Navigating the FCPA in Healthcare and Life Sciences

It has been over three years since former Assistant Attorney General Lanny Breuer told the pharmaceutical industry that it would be a focus of the Criminal Division's FCPA efforts. Lanny A. Breuer, Assist. Attn. Gen. of Crim'l Div., Keynote Address to the Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available at http://tinyurl.com/cp7hp36.The DOJ acknowledged in press releases that the actions against Orthofix and Smith & Nephew were part of an investigation into bribery by medical device companies. Press Release, U.S. Dep't of Justice, Medical Device Company Smith & Nephew Resolves Foreign Corrupt Practices Act Investigation (Feb. 6, 2012), available at http://tinyurl.com/7vmtuwl.

Broad Interpretation of the FCPA: An Easy Fit for Physician-Focused Industries

In general, the FCPA prohibits corruptly offering to pay, paying, or authorizing the payment of money or anything of value to a foreign official for the purpose of influencing the foreign official's acts or decisions or securing an improper advantage, in order to obtain or retain business. See, e.g., 15 U.S.C. ' 78dd-1(a)(1). The FCPA also prohibits bribing or offering a bribe to foreign political parties, their officials, and candidates for public office. The FCPA further includes a “books-and-records provision” that requires issuers to “make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer's transactions and dispositions of [its] assets.” Resource Guide to the U.S. Foreign Corrupt Practice Act, Crim'l Div. of Dep't of Justice and Enforcement Div. of Sec. and Exchange Comm'n at 38 (Nov. 14, 2012), available at http://tinyurl.com/cwj85jx%20(citing 15 U.S.C. ' 78m(b)(2)(A)). The “internal controls” provision requires an issuer to “devise and maintain a system of internal accounting controls sufficient to assure management's control, authority, and responsibility over the firm's assets.” Id. (citing 15 U.S.C. ' 78m(b)(2)(B)). The FCPA imposes criminal and civil penalties for corporations and individuals.

'Anything of Value'

In the healthcare and life sciences context, examples abound of FCPA allegations involving cash, trips, entertainment, and other items of value being provided to influence doctors, purchasing agents, and others who qualify as foreign officials based on their employment at publicly owned and controlled hospitals or universities. These payments may be masked as “commissions,” “consulting fees,” “royalties,” “rebates,” “incentives” or even “chocolates.”

Entertainment and Travel

Although the FCPA contains a carve-out for reasonable and bona fide expenditures in connection with the execution or performance of a contract or the promotion, demonstration, or explanation of companies' products and services (See, e.g., 15 U.S.C. ' 78dd-1(c)), there is no carte blanche for travel and entertainment that is too lavish or furthers an improper purpose. Events such as speaker programs, speaker training, advisory boards and meetings with consultants present the possibility of out-of-bounds meals and entertainment.

The charges against Biomet, for example, included sponsoring international travel for surgeons for training, where a “substantial portion of the trip [was] devoted to sightseeing and other entertainment at Biomet's expense.” Information at 13, U.S. v. Biomet, Inc., No. 1:12-CR-00080-RBW (D.D.C. Mar. 26, 2012). In the case of Orthofix, the alleged bribes were more straightforward ' typically cash ' but were concealed in expenditures that “regularly far exceeded the budgeted amounts in several categories, including promotional expenses, travel expenses, and meetings for doctors[,]” which “ were all high risk[.]” Information at 7, 9, U.S. v. Orthofix Int'l, N.V., No. 4:12-cr-00150-RAS-DDB-1 (E.D. Tex. Jul. 10, 2012).

Gifts and Charitable Donations

The FCPA Resource Guide issued by the DOJ and the SEC explains that the FCPA does not prohibit gift-giving or charitable donations per se but, rather, improper payments seeking a quid pro quo that are disguised as gifts or donations. See Resource Guide at 16, 19. While the Resource Guide signals that enforcement actions would not be based on small, appropriate gifts given openly and transparently, that is not the case when gifts “comprise part of a systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials.” Id. at 15.

The SEC's complaint in the Eli Lilly case included allegations of gifts of wine, specialty foods, jewelry, cosmetics, and cigarettes. Complaint at 7-8, SEC v. Eli Lilly & Co., No. 1:12-CV-02045 (D.D.C. Dec. 20, 2012). “Although the dollar amount of each gift was generally small, the improper payments were wide-spread throughout the … subsidiary.” Id. at 8. The charges against Orthofix included gifts of laptops, appliances, and even leasing a Volkswagen Jetta. Information at 7, Orthofix; Complaint at 4, SEC v. Orthofix Int'l, N.V., No. 4:12-cv-00419-RC-ALM (E.D. Tex. Jul. 10, 2012).

The SEC's allegations regarding the “value” provided by Eli Lilly in Poland also included payments to a charity founded and administered by a government health official. Complaint at 3-7, Eli Lilly & Co. (Donations to the same charity were a subject of the SEC's Complaint against Schering-Plough in 2004. See Complaint at 2-5, SEC v. Schering-Plough Corp., No. 1:04CV00945 (D.D.C. June 9, 2004)). They also included another Lilly subsidiary offering to “donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials,” including support of charities. Id. at 15.

Foreign Official, M.D.

Healthcare, life sciences, and medical device companies interact with foreign governments in myriad ways, including in connection with approval, labeling, manufacture, import, export, distribution through pharmacies, pricing, sale, and marketing. Clinical trials frequently are conducted abroad ' often by U.S. companies that do not have any other activities overseas ' and provide for additional interaction with government officials and healthcare providers.

In 2002, Syncor Taiwan pleaded guilty to violating the FCPA, and its parent company settled with the SEC based on improper payments and gifts to physicians at state-owned hospitals. Information, U.S. v. Syncor Taiwan, Inc., No. 02-CR-1244-SVW (D.D.C. Dec. 5, 2002); Press Release, U.S. Dep't of Justice, Syncor Taiwan, Inc. Pleads Guilty to Violating the Foreign Corrupt Practices Act (Dec. 10, 2002), available at http://tinyurl.com/a2vyqg9; Complaint, SEC v. Syncor Int'l Corp., No. 1:02-CV-02421 (D.D.C. Dec. 10, 2002); Litigation Release, SEC Obtains $500,000 Penalty Against Syncor Int'l Corp. for Violating the Anti-Bribery Provisions of the Foreign Corrupt Practices Act (Dec. 10, 2002), available at http://tinyurl.com/bxkcwjy. From the government's perspective, that such physicians are foreign officials is incontrovertible by now.

In the recent case against Eli Lilly, one of the alleged foreign officials was employed by the government health authority that reimbursed hospitals and healthcare providers for the purchase of approved products. In the case of Orthofix, a social service agency official was considered a foreign official. Complaint at 3, Eli Lilly & Co.; Information at 5, 7, Orthofix.

The term “foreign officials” also includes high- and low-level officers or employees of “instrumentalities,” including entities controlled or owned in whole or in part by a foreign state. See Resource Guide at 19-20. Particular care should be paid when dealing with pharmacies if they are owned in part by a government entity.

Third-Party Distributors

The Resource Guide cautions that “companies should be aware of the risks involved in engaging third-party agents or intermediaries.” Id. at 22. These may include distributors, consultants, and clinical research organizations (CROs). A medical device manufacturer's authorization of its distributor's corrupt payments is one example highlighted in the Resource Guide. Id. at 22 (citing Information, U.S. v. AGA Medical Corp., No. 08-cr-172 (D. Minn. June 3, 2008)).

The Pfizer and Eli Lilly cases illustrate basic ways a company may be held responsible for third parties' acts. The Pfizer HCP Information alleged that Pfizer HCP entered into an exclusive distribution contract, “believing” that all or part of the value of the contract would be provided to a government official. Information at 8, U.S. v. Pfizer H.C.P. Corp., No. 1:12-CR-00169-ESH (D.D.C. Aug. 7, 2012). It also stated that Pfizer HCP and Pfizer Russia worked with a third party that bid on tenders issued by government healthcare institutions and filled the tenders with Pfizer products, knowing that the third party's costs included a percentage for “Motivation of Officials.” Id. At 2-3, 9. The Eli Lilly Complaint alleged that a Brazil subsidiary gave a nationwide distributor “unusually large discounts,” part of which the distributor used for bribes. Complaint at 8-9, Eli Lilly & Co. The Eli Lilly and Smith & Nephew charges also included other arrangements with shell companies intended to provide “something of value” to foreign officials. See e.g., id. at 9-10; Complaint at 3-7, SEC v. Smith & Nephew Plc., No. 1:12-CV-00187 (D.D.C. Feb. 6, 2012).

Prosecution of Individuals

In a statement following the release of the Resource Guide, then-Assistant Attorney General Breuer highlighted the DOJ's pursuit of individuals. Lanny A. Breuer, Assist. Attn. Gen. of Crim'l Div., Speaks at the American Conference Inst's 28th Nat'l Conference on the Foreign Corrupt Practices Act (Nov. 16, 2012), available at http://tinyurl.com/c8rs4ge. Breuer said that “corporate executives now actually believe ' for good reason ' that if they participate in a scheme to improperly influence a foreign official, they face the very real prospect of going to prison.” Id. In 2009 remarks at a pharmaceutical industry conference, Breuer noted that the Criminal Division's focus on the industry would include the investigation and, where appropriate, prosecution of senior executives. Breuer Keynote Address, supra note 3.

There are numerous examples in the FCPA context of individuals being charged after the government has begun negotiations with, or even resolved its case against, a company, such as former executives charged three years after Siemens' and its subsidiaries' guilty pleas; former executives charged over a year after Latin Node pleaded guilty; and executives charged over a year after Noble Corp. settled with the government. Last year, a former managing director of Morgan Stanley pleaded guilty to conspiring to evade the company's internal accounting controls while the government publicly declined to prosecute the company. Press Release, U.S. Dep't of Justice, Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA (Apr. 25, 2012), available at http://tinyurl.com/72jmypq.

The charges against the healthcare and life sciences companies referred to herein are rife with alleged culpable conduct by individuals, and companies' deferred prosecution agreements (DPAs) with the DOJ typically provide no protection for current or former directors, officer, employees, or agents.

Conclusion

Healthcare, life sciences, and medical device companies are particularly well positioned to develop effective FCPA compliance programs. In order to comply with extensive domestic regulations, including the Anti-Kickback Statute, the False Claims Act, and the new Sunshine laws, many in these industries already have programs that address interactions with regulators, purchasers, and health care providers. Designing and implementing an effective global compliance program, including effective monitoring and testing of both overseas and domestic interactions with physicians and government officials, should remain the industries' highest priority.

Jacqueline C. Wolff is a partner and Co-Chair of the Corporate Investigations & White Collar Defense group at Manatt, Phelps & Phillips, LLP and a member of this newsletter's Board of Editors. Lorie E. Lupkin is an associate in Manatt's litigation division and a member of the same practice group.

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In 2012, companies and executives operating in the healthcare and life sciences industries had an outsize presence in Foreign Corrupt Practices Act (FCPA) enforcement actions. Given recent Department of Justice (DOJ) and Securities and Exchange Commission (SEC) pronouncements, coupled with more companies deciding to voluntarily disclose and seek greater leniency by providing information regarding their employees and competitors, it appears that the world of healthcare, pharmaceuticals, and medical devices will continue to figure prominently in FCPA enforcement.

Recent Enforcement Actions

During 2012, the government collected over $260 million as a result of FCPA-related enforcement actions. The life sciences and medical device industries accounted for over half that amount. Jeffrey Benzing, “Corporate FCPA Penalties Continued to Fall in 2012,” Main Justice and Just Anti-Corruption (Jan. 3, 2013), available at http://tinyurl.com/c7cx7yo. Of 12 new enforcement actions against companies in 2012, six involved life sciences and medical devices ' Biomet, Eli Lilly, Orthofix, Pfizer/Wyeth, Smith & Nephew, and Tyco. So far in 2013, the DOJ and the SEC have publicized FCPA enforcement actions against several companies, one of which was Koninklijke Philips Electronics, a Netherlands-based healthcare company. Order Instituting Cease-and-Desist Proceedings, In re Koninklijke Philips Electronics N.V., 2013 WL 1384548 (Sec. and Exchange Comm'n Apr. 5, 2013).

It has been over three years since former Assistant Attorney General Lanny Breuer told the pharmaceutical industry that it would be a focus of the Criminal Division's FCPA efforts. Lanny A. Breuer, Assist. Attn. Gen. of Crim'l Div., Keynote Address to the Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available at http://tinyurl.com/cp7hp36.The DOJ acknowledged in press releases that the actions against Orthofix and Smith & Nephew were part of an investigation into bribery by medical device companies. Press Release, U.S. Dep't of Justice, Medical Device Company Smith & Nephew Resolves Foreign Corrupt Practices Act Investigation (Feb. 6, 2012), available at http://tinyurl.com/7vmtuwl.

Broad Interpretation of the FCPA: An Easy Fit for Physician-Focused Industries

In general, the FCPA prohibits corruptly offering to pay, paying, or authorizing the payment of money or anything of value to a foreign official for the purpose of influencing the foreign official's acts or decisions or securing an improper advantage, in order to obtain or retain business. See, e.g., 15 U.S.C. ' 78dd-1(a)(1). The FCPA also prohibits bribing or offering a bribe to foreign political parties, their officials, and candidates for public office. The FCPA further includes a “books-and-records provision” that requires issuers to “make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer's transactions and dispositions of [its] assets.” Resource Guide to the U.S. Foreign Corrupt Practice Act, Crim'l Div. of Dep't of Justice and Enforcement Div. of Sec. and Exchange Comm'n at 38 (Nov. 14, 2012), available at http://tinyurl.com/cwj85jx%20(citing 15 U.S.C. ' 78m(b)(2)(A)). The “internal controls” provision requires an issuer to “devise and maintain a system of internal accounting controls sufficient to assure management's control, authority, and responsibility over the firm's assets.” Id. (citing 15 U.S.C. ' 78m(b)(2)(B)). The FCPA imposes criminal and civil penalties for corporations and individuals.

'Anything of Value'

In the healthcare and life sciences context, examples abound of FCPA allegations involving cash, trips, entertainment, and other items of value being provided to influence doctors, purchasing agents, and others who qualify as foreign officials based on their employment at publicly owned and controlled hospitals or universities. These payments may be masked as “commissions,” “consulting fees,” “royalties,” “rebates,” “incentives” or even “chocolates.”

Entertainment and Travel

Although the FCPA contains a carve-out for reasonable and bona fide expenditures in connection with the execution or performance of a contract or the promotion, demonstration, or explanation of companies' products and services (See, e.g., 15 U.S.C. ' 78dd-1(c)), there is no carte blanche for travel and entertainment that is too lavish or furthers an improper purpose. Events such as speaker programs, speaker training, advisory boards and meetings with consultants present the possibility of out-of-bounds meals and entertainment.

The charges against Biomet, for example, included sponsoring international travel for surgeons for training, where a “substantial portion of the trip [was] devoted to sightseeing and other entertainment at Biomet's expense.” Information at 13, U.S. v. Biomet, Inc., No. 1:12-CR-00080-RBW (D.D.C. Mar. 26, 2012). In the case of Orthofix, the alleged bribes were more straightforward ' typically cash ' but were concealed in expenditures that “regularly far exceeded the budgeted amounts in several categories, including promotional expenses, travel expenses, and meetings for doctors[,]” which “ were all high risk[.]” Information at 7, 9, U.S. v. Orthofix Int'l, N.V., No. 4:12-cr-00150-RAS-DDB-1 (E.D. Tex. Jul. 10, 2012).

Gifts and Charitable Donations

The FCPA Resource Guide issued by the DOJ and the SEC explains that the FCPA does not prohibit gift-giving or charitable donations per se but, rather, improper payments seeking a quid pro quo that are disguised as gifts or donations. See Resource Guide at 16, 19. While the Resource Guide signals that enforcement actions would not be based on small, appropriate gifts given openly and transparently, that is not the case when gifts “comprise part of a systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials.” Id. at 15.

The SEC's complaint in the Eli Lilly case included allegations of gifts of wine, specialty foods, jewelry, cosmetics, and cigarettes. Complaint at 7-8, SEC v. Eli Lilly & Co., No. 1:12-CV-02045 (D.D.C. Dec. 20, 2012). “Although the dollar amount of each gift was generally small, the improper payments were wide-spread throughout the … subsidiary.” Id. at 8. The charges against Orthofix included gifts of laptops, appliances, and even leasing a Volkswagen Jetta. Information at 7, Orthofix; Complaint at 4, SEC v. Orthofix Int'l, N.V., No. 4:12-cv-00419-RC-ALM (E.D. Tex. Jul. 10, 2012).

The SEC's allegations regarding the “value” provided by Eli Lilly in Poland also included payments to a charity founded and administered by a government health official. Complaint at 3-7, Eli Lilly & Co . (Donations to the same charity were a subject of the SEC's Complaint against Schering-Plough in 2004. See Complaint at 2-5, SEC v. Schering-Plough Corp., No. 1:04CV00945 (D.D.C. June 9, 2004)). They also included another Lilly subsidiary offering to “donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials,” including support of charities. Id. at 15.

Foreign Official, M.D.

Healthcare, life sciences, and medical device companies interact with foreign governments in myriad ways, including in connection with approval, labeling, manufacture, import, export, distribution through pharmacies, pricing, sale, and marketing. Clinical trials frequently are conducted abroad ' often by U.S. companies that do not have any other activities overseas ' and provide for additional interaction with government officials and healthcare providers.

In 2002, Syncor Taiwan pleaded guilty to violating the FCPA, and its parent company settled with the SEC based on improper payments and gifts to physicians at state-owned hospitals. Information, U.S. v. Syncor Taiwan, Inc., No. 02-CR-1244-SVW (D.D.C. Dec. 5, 2002); Press Release, U.S. Dep't of Justice, Syncor Taiwan, Inc. Pleads Guilty to Violating the Foreign Corrupt Practices Act (Dec. 10, 2002), available at http://tinyurl.com/a2vyqg9; Complaint, SEC v. Syncor Int'l Corp., No. 1:02-CV-02421 (D.D.C. Dec. 10, 2002); Litigation Release, SEC Obtains $500,000 Penalty Against Syncor Int'l Corp. for Violating the Anti-Bribery Provisions of the Foreign Corrupt Practices Act (Dec. 10, 2002), available at http://tinyurl.com/bxkcwjy. From the government's perspective, that such physicians are foreign officials is incontrovertible by now.

In the recent case against Eli Lilly, one of the alleged foreign officials was employed by the government health authority that reimbursed hospitals and healthcare providers for the purchase of approved products. In the case of Orthofix, a social service agency official was considered a foreign official. Complaint at 3, Eli Lilly & Co.; Information at 5, 7, Orthofix.

The term “foreign officials” also includes high- and low-level officers or employees of “instrumentalities,” including entities controlled or owned in whole or in part by a foreign state. See Resource Guide at 19-20. Particular care should be paid when dealing with pharmacies if they are owned in part by a government entity.

Third-Party Distributors

The Resource Guide cautions that “companies should be aware of the risks involved in engaging third-party agents or intermediaries.” Id. at 22. These may include distributors, consultants, and clinical research organizations (CROs). A medical device manufacturer's authorization of its distributor's corrupt payments is one example highlighted in the Resource Guide. Id. at 22 (citing Information, U.S. v. AGA Medical Corp., No. 08-cr-172 (D. Minn. June 3, 2008)).

The Pfizer and Eli Lilly cases illustrate basic ways a company may be held responsible for third parties' acts. The Pfizer HCP Information alleged that Pfizer HCP entered into an exclusive distribution contract, “believing” that all or part of the value of the contract would be provided to a government official. Information at 8, U.S. v. Pfizer H.C.P. Corp., No. 1:12-CR-00169-ESH (D.D.C. Aug. 7, 2012). It also stated that Pfizer HCP and Pfizer Russia worked with a third party that bid on tenders issued by government healthcare institutions and filled the tenders with Pfizer products, knowing that the third party's costs included a percentage for “Motivation of Officials.” Id. At 2-3, 9. The Eli Lilly Complaint alleged that a Brazil subsidiary gave a nationwide distributor “unusually large discounts,” part of which the distributor used for bribes. Complaint at 8-9, Eli Lilly & Co . The Eli Lilly and Smith & Nephew charges also included other arrangements with shell companies intended to provide “something of value” to foreign officials. See e.g., id. at 9-10; Complaint at 3-7, SEC v. Smith & Nephew Plc., No. 1:12-CV-00187 (D.D.C. Feb. 6, 2012).

Prosecution of Individuals

In a statement following the release of the Resource Guide, then-Assistant Attorney General Breuer highlighted the DOJ's pursuit of individuals. Lanny A. Breuer, Assist. Attn. Gen. of Crim'l Div., Speaks at the American Conference Inst's 28th Nat'l Conference on the Foreign Corrupt Practices Act (Nov. 16, 2012), available at http://tinyurl.com/c8rs4ge. Breuer said that “corporate executives now actually believe ' for good reason ' that if they participate in a scheme to improperly influence a foreign official, they face the very real prospect of going to prison.” Id. In 2009 remarks at a pharmaceutical industry conference, Breuer noted that the Criminal Division's focus on the industry would include the investigation and, where appropriate, prosecution of senior executives. Breuer Keynote Address, supra note 3.

There are numerous examples in the FCPA context of individuals being charged after the government has begun negotiations with, or even resolved its case against, a company, such as former executives charged three years after Siemens' and its subsidiaries' guilty pleas; former executives charged over a year after Latin Node pleaded guilty; and executives charged over a year after Noble Corp. settled with the government. Last year, a former managing director of Morgan Stanley pleaded guilty to conspiring to evade the company's internal accounting controls while the government publicly declined to prosecute the company. Press Release, U.S. Dep't of Justice, Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA (Apr. 25, 2012), available at http://tinyurl.com/72jmypq.

The charges against the healthcare and life sciences companies referred to herein are rife with alleged culpable conduct by individuals, and companies' deferred prosecution agreements (DPAs) with the DOJ typically provide no protection for current or former directors, officer, employees, or agents.

Conclusion

Healthcare, life sciences, and medical device companies are particularly well positioned to develop effective FCPA compliance programs. In order to comply with extensive domestic regulations, including the Anti-Kickback Statute, the False Claims Act, and the new Sunshine laws, many in these industries already have programs that address interactions with regulators, purchasers, and health care providers. Designing and implementing an effective global compliance program, including effective monitoring and testing of both overseas and domestic interactions with physicians and government officials, should remain the industries' highest priority.

Jacqueline C. Wolff is a partner and Co-Chair of the Corporate Investigations & White Collar Defense group at Manatt, Phelps & Phillips, LLP and a member of this newsletter's Board of Editors. Lorie E. Lupkin is an associate in Manatt's litigation division and a member of the same practice group.

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