals who serve as consultants or advisers (although the Code does not specify a dollar amount). Another departure from the 2002 Code involves the location of consultant or advisory meetings. Any proposed location should be “conducive” to the purpose of the meeting and resorts are no longer appropriate venues.

The revised Code concludes with a question and answer section that further clarifies acceptable activities and prohibitions. For example, while a sales representative should not provide meals to a doctor outside of their office or hospital, a doctor may attend a company-sponsored speaker presentation at a restaurant. The sales representative may also attend, but only to assist with logistical arrangements and ensure compliance with FDA regulations. It should be noted that the restaurant prohibition does not extend to all company personnel. Employees other than sales representatives and their immediate managers may take a physician to a restaurant as long as the meal is modest, is not part of an entertainment or recreational activity, and occurs in a venue appropriate for an informational discussion.

The most significant change to the revised Code deals with compliance. Companies are encouraged to provide an annual certification that they have policies and procedures in place to foster compliance with the revised Code. Those companies that provide the certification will be identified by PhRMA on a public Web site. Notably, the certification must be signed by both the company's Chief Executive Officer and Chief Compliance Officer, similar to the requirements of the Sarbanes-Oxley Act. An external verification of the existence of a company's policies and procedures every three years is also recommended. In effect, a company must publicly announce its intent to comply with the revised Code then open its files to scrutiny so others can confirm this representation.

The revised Code does not specify what the certification of compliance should contain, i.e., a statement simply confirming the existence of policies and procedures or more detailed information relating to actual compliance. Similarly, at present, there is little information offered as to how the external verification should be conducted, but PhRMA intends to publish general guidance information to assist companies further in this area.

Adoption of the PhRMA Code by State Governments

When the Code was first promulgated in 2002, it received attention from both state governments and federal agencies. Since it was issued in July 2008, the revised Code has also received attention from public officials who have endorsed the industry's continued efforts to police itself. Indeed, Sen. Herbert Kohl (D-WI), one of the co-sponsors of the Physician Payments Sunshine Act, commented, “I'm encouraged by the industry's attempt to clean up its act.” Press Release, Senator Herb Kohl Reacts to Release of PhRMA's New Code of Conduct (July 10, 2008) available at (http://aging.senate.gov/record.cfm?id=300426).

California and Nevada previously incorporated the principles of the 2002 Code into state laws governing the conduct of pharmaceutical companies. California mandates that pharmaceutical companies update their “comprehensive compliance program” (as required by the statute) to reflect revisions to the PhRMA Code within six months of such revisions. CA Health & Safety Code ' 119402(b) 2008. Similarly, Nevada requires that a company's code of conduct be consistent with applicable legal standards and advises that compliance with the Code will satisfy the statute. Nev. Rev. Stat. ' 639.570 (2008). In addition, Massachusetts has recently passed a law requiring pharmaceutical companies to adopt a code of conduct that is “no less restrictive” than the revised Code. S. 2863, 2008 Leg., 185th Sess. (Mass. 2008). Of the three states, only Massachusetts sets forth the penalties for violations, assessing fines of $5,000 for each “transaction, occurrence or event.” Id. Even where penalties are not specifically identified, companies could risk revocation of the right to conduct business within the state if they are found to be in violation of a state's code of conduct. This prospect ' as remote as it may be ' should still be viewed as an expensive possibility that should be avoided. To date there have been no reported prosecutions for violations of CA Health & Safety Code ' 119402 (b) or Nev. Rev. Stat. ' 639.750, but companies have wisely chosen not to test the consequences of violating these statutes and several have made their annual statements of compliance publicly available. See, e.g., McKesson Corporation Comprehensive Compliance Program Pursuant to California Health & Safety Code ” 119400 –119402, available at http://www.mckesson.com/static_files/McKesson.com/CorpCommunity/mccp.pdf; P&GP Compliance with CA Health & Safety Code Sections. 119400-119402, available at http://www.pgpharma.com/pdf/PGP_Compliance_Policy.pdf; Allergan Comprehensive Compliance Program, available at http://www.allergan.com/responsibility/compliance.htm.

Adoption of the PhRMA Code by Federal Regulators

While no federal agency has formally adopted the Code, the Office of Inspector General (“OIG”) has previously endorsed the 2002 Code. In the context of discussing the prevention of healthcare fraud and abuse, the OIG referenced the “Anti-Kickback” statute, which provides for criminal prosecution as well as civil penalties against individuals or entities that among other things, “knowingly and willfully” solicit or pay bribes (in cash or in kind) for the purpose of inducing referrals of patients for drugs or services that are reimbursable under a federal health care program. 42 U.S.C.A. ' 1320a-7b (2008). The OIG noted, “pharmaceutical manufacturers and their employees and agents should be aware that the anti-kickback statute prohibits in the health care industry some practices that are common in other business sectors.” 68 Fed. Reg. 23731-01 at 23734 (May 5, 2003). Turning its attention to the company/doctor relationship, the OIG cautioned:

Any time a pharmaceutical manufacturer provides anything of value to a physician who might prescribe the manufacturer's product, the manufacturer should examine whether it is providing a valuable tangible benefit to the physician with the intent to induce or reward referrals. Id. at 23737.

The OIG explicitly referenced the 2002 Code, noting that it “provide[d] useful and practical advice for reviewing and structuring these relationships” and characterized compliance as a “good-faith effort” to comply with federal health care programs. Id. Specifically, OIG guidance opined:

[a]lthough compliance with the PhRMA Code will not protect a manufacturer as a matter of law under the anti-kickback statute, it will substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply with the applicable federal health care program requirements. Id.

With this in mind, manufacturers would be wise to heed OIG's recommendation that they “familiarize [their] sales force[s] with the minimum PhRMA Code standards and other relevant industry standards.” Id. at 23739. In light of the OIG's supportive statements in favor of the 2002 Code, companies should expect that the OIG will similarly embrace the revised Code.

Compliance with the revised Code may also benefit companies that find themselves the subject of a criminal investigation by the U.S. Attorney's office. The “McNulty Memorandum,” issued by Deputy Attorney General Paul J. McNulty in 2006, offers guidance to federal prosecutors on factors to consider when determining whether to prosecute a corporation. Memorandum from Paul J. McNulty, Deputy Att'y Gen., U. S. Dep't of Justice (Dec. 12, 2006) available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf. The memo devotes an entire section to corporate compliance programs and echoes the OIG's opinion that the mere existence of a corporate compliance program does not automatically absolve a corporation of responsibility for the criminal acts of its employees. The memo does, however, identify the “critical factors” in evaluating a company's compliance program, namely, whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives. Id. at 14. The McNulty Memo instructs prosecutors to determine whether the compliance program has been both designed and implemented effectively or if it is “merely a paper program.” Id. Consequently, should a company find itself under the microscope of a federal investigation, or worse yet, subject to a deferred prosecution or non-prosecution agreement (“DPA” and “NPA,” respectively), demonstrating good-faith compliance with the revised Code as well as other industry standards can be a significant benefit to the ultimate outcome.

What Are the Risks of Violating the Revised Code?

As discussed above, California, Nevada and Massachusetts have elevated the Code from voluntary industry standard to law, the violation of which may have criminal and civil repercussions. The federal government has not expressly adopted the Code, however, several activities banned under the 2002 Code are also illegal under the anti-kickback statute, e.g., gratuities to physicians for prescribing a particular drug. Aside from the legal ramifications, a company must also consider the public relations nightmare of an accusation in the media that it continued to distribute improper gifts or chose to hold its fall 2009 consultant meeting at the Four Seasons resort in Maui despite the revised Code's explicit ban on such activities.

Prior to the revised Code, it may have been possible to engage in an activity that was appropriate under the Code but might provoke an investigation by federal prosecutors under the anti-kickback statute. For example, under the 2002 Code, companies were permitted to compensate consulting physicians for attending meetings or conferences in this capacity. The OIG commented, however, that “compensating physicians as 'consultants' when they are expected to attend meetings or conferences primarily in a passive capacity is suspect.” 68 Fed. Reg. at 23738. While the tighter restrictions under the revised Code should decrease the likelihood of this scenario in the future, companies will wisely continue to comply with all federal and state regulations, including the anti-kickback statute in the first instance which should guarantee compliance with the Code on issues where there is overlap.

Implications of the Revised Code in Product Liability Cases

Evidence of a company's violations of industry standards are generally admissible ' but not dispositive ' on the issue of negligence. See W. Page Keeton, et al.: Prosser And Keaton on the Law of Torts ' 33 (5th ed. 1984); see also McComish v. DeSoi , 200 A.2d 116, 121 (N.J. 1964) (methods, practices or rules accepted and followed by “experienced men” admissible to compare tortfeasor's alleged conduct with required norm of “reasonable prudence”). Several courts have held that a failure to comply with industry regulations can be considered by the jury as evidence of negligence, but it does not constitute negligence per se because industry standards, unlike statutes or government regulations, are voluntary. See Delaware Elec. Coop., Inc. v. Duphily , 703 A.2d. 1202, 1209 (Del. 1997) (failure to adhere to National Electric Safety Code some evidence of negligence but not negligence per se); J orgensen v. Horton , 206 N.W.2d 100, 103 (Iowa 1973) (defendant's violation of Associated General Contractors of America safety codes not evidence of negligence per se); Commonwealth, T ransp. Cabinet, Dep't of Highways v. Babbitt , 172 S.W.3d 786, 795 (Ky. 2005) (failure to follow highway transportation association guidelines does not constitute evidence of negligence per se). At least one court has found, however, that if a government entity adopts the industry standards, violation of the standard can be evidence of negligence per se. See Knarr v. Chapman School of Seamanship, 2000 WL 433981, at *3 (E.D.Pa. 2000) (finding negligence per se where Coast Guard adopted regulations in question from American National Standard Institute for ladders installed on boats). But see Belk v. Wal-Mart Stores, Inc. , 106 F.3d 389, 1997 WL 26579, at *6 (4th Cir. 1997) (under South Carolina law, employee's violation of company rules does not constitute negligence per se). Therefore, violation of the revised Code in California, Nevada and now Massachusetts would likely constitute negligence per se.

Unfortunately, the converse is not always true. Even in those situations where a state has adopted the revised Code, a company's adherence to the industry standard ordinarily will not provide a complete defense to civil liability. While compliance with state government or industry standards generally is evidence of the exercise of due care, in most situations a jury retains the power to decide that the government standard ' and certainly an industry standard ' was inadequate. Restatement (Third) of Torts: Product Liability '4. Still, the Code does provide industry standards for a “reasonable manufacturer” to observe when interacting with prescribing physicians, and, therefore, some measure of protection in product liability lawsuits. On the other hand, deviations from the revised Code ' even unintentional ones ' will almost certainly fuel arguments by plaintiffs that these unsanctioned “perks” were offered to co-opt the prescribing physicians and undermine the effectiveness of the labeled warnings. Although plaintiffs will still bear the burden of proving that the alleged “improper marketing” influenced the physician's prescribing decision, conduct in violation of the Code will place companies at a significant litigation disadvantage by contributing to the overall “big bad pharmaceutical company” storyline that plaintiffs use to inflame a jury's passions in pursuit of a bell-ringer verdict. In addition to personal injury claims, companies need to be vigilant against plaintiffs seeking redress for economic injuries under state consumer protection statutes. Several states permit the assessment of penalties or the recovery of damages against a defendant who has engaged in “unlawful conduct” in the context of unfair or deceptive trade practices. See, e.g., N.J.S.A. ' 56:8-19 (2008) (providing for treble damages and attorney's cost against a defendant found to have engaged in unlawful conduct under the statute); 815 ILCS ' 505-7 (2008) (assessing penalties up to $50,000 for each instance a defendant has engaged in conduct deemed unlawful under the statute). Arguments will exist in many states that activities within the company/doctor relationship are not within the coverage of consumer protection statutes. However, as more states adopt the revised Code as law, this claim could be added to the laundry list of allegations. Once the revised Code takes effect, plaintiffs may begin to argue that any dinners, trips or other prohibited activities should be considered unfair practices because they are used as part of a pattern and practice of encouraging physicians to promote unproven benefits to their patients. Most state consumer protection statutes already prohibit representations of nonexistent benefits of a product. See, e.g., Cal. Civ. Code '1770(a)(5)(2008); MD Com. Law ' 13-301(2)(i) (2008); Tenn. Code Ann. ' 47-18-104 (1977).

The reality in civil litigation is that a defendant manufacturer will never reach the bar set by the plaintiffs. Therefore, the company must focus on how it can be viewed as a “reasonable manufacturer” in the eyes of the jurors who will weigh, among other things, the company's compliance with the law and the industry's code of conduct.

The conclusion of this article will discuss compliance fundamentals.

Eric H. Sussman is the head of Regulatory Enforcement and White Collar Litigation in Kaye Scholer LLP's Chicago office. He is the former Deputy Chief of the Financial Crimes and Special Prosecutions Section, and former Food & Drug Administration Coordinator for the U.S. Attorney's Office for the Northern District of Illinois. Adrienne Gonzalez is an associate in the firm's New York office, and a member of the Product Liability Litigation and Counseling Group. The authors would like to thank Aaron Levine for his assistance.