The “Risc” in Pharmarisc stands for “Reporting, Information Systems and Controls,”and is an area of risk management practice that I and others at my law firm (Fish & Richardson, P.C.), specialize with the goal of assisting clients identify and mitigate their corporate and individual risks. Up until now, this blog has focused on the legal risks to pharmaceutical and medical device companies, as well as their corporate officers, from so-called off-label promotion practices. While one could make a blogging career out of this controversial and fascinating niche area of legal and risk management practice, given that (1) the Second Circuit has refused so far to issue an opinion in U.S. v. Caronia – it has been 18 months since oral argument on whether Caronia’s off-label conviction violated his First Amendment right to free speech, and nearly a year since supplemental briefs were submitted — and (2) the only other serious legal challenge to the Government’s off-label regime, Par Pharmaceutical v. U.S., et al., appears headed for a settlement without reaching the free speech issue, this is a good time to move on to another fascinating, controversial and hot risk topic, especially for pharmaceutical companies and other enterprises doing business overseas: the Foreign Corrupt Practices Act, or FCPA.
The FCPA was enacted in 1977 in the wake of many Watergate era reforms and was intended in large part to create a level playing field among firms competing for business overseas. Although there was little Government enforcement of the FCPA in the last century, there have been numerous prosecutions in the last several years. A few of the high profile corporate prosecutions during this period include Siemens, which paid $1.6 billion to U.S. and German authorities in 2008; KBR/Halliburton, which paid $579 million in 2009; BAE, which paid $400 million in 2010; and Johnson & Johnson, which paid $70 million in 2011. With subpoenas and sweeps of entire industries, including the pharmaceutical industry, it seems that FCPA prosecutors are determined to pursue virtually any company and individual whom they believe either paid a bribe to a foreign official or failed to record the bribe in the company’s books and records. After all, unlike off-label prosecutors, FCPA prosecutors don’t need to worry about that pesky First Amendment defense.
So what can a company and its officers do to avoid getting tagged for an FCPA violation? Don’t do business overseas? Yes, but for some companies, that isn’t really a good option. Don’t pay a bribe to a foreign official in order to get or retain business? Well, yes, but as the U.S. Chamber of Commerce stated in its February 21, 2012 letter to the U.S. Department of Justice and the S.E.C., the statute and current regulations don’t exactly make it clear who is or isn’t a foreign official. For example, in the case of a pharmaceutical company conducting clinical programs in China, a payment to a physician could be considered a payment to a foreign official, since physicians on staff of a Chinese government-owned hospital are essentially foreign officials. (In addition to the lack of a good definition for a “foreign official”, the U.S. Chamber of Commerce identified several other areas needing guidance, including (1) the need to define a foreign government “instrumentality”; (2) the credit a company should get for having a good FCPA compliance program; (3) U.S. parent company liability for the conduct of a foreign subsidiary; (4) corporate successor liability for the previous acts of an acquired company; (5) liability for providing de minimis and customary gifts and hospitality; (6) the need for a corporate mens rea requirement; and (7) the need for guidance through the publication of prosecution declination decisions.)
Until we get the “detailed” guidance from the Government that Assitant Attorney General Lanny Breuer promised last November, it will still be a game of Russian roulette for companies doing business overseas, despite the best FCPA compliance program efforts. However, when it comes to corporate managers, the answer on what to do if FCPA prosecutors ‘come a knocking’ may be the same as when off-label prosecutors go after real people: fight back! Despite some aggressive Government prosecutions of individuals under the FCPA, the Government has come up empty in a few big cases in recent months. Some of the Government’s most embarassing setbacks include: (1) a dismissal of FCPA conspiracy charges last December in Washington, D.C. against six defendants, and a later mistrial on substantive counts against four of the defendants, in the largest FCPA prosecution of individuals in U.S. history — all after a two-and-a-half year investigation and three-and-a-half month trial; (2) a dismissal of FCPA charges in Houston last January against former ABB manager John O’Shea who was accused of bribing officials at Mexico’s state-owned electric utility and covering up the payments; and (3) dismissals of FCPA convictions last December in Los Angeles against executives at Lindsey Manufacting Co., following the court’s finding that the Government had secured the convictions through prosecutorial misconduct.
These Government setbacks should not be viewed, however, as an indication that the Government will ease up on individuals and only seek to prosecute companies that usually find it easier to settle than fight. Unlike off-label cases, where prosecutors have to deal with First Amendment challenges and the perception that off-label promotion of legitimate off-label uses harms no one, bribery charges create a different perception about the accused. The Government will almost certainly continue to vigorously pursue corporate individuals in the future and it would behoove all executives of international companies to focus on their FCPA compliance programs. Nonetheless, at the end of the day, and given the empathy judges and jurors may feel for an employee who was “just doing his job” in a tough, corrupt environment, fighting back may very well be the last and best option.