Increased Targeting of the Pharmaceutical And Medical Device Industries Under the Foreign Corrupt Practices Act

Pharmaceutical and medical device companies recently have been finding themselves in the crosshairs of the federal government’s efforts to scrutinize and criminally prosecute their interactions with healthcare providers employed by foreign governments. For example, on February 6, 2012, the U.S. Department of Justice (“DOJ”) announced that Smith & Nephew Inc. entered into a deferred prosecution agreement and agreed to pay more than $22 million to resolve allegations of improper payments to publicly employed healthcare providers in Greece in violation of the Foreign Corrupt Practices Act (“FCPA”). DOJ’s press release stated that this “matter is part of an investigation into bribery by medical device companies of physicians employed by government institutions” (6 MELR 99, 2/8/12).

Like medical device companies, pharmaceutical companies also have been recently investigated and prosecuted by the federal government for alleged violations of the FCPA. The Wall Street Journal reported last fall that Pfizer Inc. agreed to pay more than $60 million to settle investigations into “potentially improper payments” made to secure business in foreign countries. In addition, in April 2011, Johnson & Johnson agreed to pay $70 million to settle FCPA allegations that certain of its subsidiaries paid bribes to Greek physicians to choose the company’s surgical implants, and to Polish and Romanian physicians in exchange for prescribing the company’s drugs (5 MELR 259, 4/20/11). According to reports, Pfizer’s and Johnson & Johnson’s cooperation with federal prosecutors contributed to the government’s investigation of several major drug companies, including Merck & Co., AstraZeneca PLC, Bristol-Myers Squibb Company, and GlaxoSmithKline PLC. These four companies disclosed in regulatory filings in 2010 that they received letters of inquiry from DOJ and the Securities and Exchange Commission (“SEC”), and have stated that they are cooperating with investigators.

Reasons for Increased Targeting of the Pharmaceutical and Medical Device Industries

Among the reasons why the drug and device industries are increasingly targets of rigorous enforcement of the FCPA are the significant amount of drug and device sales in overseas markets (where healthcare systems are regulated and operated to a large extent by governmental entities), and the growth in overseas product development and clinical trials. Another reason is that drug and device companies regularly rely on third parties to do business overseas (e.g., sales and marketing representatives, consultants, customs agents, and distributors), many of which are either owned by or affiliated with a foreign official, or are in a position to make improper payments to foreign officials.

In addition to these industry dynamics, drug and device companies have long been favorite targets of enforcement actions under the federal Anti-Kickback Statute (“AKS”), which provides that anyone who knowingly and willfully receives or pays anything of value to influence the referral of federal healthcare program business can be prosecuted for a felony. The FCPA is in many ways the foreign counterpart to the AKS. Indeed, as the Assistant Attorney General for DOJ’s Criminal Division, Lanny A. Breuer, observed in his address at the Tenth Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum in November 2009:

[T]he types of corrupt payments that violate the FCPA because they are given to obtain or retain business in other countries are not any different than the items of value that would violate the Anti-Kickback Statute if given within the United States—cash, gifts, charitable donations, travel, meals, entertainment, grants, speaking fees, honoraria, and consultant arrangements, to name a few.

Thus, the federal government’s recent enforcement efforts in the FCPA context are a logical extension of the government’s longstanding focus on prosecuting drug and device companies for alleged violations of the AKS.

Moreover, as discussed in greater detail below, the term “foreign official”—a critical term of art under the FCPA—is defined broadly by the statute. In the view of the federal government, the definition includes employees of state-owned enterprises (e.g., physicians employed by state-owned hospitals). Assistant Attorney General Breuer has remarked that “nearly every aspect of the approval, manufacture, import, export, pricing, sale, and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA,” given the “depth of government involvement in foreign health systems.”

The Key Provisions of the FCPA

The FCPA contains two types of provisions: (1) anti-bribery provisions, which prohibit corrupt payments to foreign officials, parties, or candidates to assist in obtaining or retaining business or securing any improper advantage; and (2) recordkeeping and internal controls provisions, which impose certain requirements on all companies whose securities are registered in the United States or that are required to file reports with the SEC. DOJ has primary responsibility for enforcing the former provisions, and the SEC generally enforces the latter provisions.

The anti-bribery provisions apply to three categories of persons: (1) “issuers” or an agent thereof; (2) “domestic concerns” or an agent thereof; and (3) foreign nationals or businesses or an agent or national thereof who take any action within U.S. territory in furtherance of a corrupt payment. The term “issuer” is defined as any company that has its securities are registered in the United States or is required to file reports with the SEC. The term “domestic concern” includes any individual who is a citizen, national, or resident of the United States, as well as any company that has its principal place of business in the United States or is organized under the laws of a state, territory, possession, or commonwealth of the United States.

A violation of the anti-bribery provisions by one of these three categories of persons consists of the following five elements:

1. A payment, offer, authorization, or promise to pay money or make a gift of anything of value directly or through a third party;

• 2.  To (a) any foreign official, (b) any foreign political party or party official, (c) any candidate for foreign political office, (d) any official of a public international organization, or (e) any other person while “knowing” that the payment or promise will be passed on to one of the aforementioned persons;

• 3.  Using an instrumentality of interstate commerce (e.g., telephone, e-mail, or the mail) by any person (either U.S. or foreign), an act outside the United States by a domestic concern or U.S. person, or an act in the United States by a foreign person in furtherance of the payment, offer, or promise;

• 4.  For the corrupt purpose of (a) influencing an official act or decision of that person, (b) inducing that person to do or neglect to do any act in violation of his or her lawful duty, (c) securing an improper advantage, or (d) inducing that person to use his or her influence with a foreign government to influence any government act or decision; and

• 5.  In order to assist in obtaining or retaining business for or with, or directing business to, any person.

For the reasons discussed below, certain aspects of these elements of an FCPA violation result in particular risk for the drug and device industries.

Foreign Officials

The FCPA defines the term “foreign official” as “any officer or employee of a foreign government or any department, agency or instrumentality thereof, or of a public international organization, or any person acting in an official capacity or on behalf of any such government, department, agency or instrumentality or for, or on behalf of, any such public international organization.” DOJ and the SEC take the position that this broad definition includes employees of state-owned enterprises. For example, Assistant Attorney General Breuer has opined that the term “foreign official” includes “doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities.” This interpretation of the term “foreign official” creates particular risk for drug and device companies for whom state-employed healthcare professionals act as customers, business operatives, or both.

Third Parties

Under the FCPA, a company may be liable for an offer, promise to pay, or payment by a third party if the company “knew” that such offer, promise, or payment would be made. A person is deemed to have knowledge of an offer, promise to pay, or payment by a third party “if a person is aware of a high probability of the existence of such circumstance, unless the person believes that such circumstance does not exist.”

Many drug and device companies are particularly susceptible to the risk of vicarious liability under the FCPA, given their significant reliance on third parties (e.g., sales and marketing agents, consultants, freight forwarders, customs agents, and distributors) for conducting business overseas. Unless a company has a particular reason to believe that its third-party representatives are not violating the FCPA, the company must take affirmative steps whenever it and its third-party representatives conduct business in high risk areas.

Steps for Achieving and Maintaining FCPA Compliance

In light of the risks identified above, drug and device companies subject to the FCPA should, with the assistance of competent counsel, review and update their existing compliance program (or develop and implement a compliance program) that includes the following minimum elements:

• Written standards of business ethics setting forth the company’s obligations under the FCPA (these materials should be distributed to employees as well as translated and distributed to employees in the company’s overseas operations);

• Mandatory training and educational programs that include segments specific to the FCPA;

• A confidential compliance hotline for the reporting of potential violations;

• Written policies and procedures for exercising due diligence in the engagement of third-party representatives;

• Written policies and procedures for the ongoing auditing and monitoring of third-party representatives; and

• Written policies and procedures that require prior written authorization by the company’s compliance officer for any payment to a foreign official.

Although a compliance program may not succeed in preventing all violations of the FCPA, in the event of a government investigation, regulatory authorities view favorably the existence of a compliance program that contains these minimum elements.