Not Finished With You Yet—The U.S. Government Extends its Deferred Prosecution Agreement With Biomet, Inc., Again Underscoring the FCPA Risks in Life Sciences
In an 8-K issued last week, Biomet, Inc., (“Biomet” or the “Company”) an Indiana-based medical device company, announced that the Department of Justice (“DOJ”) had extended the Company’s Deferred Prosecution Agreement (“DPA”) and monitorship relating to violations of the Foreign Corrupt Practices Act (“FCPA”).
The Use of Deferred Prosecution Agreements in Resolving FCPA Investigations
For nearly a decade, multinational companies facing investigations into alleged FCPA transgressions have sought to avoid criminal prosecution through several negotiated vehicles with the U.S. government. Following many years of use resolving various types of criminal cases,
DPAs are attractive mechanisms for both companies that wish to avoid action on an indictment, and regulators who retain an enforcement arm to facilitate continued oversight of the company’s compliance and steps to address the issues investigated. Despite a slight pull back in response to criticism of the oversight provided in corporate monitorships accompanying DPAs in a handful of medical device resolutions,
DPAs resolving FCPA cases typically contain many provisions that provide meaningful guideposts to other companies regarding regulator expectations and best practices, including with regard to what constitutes an effective compliance program. Given its minimal usage, however, the now-common DPA language permitting extension of the DPA term to which Biomet fell victim, too often goes unappreciated. Through this provision, generally mirrored in each of the recent FCPA DPAs in the life sciences sector, the DOJ reserves the right to unilaterally extend the DPA term where, “the Department determines, in its sole discretion, that [the company] has knowingly violated any provision of th[e] Agreement.”
However, on March 13, 2015, just weeks before its FCPA DPA was set to expire, the DOJ informed Biomet that its DPA and accompanying monitorship were being extended for another full year. With this extension, Biomet serves as the most recent example of the continued perils life science companies face in the FCPA space. Even where a company believes the risk of enforcement is waning or has passed, lack of vigilance can exact a steep price.
The Biomet DPA Extension
On March 26, 2012 Biomet entered a DPA and Final Judgment with the DOJ and SEC resolving allegations that the Company, its subsidiaries, and agents (including third-party distributors) paid more than $1.5 million in corrupt payments to government doctors in Argentina, Brazil, and China from 2000 to 2008.
Biomet agreed to pay a $17.28 million criminal penalty to the DOJ, and $5.4 million in disgorgement of profits including pre-judgment interest to the SEC. Additionally, the DPA, originally set for a three-year term, required the implementation of rigorous internal controls and compliance enhancements, and the appointment of an independent, external compliance monitor regularly reporting to the DOJ on the state of the Company’s compliance program.
Approximately midway through its DPA term, in October 2013, Biomet became aware of issues relating to its operations in Brazil (a market at issue in the original resolution) and Mexico, including conduct that predated the DPA.
Lessons Learned From the Biomet DPA Extension
Against the backdrop of numerous active investigations, some of which involve companies in their second face off with the government, the Biomet DPA extension, the first of its kind in the recent history of FCPA resolutions, again makes clear that the life sciences sector remains squarely in the cross hairs of FCPA enforcement. While information detailing the “new” Biomet concerns and the resulting DPA extension is limited, the extension underscores the seriousness with which regulators approach, not just investigations, but oversight of corporate offenders, and emphasizes the fact that DPA close outs are not automatic. For companies under DPAs, the best strategy for avoiding extended external government oversight is much the same as the strategy to avoid government prosecution in the first place: build and maintain hard-earned credibility with regulators by:
Implementing an effective compliance program, including adequate mechanisms for detecting concerns. As emphasized in The FCPA Guideand in seemingly all public remarks by FCPA prosecutors, the U.S. government expects integrated, global compliance programs, tailored to industry-, business-, and country-specific risks. These programs should include mechanisms that effectively bring issues to light, such as robust reporting mechanisms and auditing and real-time monitoring functions. Where regulators are not confident that a compliance program is adequate to both deter and detect potential wrongdoing, as may have been the case with Biomet, there is more likely to be greater government scrutiny.
Making thoughtful and timely decisions about disclosure. In this age of increased disclosure, there can be no question that regulators increasingly expect to be informed of the discovery of potential wrongdoing—particularly where the issues are of significant value, implicate senior leadership, and/or demonstrate material control or program gaps. This expectation is considerably stronger in the FCPA DPA context where many companies face, as did Biomet, express obligations to disclose additional issues as they arise throughout the DPA period.While there are certainly many important considerations that must necessarily accompany decisions on what and when to disclose, a company providing too little information too late will find regulators leery of trusting the company’s ability or willingness to self-police in the future. In the context of an FCPA DPA, companies like Biomet proceed at their own peril when the content or timing of their disclosures are perceived by regulators as falling short of government expectations.
Enacting demonstrable compliance program improvement. No compliance program is perfect and no controls can guarantee against all misconduct, especially in industries, such as life sciences, where there are multiple levels and methods of interacting with government officials, including healthcare professionals (typically deemed to be foreign officials by U.S. prosecuting authorities). Nonetheless, a company that can demonstrate that its compliance efforts have driven positive change will reduce the risk of monitorship and formally mandated enhancements. In order to achieve that demonstrable improvement, it is not enough for companies to construct a seemingly effective compliance program and leave its future well-being to chance. Instead, much like annual physicals, companies must regularly conduct proactive check-ups to ensure their compliance program is in fact meeting the actual challenges and risks faced by the enterprise.