Legal: The Kickback Effect - Pharmaceutical Executive


Legal: The Kickback Effect
Pharma tends not to treat relationships with foreign doctors as cautiously as it does those with US physicians. But watch out: Misconduct on the part of your international employees could get kicked back onto your plate.

Pharmaceutical Executive

Settling Up

Enforcement action is likely to increase in the coming year, but, already, the DOJ and SEC have punished some pharmaceutical companies for FCPA violations related to financial relationships with foreign physicians and hospitals.

In 2005, the DOJ charged the Chinese subsidiary of Diagnostic Products Corporation for violating the FCPA. Through the subsidiary, the US company allegedly paid $1.6 million to doctors and laboratory personnel employed by government-owned hospitals in the People's Republic of China. The payments occurred between 1991 and 2002, and allegedly were made to obtain and retain business with the hospitals. The company called the payments "commissions," which typically represented between three and 10 percent of sales.

The subsidiary pled guilty and paid a $2 million criminal fine. Simultaneously, the American parent settled a civil action by the SEC for $2.8 million, an amount equal to the company's net profit in the People's Republic of China, plus interest, for the period of the alleged misconduct. As a condition of the settlement and plea, Diagnostic Products Corporation was required to adopt internal compliance policies and hire an independent consultant to audit and monitor its adherence to these policies.

Also in 2005, Micrus Corporation, a US medical-device company, settled an FCPA investigation by agreeing to pay $450,000 in civil penalties and adopting an FCPA internal compliance program. Micrus allegedly paid $105,000 to physicians employed by government-owned hospitals in France, Turkey, Spain, and Germany in return for the hospitals' purchase of Micrus' embolic coils. Citing Micrus' self-disclosure of the matter, the DOJ declined to charge the company criminally, agreeing instead to enter a deferred prosecution agreement under which Micrus must abide by certain FCPA compliance obligations for at least two years.

In 2004, Schering-Plough entered into a settlement with the SEC over an alleged FCPA violation. Schering-Plough's Polish subsidiary purportedly paid approximately $75,000 to a Polish charitable organization headed by a government official. That individual also directed a government agency that influenced pharmaceutical purchasing decisions of Polish government-owned hospitals. In its settlement, Schering-Plough agreed to pay a $500,000 civil penalty, to retain a consultant to review the company's FCPA policies and procedures, and to follow the consultant's recommendations.

In 2002, Syncor International Corporation, a US radiopharmaceutical company, and its Taiwanese subsidiary settled criminal and civil FCPA charges. The federal government accused Syncor and its foreign subsidiaries in Taiwan, Mexico, Belgium, Luxembourg, and France of improperly paying roughly $600,000 to physicians to convince them to persuade their government-owned hospital employers to purchase Syncor's products. In addition, the Taiwanese subsidiary allegedly paid the physicians in exchange for their referral of patients to Syncor imaging centers.

The American parent agreed to pay a $500,000 fine and to retain an independent consultant to make recommendations concerning the company's FCPA compliance policies and procedures. The Taiwanese subsidiary pled guilty to a criminal FCPA violation and agreed to a $2 million penalty. The SEC announced that in accepting Syncor's civil settlement offer, it considered the company's cooperation with the investigation, as well as the fact that Syncor promptly brought the matter to the attention of the SEC and DOJ after being alerted to the questionable conduct.

Other FCPA investigations of pharmaceutical companies are pending. For example, in an SEC filing, Bristol-Meyers Squibb reported that the SEC is conducting an inquiry into the activities of its German pharmaceutical subsidiaries.

Compliance Programs

Pharmaceutical manufacturers may consider taking several discrete, yet highly important, steps to ensure that their current operations and policies do not create an undue risk of violating the FCPA.

First, such companies should review their existing compliance policies and procedures to ensure that they adequately address the financial relationships that they or their foreign subsidiaries may enter with foreign physicians.

Second, pharmaceutical companies may wish to conduct an internal assessment to identify potential risk areas under the FCPA. This evaluation should include all of the company's foreign operations, including distributors, sales representatives, consultants, and others acting on their behalf, as well as the nature of the company's relationship with foreign business partners.

Finally, the company should carefully review the adequacy of ongoing FCPA training and monitoring procedures in its compliance program.

R. Christopher Cook is a partner in the Washington, DC office of Jones Day. He can be reached at

Jesse A. Witten is a partners in the Washington, DC office of Jones Day. He can be reached at


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