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Inside Medical Devices Updates on Developments for Medical Devices from Covington & Burling LLP

Managing Your FCPA Risk: Lessons for the Device Industry from 2012 Enforcement Actions

Posted in Foreign Corrupt Practices Act, U.S. Government Investigations and Compliance

Just as the start of a new year leads individuals to reflect on the year just ended and make resolutions for the year to come, the dawn of 2013 represents the perfect time for medical device companies to take stock of lessons learned in 2012 in order to adapt and strengthen their anti-corruption compliance programs.  A full quarter of the twelve companies that settled FCPA enforcement actions in 2012 were medical device companies, with nearly half coming from the broader life sciences industry.  These settlements reflect many of the unique risk areas faced by life sciences companies and offer lessons for the device industry as we head into 2013.

Scrutinize Financial Arrangements with Distributors

Device maker Smith & Nephew paid $22.2 million in fines and penalties this year to settle charges that it violated the FCPA by making improper payments through its Greek distributor.  Subsidiaries of the company allegedly paid a percentage of the distributor’s discount to off-shore shell companies, which the distributor used to provide cash incentives and other items of value to doctors at public hospitals.  Pharmaceutical companies Pfizer and Eli Lilly’s respective $60.2 million and $29.3 million settlements also involved alleged bribes paid through unusually large discounts or discounts paid to off-shore shell companies.

Before engaging a distributor or other third party, companies should follow up on red flags such as unusually large discounts and payments outside the country where services will be performed.  Otherwise, companies risk commercial consequences as well potential investigation and settlement costs.

Monitor for Improper Gifts , Travel and Entertainment 

Though the recently released FCPA Resource Guide recognizes that modest gifts and entertainment can be an appropriate business practice, enforcement actions against life sciences companies in 2012 demonstrate the importance of controls to prevent the improper use of gifts, travel, and other hospitality.  For instance, Biomet’s $22.9 million settlement covered allegations that the company paid for trips to Europe for doctors in China that were primarily devoted to sightseeing and other entertainment, or, in the case of one doctor, visiting his daughter in Switzerland.  Pfizer’s settlement similarly included allegations that the company used “conference attendance or travel” to gain improper advantages.

Adopt Controls to Ensure Consulting Fees are Paid for Legitimate and Necessary Services

The 2012 settlements also reinforced that life sciences companies should adopt controls to ensure that consulting fees to health care professionals (“HCPs”) — whether for speaking engagements, consulting services, clinical trials, or other activities — are (1) made for a legitimate purpose where a company has a genuine need; and (2) not given to HCPs as an inducement or reward.  Biomet’s Argentina subsidiary allegedly made improper payments to doctors through false invoices for professional or consulting services that were never performed.  Device maker Orthofix’s Mexican subsidiary allegedly made improper payments to doctors in part by paying invoices for “training” to the fictitious companies of various government officials.

Conduct Pre- and Post-Acquisition Due Diligence on Targets

Pfizer’s settlement illustrated the potential impact post-acquisition due diligence and integration of anti-corruption controls have on successor liability.  Although the DOJ imposed successor liability in connection with alleged improper payments made before and after Pfizer’s acquisition of Pharmacia in 2003, Pfizer was not held responsible for the pre-acquisition conduct of Wyeth subsidiaries. Pfizer — which acquired Wyeth while its FCPA investigation was pending — conducted an extensive due diligence and investigative review of Wyeth’s operations after the acquisition and integrated its internal controls system into the new Wyeth entities.  The SEC brought a separate civil action against Wyeth, also declining to charge Pfizer itself for conduct by the Wyeth subsidiaries.

The government’s approach to the Pfizer settlement, confirmed in the recently-released Resource Guide, demonstrates how companies can decrease the risk of successor liability when acquiring or merging with another company.  Pre-acquisition due diligence and post-acquisition integration are particularly important for life sciences companies because of the many points of interaction a target will have with government officials, ranging from regulators to publicly-employed HCPs.