The Novartis Speakers Bureau

Last week, Novartis agreed to pay a $185 million criminal fine for off-label marketing of the epilepsy drug Trileptal, and $237.5 million to resolve civil allegations over kickbacks paid to doctors to prescribe Trileptal and five other drugs.

A reader wondered if there's any connection between what Novartis did and the FCPA.

To find out more, we looked at the civil complaint against the company filed by Jeremy Garrity, a former cardiovascular sales rep. His suit was brought under the False Claims Act, 31 USC §3730(b)(2). He alleged violations of the Anti-Kickback Act, 42 USC §1320a-7b(b). It outlaws paying or offering anything of value in exchange for the referral of any product (including prescription drugs) for which payment is sought from any federally funded health care program, including Medicare, Medicaid, and Tricare.

With Novartis' settlement, Garrity will now split $25.7 million with at least three other inside whistleblowers.

According to his complaint, Novartis paid doctors "honoraria" of between $1,500 and $2,000 to speak at physician "events" about the benefits of Novartis' drugs. Some doctors earned as much as $150,000 a year in honoraria. In 2007 alone, Novartis paid $9.5 million to doctors through its speakers bureau.

Many of the doctors selected by Novartis as speakers had no publications or teaching positions. "Several speakers," the complaint alleged, "had difficulty with English. Other speakers were simply very poor communicators."

Physician attendance at the "events" was sparse -- often just one or two other doctors. And the venues may have been tables at restaurants, during the dinner hour, although Novartis never really checked who attended or where the events were held.

How did Novartis pick its speakers? "Most physicians were selected based upon criteria related to prescription writing  . . ," the complaint said. The more prescriptions they wrote for Novartis' drugs, the complaint alleged, the more speaking engagements would come their way.

Last week's settlement covered Novartis' practices in the U.S., with doctors working there. If the company made similar payments to doctors overseas, could it have violated the FCPA? For sure.

Physicians at government-owned or managed hospitals overseas are "foreign officials" for purposes of the FCPA. That means corrupt payments to them intended to obtain or retain business can violate the antibribery provisions.

Application of the FCPA to overseas doctors made news in 2002, when the SEC and DOJ settled civil and criminal enforcement actions against Syncor and its Taiwan subsidiary. Payments to doctors also resulted in FCPA enforcement actions in 2005 against DPC (Tianjin) Co. Ltd. -- the Chinese subsidiary of Los Angeles-based Diagnostic Products Corporation -- and Micrus Corporation.

On Monday, the Wall Street Journal said the DOJ and SEC asked drug companies to voluntarily report any violations of the FCPA. The report mentioned Eli Lilly, Merck, Astra Zeneca, Bristol-Myers Squibb, GlaxoSmithKline, and SciClone. They haven't been accused of wrongdoing.

In August, SciClone disclosed an SEC subpoena and a letter from the DOJ investigating the "sale, licensing and marketing of its products in foreign countries, including China." SciClone said the DOJ was looking at FCPA issues in the pharmaceutical industry generally, and had received information about SciClone's practices suggesting possible violations.

The Wall Street Journal said the DOJ asked the companies about four types of possible violations: bribing government-employed doctors to purchase drugs, paying company sales agents commissions that are passed along to government doctors, paying hospital committees to approve drug purchases, and paying regulators to win drug approvals.

All that adds up to an FCPA storm swirling around the drug makers. What will happen next? Jeremy Garrity and his fellow Novartis whistleblowers are now rich. It's easy to imagine one of them or some other drug-company insiders becoming FCPA whistleblowers under the new Dodd-Frank provisions.

As Willie Sutton might have said, that's now where the money is.

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Download a copy of the August 13, 2010 first amended false claims act complaint in ex rel. Jeremy Garrity v. Novartis Pharmaceuticals Corporation here.

Defending The Defense

By Thomas Fox

I want to thank Kyle Sheahen for his recent post and paper arguing that the promotional expenses defense under the FCPA is illusory. His work has stimulated a useful debate.

From a perspective different than previous commenters (here), I'd like to state the case for the value of the defense.

Generally, enforcement actions that discuss promotional expenses -- including those Kyle cited in his paper -- involve expenses that were neither bona fide nor reasonable as required by the FCPA. The cases include:

Lucent Technologies - $10 million in trips, primarily to vacation destinations in the U.S., including $34,000 for five days of sightseeing, wrapped onto a three day trip of business activity.

Ingersoll Rand - holiday excursion to Florence after visiting the company’s facilities in Vigante, Italy. The excursion to Florence included payment of $1000 in “pocket money”.

Metcalf & Eddy - first-class travel to the U.S. for foreign officials and per diem cash payments equivalent to 150% of estimated daily expenses.

Syncor -the SEC said payments for promotional expenses came “mostly came in the form of sponsorships for the doctors' attendance at educational seminars, including payments for registration fees, travel, lodging, and meals” but also included “gifts of computer equipment, software, office furniture, and medical supplies to doctors and their hospitals; sponsorships of social functions and fundraisers at the hospitals; funds provided to cover the cost of temporary employees at the hospitals; and payments made for outside testing when a particular hospital's laboratory equipment was not functioning properly.”

Titan Corporation - there's a reference to an authorization for a $20,000 payment for promotional travel expenses, with the notation that it was unclear if the payment was made. However this was in the context of at least $2 million paid in bribes to government officials. Even if the $20,000 was not paid, there were other  facts on which to base the enforcement action.

I would argue that none of the above enforcement actions involved promotional expenses which were either bona fide or reasonable. Based on the foregoing, I think companies subject to the FCPA have sufficient guidance on what constitutes a bona fide or reasonable promotional expense. I also believe the cases cited in the article can be used as solid teaching points on what is not bona fide or reasonable without having to try and ascertain the intent to corrupt.

Thomas Fox is an attorney in Houston, Texas, specializing in FCPA compliance, risk management and international transactions. His blog can be found here and he can be reached at tfox@tfoxlaw.com.

Watching For Whistleblowers

In its quarterly report released August 9, SciClone Pharmaceuticals, Inc. said it received an SEC subpoena and a letter from the DOJ investigating the "sale, licensing and marketing of its products in foreign countries, including China."

According to SciClone, the DOJ said it was looking at FCPA issues in the pharmaceutical industry generally, and had received information about SciClone's practices suggesting possible violations.

A reader was curious about the timing of SciClone's announcement. Less than a month ago, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. It authorizes payments of 10% to 30% for recoveries of at least a million dollars based on information about violations of the securities laws, including the FCPA.

So we asked SciClone if the FCPA investigation was triggered by a recent whistleblower complaint. Ana Kapor, the firm's director of investor relations and corporate communications, answered quickly but said only: "We are not able to comment on this topic beyond what we included in our filings earlier this week."

Is this the first FCPA-related whistleblower case under the new reward program? Or is it, as most assume, part of the year-old investigation of drug makers that already targeted GlaxoSmithKline, AstraZeneca, and Merck? Or is it both? There's no way to tell until someone involved goes on the record.

SciClone Pharmaceuticals, Inc. trades on NASDAQ under the symbol SCLN.

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A slice of the FCPA pie. In his August 16 article about FCPA-related civil suits, Forbes' Nathan Vardi correctly says there's no private right of action under the FCPA. So plaintiff lawyers look for other ways to sue directors and officers for their company's overseas bribery.

Results of the suits have been mixed but some have produced big settlements. He lists Faro Technologies, which paid $6.9 million; Nature’s Sunshine, which paid $6 million; Immucor, $2.5 million; and Syncor, $15.5 million. And he says plaintiff lawyers are prowling for more targets by following SEC and DOJ leads -- including Weatherford International, Parker Drilling, Avon Products, and Pride International.

Ther article is Plaintiff Lawyers Join The Bribery Racket.

M&A Surge Means More FCPA Action

Mergers and acquisitions are back. Seeking Alpha just said: "Over the past few weeks, there has been a resurgence in acquisition activity, fueling an already strong market rally. This news has spanned all regions of the economy ranging from the transportation sector (Burlington Northern being taken over by Berkshire Hathaway) to pharmaceuticals (Schering Plough being acquired by Merck). Most recently, in the consumer sector, Kraft announced its intention to take over confectionery giant Cadbury while Hewlett Packard announced plans to buy 3com."

When M&A numbers climb, so do Foreign Corrupt Practices Act enforcement actions. That's because all acquisitions involve due diligence, either before or after the deal is done. Due diligence is one way potential FCPA offenses are discovered. And once discovered, most are now self-reported to the Justice Department or the Securities and Exchange Commission. Directors protect themselves through disclosure. Beyond that, buyers in friendly M&A deals commonly insist that the target's compliance problems be reported and resolved before the closing.

In the past, M&A activity has led to some well-known FCPA enforcement actions. Cardinal Health's 2003 acquisition of Syncor produced FCPA precedents concerning an acquirer's pre-merger due diligence obligations and successor liability. Titan Corporation's FCPA violations were discovered after a Lockheed tender offer. Lockheed aborted the offer and in 2005 Titan paid a record $28.5 million for its FCPA settlement. More recently, M&A activity resulted in enforcement actions involving Delta Pine, Aibel, and Latin Node, among others. In May, Sun Microsystems self-disclosed an internal investigation into possible FCPA violations discovered during due diligence for Oracle's takeover bid. And last year, Halliburton's clumsy attempt to buy British firm Expro through a hostile takeover produced the most intrusive Justice Department FCPA Opinion Procedure Release on record.

The current M&A wave, combined with the DOJ's already sharpening focus on the FCPA, means there's lots more enforcement action on the way.

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Where do FCPA cases come from? In remarks yesterday to the National Forum on the Foreign Corrupt Practices Act, Assistant Attorney General Lanny Breuer said this: "Although many of these cases come to us through voluntary disclosures, which we certainly encourage and will appropriately reward, I want to be clear: the majority of our cases do not come from voluntary disclosures. They are the result of pro-active investigations, whistleblower tips, newspaper stories, referrals from our law enforcement counterparts in foreign countries, and our Embassy personnel abroad, among other sources. I have personally traveled abroad and spoken with Embassy personnel about this issue."

A copy of Lanny Breuer's November 17, 2009 remarks can be downloaded here.

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Presidential Proclamation 7750 allows the State Department to deny visas to foreign kleptocrats and their families. It was signed into law in 2004 and by 2006 it was being called a key tool in America's anti-corruption arsenal. (The FCPA reaches bribe payers but not bribe takers.) Yet we could say without exaggeration in a post last week that the U.S. press had completely ignored Proclamation 7750.

But that's now changed.

Harper's Magazine published an article by Ken Silverstein on November 16 about the son of Equatorial Guinea's ruler, Teodoro Nguema Obiang Mangue. The article began:

In 2004, George W. Bush issued Presidential Proclamation 7750, which barred corrupt foreign officials from entering the United States and ordered the State Department to compile a list of banned individuals. Three years later Congress approved a complementary measure that said the State Department should take special heed to bar officials when there was “credible evidence” to believe they were involved in the theft of natural resources revenues. Last July, the State Department issued a report noting that corruption eroded “confidence in democratic institutions” and that fighting it was a central tenet of American foreign policy. The report also stated that the Obama administration would “vigorously” enforce 7750, better known as the Anti-Kleptocracy Intiative, and give particularly close scrutiny to visa requests from individuals involved in corruption involving natural resources.

And somewhat improbably, the New York Times carried its own story on the same day by Ian Urbina about Teodoro Nguema Obiang that also featured the hitherto invisible Proclamation 7750.

After five years, what a difference a week makes.

Tough Medicine For Medical Device Makers

The Securities and Exchange Commission said in October this year it is investigating possible violations of the U.S. Foreign Corrupt Practices Act by the leading manufacturers of orthopedic implants. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. all made announcements about the SEC's investigation and denied violating any laws. In September this year, four of them plus Depuy Orthopedics (part of Johnson & Johnson) paid $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products.

Medtronic wasn't part of the domestic case. But it now confirms that the SEC and the Department of Justice are asking for information about payment practices abroad that might violate the FCPA. Medtronic -- based in Minneapolis -- does business in some 120 countries and employs more than 37,000 people worldwide. The company's latest Form 10-Q disclosed these details about the FCPA investigation:

"On September 25, 2007, the Company received a letter from the SEC requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in an unspecified number of foreign countries, including Greece, Poland and Germany. The letter notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors. A number of competitors have publicly disclosed receiving similar letters. On November 16, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC. The Company intends to cooperate with both requests."

Doctors at government-owned or managed hospitals overseas are "foreign officials" for purposes of the FCPA. That means payments to them intended to obtain or retain business might violate the antibribery provisions. Application of the FCPA to overseas doctors made the headlines in 2002, when the SEC settled civil and administrative proceedings against Syncor International Corp. and the DOJ settled criminal FCPA charges against Syncor's Taiwan subsidiary. Payments to doctors have since resulted in FCPA enforcement actions against DPC (Tianjin) Co. Ltd. -- the Chinese subsidiary of Los Angeles-based Diagnostic Products Corporation -- and Micrus Corporation.

Those cases -- and the current investigation of Medtronic and its peers -- demonstrate the compliance risks involved when doing business with foreign hospitals that are owned or controlled by government authorities. The companies face a dilemma. Often the only way to promote their products is through direct contact with local physicians. Much of that contact is educational and might include, for example, sponsoring the doctors' evaluations of the companies' products and subsidizing the presentation of papers at medical seminars. The payments, however -- unless expressly permitted by the written laws or regulations of the host country -- can violate the FCPA.

The investigations of Medtronic and its peers will lead to better compliance practices by companies dealing with government-linked hospitals overseas. Another result, we suspect, will be that more countries -- with the backing of the global medical industry -- will pass laws and regulations to allow some level of financial support from foreign companies to local doctors for product evaluations and related programs.

Medtronic Inc. trades on the New York Stock Exchange under the symbol MDT.

View Medtronic's Form 10-Q (December 4, 2007) Here.