New England Biz Law Update
The U.S. Department of Justice put the pharmaceutical and medical device industries on notice in November 2009. In the months and years ahead, the DOJ said, it would be targeting those industries for violations of the Foreign Corrupt Practices Act, a law that criminalizes bribery of foreign officials to obtain or retain business.
Since the announcement, dozens of drug and device companies have publicly disclosed their receipt of federal grand jury subpoenas focusing on their international operations.
Johnson & Johnson’s settlements with the DOJ, the SEC and the U.K.’s Serious Fraud Office in 2011, totaling more than $77 million, appears to be the first shot across the bow.
Biomet’s payment of fines and penalties of approximately $23 million to the DOJ and the SEC this past March signals that there are more enforcement actions to come.
Scores of other drug and device companies in the government’s crosshairs now face a likelihood of federal prosecution under the FCPA. Many others will continue to encounter high risks posed by their foreign operations.
And all these companies are exposed to follow-on civil liability, including shareholders’ derivative actions alleging that their directors breached their oversight duties by failing to establish and enforce effective compliance programs that would have averted criminal violations.
Understanding FCPA risks
Several areas inherent to the business of pharmaceutical, medical device and life sciences companies present unique FCPA risks to which boards and compliance officers must pay particular attention.
Perhaps the greatest risk is inadvertently making payments or giving things of value to individuals who do not appear to be “foreign officials” covered by the FCPA.
The FCPA criminalizes corrupt payments only to “foreign officials,” but the term is loosely defined in the statute. Under the FCPA, “foreign official” includes any employee of a foreign government or any department, agency or instrumentality of a foreign government.
From the government’s standpoint, an instrumentality may include private companies in which the government has an ownership interest, even if it is only a minority stake. And because health care is partly or fully government-funded in many countries, almost any health care professional can conceivably be considered to be a “foreign official” under the statute.
Two recent court decisions, United States v. Noriega, No. 2:10-cr-01031 (C.D. Cal., April 18, 2011), and United States v. Carson, No. 8:09-cr-00077 (C.D. Cal., May 18, 2011), embrace the government’s broad interpretation of who is a “foreign official.”
In both cases, the courts denied motions to dismiss the indictment and articulated factors that are relevant to the “foreign official” inquiry.
Collectively, those factors include: (1) the purpose of the entity, including whether it provides a service to citizens of a jurisdiction and whether it is perceived to perform official functions; (2) how the government characterizes the entity and its employees; (3) how the entity was created; (4) whether officers and directors of the entity are government officials or were appointed by government officials; and (5) the extent of the government’s ownership or financial support of the entity.
While Noriega and Carson provide some guidance, in many countries it is difficult to ascertain whether an entity is state-owned. Additional judicial guidance is expected soon, as the issue of who is a “foreign official” under the FCPA is now pending before the 11th U.S. Circuit Court of Appeals in the case of United States v. Esquenazi.
In the meantime, there is a strong likelihood that the government will continue to consider employees of foreign health care entities to be “foreign officials” under the FCPA.
For example, the DOJ charged a Chinese subsidiary of Diagnostic Products Corp. with violating the anti-bribery provisions for making cash commission payments to laboratory personnel and physicians employed by hospitals owned by the Chinese government to obtain and retain business involving the sale of immunodiagnostic systems, kits and medical equipment. See United States v. DPC (Tianjin) Co. Ltd. (C.D. Cal., May 2005).
Another high-risk area involves the FCPA’s prohibition of corrupt payments of “anything of value,” thereby rendering routine sales tools such as samples, rebates and discounts as potential areas of risk.
An August 2009 opinion release from the DOJ in response to a query whether a shipment of medical device samples directly to a foreign government would violate the statute left open the possibility that samples would not be exempt from government scrutiny.
Thus, conduct that is permissible under U.S. health care laws nevertheless might trigger criminal liability under the FCPA if performed outside the U.S.
Finally, conducting clinical trials abroad is another area fraught with risk.
A June 2010 U.S. Department of Health and Human Services Office of Inspector General report critical of the U.S. Food and Drug Administration’s monitoring of foreign clinical trials may lead to increased attention from both the FDA and the DOJ to ensure the quality and integrity of foreign clinical data.
Given the broad definition of “foreign official,” payments made to clinical research organizations that may be passed onto employees of state-run foreign health facilities — including investigators, doctors, researchers and laboratory staff — could come under FCPA scrutiny.
The recent DOJ pharmaceutical probe no doubt includes attention to the target companies’ conduct of clinical trials overseas.
Overzealous government at work
The government’s ongoing aggressive enforcement of the FCPA against the pharmaceutical industry imposes significant burdens on companies conducting international business. Its overbroad interpretation of “foreign official” effectively criminalizes conduct that is legal even under the extraordinary regulatory scheme in the U.S.
Moreover, the government’s failure to provide clear guidance on the use of samples, discounts and rebates is inexcusable, as those are key components of the business model of drug and device companies worldwide.
Congress should amend the statute to narrow its scope and provide the industry with more certainty regarding the boundaries of legal business conduct abroad.
In its current form, the FCPA poses a veritable minefield for U.S.-based drug and device companies, and also leaves them at a disadvantage vis-à-vis their foreign competitors.
And that spells danger for the future of the industry.
Thomas C. Frongillo is head of the litigation practice and co-chair of the white-collar defense and investigations group at Weil, Gotshal & Manges in Boston. Caroline K. Simons is a litigation associate at the firm.
I’d have to disagree with several points made in this article and don’t have time to begin to cover all of them, but I will address the three most glaring.
First, you state, “[The FCPA’s] overbroad interpretation of ‘foreign official’ effectively criminalizes conduct that is legal even under the extraordinary regulatory scheme in the U.S.” I’d have to say that this is wholly inaccurate. Bribery in the US is just as illegal as it is out of country. In fact, US laws criminalize BOTH government and, in many states, commercial bribery as well. Particularly, in the healthcare industry, these types of improper payment activities are heavily monitored and enforcement is just as strong, if not stronger, because you are being regulated by not only the federal government, but also state government. Conversely, the FCPA only criminalizes bribery of foreign government officials. Additionally, it is the improper purpose of the payment that makes the activity a criminal, and thus, illegal act – just as any payment made domestically would be illegal if made for a similar improper purpose. I am unaware, then, of what acts made illegal under the FCPA, that are legal under US domestic law. Perhaps this refers to your discussion of samples (i.e. gifts, hospitality, etc.) in OPR 09-01? To this point, 2009 OPR states that no enforcement action would be taken and the government provided strong support as to why 100 medical device samples were not considered an improper payment. Additionally, in regards to enforcement actions on this same issue, I am unaware of any action brought by the government based SOLELY on gifts and hospitality issues, typically these issues are mentioned in the context of a larger issue of showing both the company’s culture of corruption and the larger bribery scheme for which they are ultimately being investigated.
Additionally, the government provides very clear guidance in the form their released schedule C’s, OPRS, and at many conferences and events. They basically provide a road map to how to run an effective and best practices compliance program. Being in house, I find using these tools incredibly effective. I do hope, however, that the much anticipated and soon to be released DOJ guidance does give some more details as to expectations, but I’m sure it will be a consolidated repeat of everything else they’ve put out which is pretty straightforward.
Finally, you also state that the FCPA leaves US companies at a disadvantage to their competitors. I’d argue that there are many laws and regulations (for example child labor laws or environmental regulations or work place safety) that may leave us at a competitive disadvantage in many ways, but that doesn’t mean the act should be made legal or less regulated. Additionally, the FCPA does not ONLY affect US companies; many non-US companies have been prosecuted as well under this law for illegal, unethical, and improper payments. In fact, I’d argue that these payments actually harm business, drive down competition, increase extortionate demands, and hurt the people in the countries in which they are made. I am proud that the US is the first country to have a law on the books that makes this type of activity illegal, and that they have paved the way for almost every other country to adopt similar laws.