Since late last year, reports have been circulating that
the U.S. government is investigating whether drug companies paid bribes
overseas to increase sales and to obtain regulatory approvals. Some firms have
now announced that they have reached settlements with enforcement authorities.
And now the first civil lawsuit relating to these investigations has been
filed, as discussed below.
According to press
reports and company filings, a number of companies have disclosed last year
that they were being investigated for possible Foreign Corrupt Practices Act (FCPA) investigations involving a
broad range of possible violations including bribing government-employed
doctors; paying sales agent commissions that are passed along to doctors,
paying hospital committees to approve drug purchases and paying regulators to
win drug approvals. Additional press coverage regarding the breadth of this
industry probe can be found here.
The first enforcement action and settlement related
to this investigation emerged last month, when governmental regulators
announced that Johnson & Johnson had agreed to pay more than $70 million
dollars to settle FCPA-related allegations. The SEC's April 8, 2011 litigation
release can be found here, the
U.S. Department of Justice's April 8, 2011 press release can be found here and
the U.K. Serious Fraud Office's press release can be found here.
As reflected in the enforcement authorities' various
press releases, Johnson & Johnson's subsidiaries, employees and agents were
alleged to have paid bribes to public doctors and administrators in Greece,
Poland and Romania and kickbacks to Iraq to win business there. Johnson &
Johnson's payments to settle the various probes included $48.6 million to the
SEC in disgorgement and prejudgment interest, a $21.4 million criminal penalty
to the Justice Department and a £4.8 million ($7.8 million) to the U.K. Serious
Frauds Office. A detailed overview of the allegations and the settlements can
be found on the FCPA Professor's Blog (here).
According to the FCPA Blog (here),
the Johnson & Johnson settlement is the tenth largest FCPA settlement ever.
Moreover, it appears that other settlements arising out
of the probe may soon follow. Last week, Eli Lilly disclosed
that it is in "advanced discussions" to settle bribery related allegations.
According to news reports, the activities under investigation involve alleged
improper payments in Poland and possibly include activities in other countries
The ongoing investigation is affecting ordinary business
operations in companies caught up in the probe. For example, SciClone
earlier this week that its compensation committee would defer decisions on
executive compensation until its board receives a report of a foreign bribery
probe. The internal investigation is said to be parallel to that of the U.S.
And now it appears that the ongoing drug company bribery
probe has also produced its first civil lawsuit. On May 2, 2011 investors filed
a shareholders' derivative suit in the District of New Jersey against Johnson
& Johnson, as nominal defendant, and eleven board members, relating to the
company's settlement of the bribery charges. The complaint, which can be found here, alleges
that the individual defendants breached their duty of loyalty by "failing to
cause J&J to implement an internal controls system for detecting and
preventing bribes to public doctors and administrators in Greece, Poland, and
Romania, and kickbacks to Iraq to win business there."
The complaint asserts claims for breach of fiduciary
duty, mismanagement, abuse of control, corporate waste, unjust enrichment and
violations of the federal securities laws." The complaint seeks to hold the
individuals liable to the company for damages, which the complaint alleges,
referring to the fines, disgorgement and interest that the company has agreed
to pay, exceed $70 million.
The FCPA itself does not provide for a private right of
action. But as I have observed in previous posts (refer for example here)
, one of the frequent accompaniments of an FCPA enforcement action is a follow
on civil action, of the type filed against the Johnson & Johnson officials.
And while the fines, disgorgements and penalties paid in connection with the
FCPA settlement would not typically be covered un der a D&O policy, the
defense costs incurred in connection with the follow on civil action would be
covered, and settlements and judgments entered in the civil action would at
least potentially be covered, subject to all of the applicable policies terms
With the signs suggesting that there may be further
enforcement actions and settlements in connection with the ongoing
pharmaceutical industry bribery probe, there is an accompanying concern that as
the overall investigation moves forward, there may also be a parallel wave of
follow on civil litigation. This possibility is not only an added concern for
the affected companies themselves and their senior executives, but is also a
concern for the D&O insurance carriers.
There are a number of interesting features of the Johnson
& Johnson settlement that may be significant in connection with the
continuing investigations against the other drug companies. The first is that
in connection with the Johnson & Johnson enforcement action, the
governmental authorities took the position that the FCPA was relevant with
respect to payments made to doctors in the counties specified. The position of
the SEC and the other enforcement authorities is that because the health system
in the counties involved is a government operation, the doctors involved are
"foreign officials" within the meaning o f the FCPA, which , as discussed on
the FCPA Professor blog here
is noteworthy issue of considerable interest and concern.
The other interesting about the Johnson & Johnson settlement
relates to the comments in the DoJ's press release with respect to Johnson
& Johnson's cooperation. The DoJ noted not only the company's "timely
voluntary disclosure" but also noted the company's "significant assistance in
the industry-wide investigation." The press release also states that the
company received a reduction in its criminal fine" as a result of its
cooperation in the ongoing investigation of other companies and individuals."
The clear implication is not just that the probe is ongoing but that other
companies and individuals are under investigation. The upshot may well be, as
suggested above, that there will be further enforcement actions and possibly
further settlements ahead.
The DoJ's press release also underscored the extent to which
the investigation of corrupt activities is a global, cross-border undertaking.
In its press release, the DoJ noted not only the investigative collaboration
with other U.S enforcement agencies and with the U.K. serious fraud office, but
also recognized the helpful assistance of investigative bodies in Greece and
Poland. These circumstances highlight both the collaborative international
scale of the investigations but also how seriously the matters are being taken
by a wide variety of governments and governmental authorities.
Finally in light of the magnitude of the Johnson &
Johnson settlement (and the fact that the settlement made the Top 10 List) it
is probably worth reflecting that the company reached this settlement while, at
least according to the DoJ, receiving a reduction in its penalties not only
because of the cooperation noted above, but also because of the company's
"pre-existing compliance and ethics programs, extensive remediation, and
improvement of its compliance systems." That the company should still face
fines and penalties of the magnitude to which it agreed notwithstanding the
credits the company received for these efforts is a striking development.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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