Three Important Lessons from the FCPA Guidance for Pharmaceutical and Medical Device Companies

by Michael Volkov
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http://corruptioncrimecompliance.com/wp-content/uploads/2012/11/imagesCABG3ED6.jpgThe US Chamber of Commerce “praised” the FCPA Guidance.  The Chamber did not get what it wanted but it had to recognize that the FCPA Guidance was helpful for businesses.  The FPCA Guidance provides important information for compliance, due diligence and other relevant issues.

Some industries received a little bit of relief; others did not.  Unfortunately, for the pharmaceutical and medical device industries, the FCPA Guidance only confirmed what they already knew – they operate in a high-risk industry, in high-risk countries where foreign doctors and others can quickly lead a company into FCPA hot water.

1.  Foreign Doctors and Medical Institutions, Clinical Trials and Foreign Officials – DOJ and SEC have built its enforcement “industry sweep” on the position that foreign doctors, medical institutions, and clinical trials all fall within the “foreign official” definition of the FCPA.  As detailed in the FCPA Guidance, the definition of a “foreign official” includes operations through state-owned and state-controlled entities as “intrumentalit[ies]” in the “foreign official” definition.

There is nothing in the FCPA Guidance which indicates that DOJ or the SEC intends to back down from its interpretation of these terms as they apply to the pharmaceutical and medical device industries.  Pharmaceutical and medical device companies continue to face significant risks from their interactions with foreign doctors, medical agencies and institutions, and hospitals and medical care providers. 

2.  Companies are Liable for Distributors — Pharmaceutical and medical device companies rely on extensive networks for distributors (and sub-distributors) to sell their products overseas.  As recognized in the FCPA Guidance, companies can be held liable for the actions of third party intermediaries, including “agents,” and “distributors.”  In fact, the FCPA Guidance cited several times how companies can be liable for the conduct of its distributors when they provide distributors significant discounts or rebates which are not justified by the nature of the services being provided by the distributor. 

Pharmaceutical and medical device companies need to redouble their efforts in conducting due diligence, reviewing financial terms, and their relationships with distributors and sub-distributors.  DOJ and the SEC have cited the risks created by these arrangements.  Companies need to build this into their compliance programs.

3.  Beware of Medical Conferences and Sponsorships: Foreign doctors, medical officials and others in the healthcare industry have significant expectations when it comes to company-sponsored attendance at medical conferences and other industry events.  The Pfizer case demonstrated how such interactions can result in FCPA liability. 

The FCPA Guidance focused on the lines between proper and improper gifts, travel, entertainment and meals, focusing on “modest” versus “extravagant” or “lavish” gifts, travel, meals and entertainment expenses.  In the foreign medical conference context, companies wrestle with sponsorship of attendance at these events by relying on the affirmative defense under the FCPA for “reasonable and boa fide” travel and lodging expenses when directly related to the “promotion, demonstration or explanation of a company’s products or services” (or are related to a company’s execution or performance of a contract with a foreign government or agency).

In response to False Claims Act and Anti-Kickback enforcement, pharmaceutical and medical device companies have reined in payments to US doctors and healthcare providers for attendance at industry conferences.  The same effort needs to be made with respect to foreign doctors, providers and officials. 

The FCPA Guidance provides no relief on this issue, and in fact reaffirms some of the concerns relating to gifts, meals, travel, entertainment, and lodging expenses which are not reasonable or directly related to promoting a particular product or service.

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Michael Volkov
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