On June 25, 2020, Novartis AG, a Swiss multinational pharmaceutical company, and two subsidiaries reached a combined $345 million resolution with the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“the SEC”) to resolve alleged Foreign Corrupt Practices Act (“FCPA”) violations involving the companies’ operations in Greece, Vietnam, and South Korea. The multimillion dollar resolution demonstrates that, even in the midst of a global pandemic that has had DOJ and SEC prosecutors working from home, they remain steadfast in their pursuit of FCPA cases. The case also signals a renewed focus on prosecuting companies for corrupt gifts, travel and entertainment-related expenses, including payments for foreign officials’ attendance at medical and academic conferences. For the very first time, the agencies also targeted payments made in connection with a clinical study to serve the basis for FCPA liability. Multinational companies in the healthcare and life sciences industries should take notice of this aggressive expansion of the FCPA.
The DOJ resolutions included deferred prosecution agreements (“DPAs”) with Novartis’ Greek subsidiary, Novartis Hellas S.A.C.I. (“Novartis Hellas”), and a former Novartis subsidiary based in Singapore, Alcon Pte Ltd (“Alcon”), in which Novartis Hellas agreed to pay a fine of $225 million and admitted to violating the FCPA’s anti-bribery and books and records provisions and Alcon agreed to pay a $8.9 million fine and admitted to books and records violations.1
Specifically, Novartis Hellas admitted in the DOJ resolution to bribing public and private healthcare providers in Greece between 2012 and 2015.2 The company paid the bribes by covering the costs for providers to attend international medical conventions in return for prescribing pharmaceutical products sold by Novartis Hellas at higher rates.3 The conventions frequently took place in destination cities, including in the United States, and the costs associated with each convention – including travel, hotel accommodations, and any registration fees – were often in excess of $6,000 per provider.4 Under a novel enforcement theory, Novartis Hellas also admitted to using an epidemiological study to funnel bribes to Greek providers.5 Through the epidemiological study, Novartis Hellas made direct payments to Greek providers, purportedly in exchange for patient data relating to hypertension.6 However, the company admitted that the payments were improper and that it knew the providers understood the payments were made in exchange for increasing their prescriptions of Novartis’ hypertension products.7 Novartis Hellas further admitted that the expenditures described above were falsely recorded as advertising and promotional expenses in the company’s books.8
Alcon admitted to bribing public and private healthcare providers in Vietnam through a third-party distributor in order to increase sales of Alcon’s surgical equipment, including artificial eye lenses used to treat various eye ailments.9 The distributor made direct payments to the providers and Alcon reimbursed the distributor for up to half the amount of these payments.10 Alcon admitted to improperly recording the reimbursements as “consultancy fees,” human resources costs, “margin reconciliation” costs, HR expenses, and “administration costs.”11
Together, Novartis Hellas and Alcon agreed to pay a combined $233 million in criminal penalties.12 Alcon’s penalty represented a 25% discount off the bottom end of the U.S. Sentencing Guidelines in recognition of the company’s cooperation, whereas Novartis Hellas’s penalty represented roughly a 25% discount off the near-midpoint of the Guidelines’ range.13 Novartis Hellas received the less favorable fine calculation despite the company’s cooperation because it was a repeat offender – its parent company Novartis AG recently settled a similar FCPA investigation with the SEC in 2016.14
The SEC’s resolution with Novartis AG involved a Cease-and-Desist Order and $112 million payment for violations of the FCPA’s books and records and internal controls provisions stemming from allegations that local subsidiaries or affiliates of Novartis or Alcon engaged in schemes to make improper payments or to provide benefits to public and private healthcare providers in South Korea, Vietnam, and Greece in exchange for prescribing or using Novartis or Alcon products.15 The SEC’s order covered the same conduct in Greece and Vietnam as the DPAs, and also conduct that occurred in South Korea.16 Relating to the conduct in Greece, the SEC alleged that Novartis made payments associated with Phase IV drug trials as well as the epidemiological study to bribe providers, and the company’s internal audit function identified control weaknesses relating to the company’s Phase IV trials as early as 2012.17 The SEC’s order also alleged that Novartis’ Korean subsidiary made payments through third-party medical publications to healthcare providers, sponsored providers’ travel to international medical conventions, and provided funding through a research study to improve sales, improperly recording the costs in the company’s books as legitimate expenses.18 The SEC ordered Novartis to pay $92.3 million in disgorgement plus $20.5 million in pre-judgment interest, earmarking the funds for transfer to the general fund of the U.S. Treasury.19
DOJ’s resolution with Novartis illustrates the scope of conduct that can trigger FCPA liability with particularly significant implications for the healthcare and life sciences industries. While several relatively recent FCPA cases involved alleged improper payments for healthcare providers’ travel to medical and academic conferences to corruptly influence prescriptions and medical device purchases,20 the Novartis resolution is the most significant case built primarily on travel and entertainment payments since Avon Products, Inc.’s resolution in 2014.21 The resolution serves as a salient reminder that corrupt travel payments, even if relatively small in value, can trigger FCPA liability and lead to substantial penalties.
Further, Novartis’ admission to using the epidemiological study as a vehicle to bribe foreign healthcare providers, as well as the allegation that it used the Phase IV drug trials to accomplish the same, represents an aggressive expansion of FCPA liability and is the first time that payments associated with these studies have formed the basis of an FCPA enforcement action. DOJ and the SEC have long treated payments to foreign providers in state-run healthcare systems as FCPA violations,22 and DOJ has gone after kickbacks disguised as research studies in domestic enforcement contexts.23 The Novartis resolution may signal increased FCPA enforcement scrutiny of research activities conducted overseas. Now that payments connected with clinical studies are in the sights of U.S. enforcement authorities, it is more important than ever for life sciences companies to ensure that their legal and compliance functions have adequate oversight into their foreign research and development operations.
1 Press Release, Dep’t of Justice, Novartis Hellas S.A.C.I. and Alcon Pte Ltd Agree to Pay over $233 Million Combined to Resolve Criminal FCPA Cases (June 25, 2020), available at https://www.justice.gov/opa/pr/novartis-hellas-saci-and-alcon-pte-ltd-agree-pay-over-233-million-combined-resolve-criminal (“Novartis Press Release”). Alcon was spun off as an independent company in 2019.
2 Id.; Deferred Prosecution Agreement, United States v. Novartis Hellas S.A.C.I., No. 20-cr-538 ¶ 2 (June 25, 2020), available at https://www.justice.gov/opa/press-release/file/1289746/download (admitting to the allegations in the attached criminal information) (“Novartis Hellas DPA”).
3 Information, United States v. Novartis Hellas S.A.C.I., No. 20-cr-538 ¶¶ 11-13 (June 25, 2020), available at https://www.justice.gov/opa/press-release/file/1289751/download ( “Novartis Hellas Information”).
4 Id. ¶¶ 11-12.
5 Id. ¶¶ 29-39.
6 Id. ¶ 34.
7 Id. ¶¶ 37, 39.
8 Id. ¶¶ 28, 40.
9 Deferred Prosecution Agreement, United States v. Alcon Pte Ltd, No. 20-cr-539 ¶ 2 (June 25, 2020), available at https://www.justice.gov/opa/press-release/file/1289736/download (admitting to the allegations in the attached criminal information) (“Alcon DPA”); Information, United States v. Alcon Pte Ltd, No. 20-cr-539 ¶¶ 13-14 (June 25, 2020), available at https://www.justice.gov/opa/press-release/file/1289741/download (“Alcon Information”).
10 Alcon Information ¶ 14.
11 Id. ¶¶ 24, 27, 32.
12 Novartis Press Release.
14 Id.; see also Order Instituting Cease-and-Desist Proceedings, Exchange Act Release No. 77,431 ¶¶ 14-15 (Mar. 23, 2016), available at https://www.sec.gov/litigation/admin/2016/34-77431.pdf (“2016 Novartis Order”).
15 Order Instituting Cease-and-Desist Proceedings, Exchange Act Release No. 89,149 (June 25, 2020), available at https://www.sec.gov/litigation/admin/2020/34-89149.pdf (“2020 Novartis Order”); Press Release, Sec. and Exch. Comm’n, SEC Charges Novartis AG with FCPA Violations (June 25, 2020), available at https://www.sec.gov/news/press-release/2020-144.
16 2020 Novartis Order.
17 Id. ¶¶ 14-15.
18 Id. ¶¶ 28-35.
19 Id. at Section IV.
20 See, e.g., Non-Prosecution Agreement, Fresenius Medical Care AG & Co. KGaA, Attachment A (Statement of Facts) ¶ 74 (Feb. 25, 2019), available at https://www.justice.gov/opa/press-release/file/1148951/download; Order Instituting Cease-and-Desist Proceedings (SciClone Pharmaceuticals, Inc.), Exchange Act Release No. 77,058 ¶¶ 8-9, 11 (Feb. 4, 2016), available at https://www.sec.gov/litigation/admin/2016/34-77058.pdf; Order Instituting Cease-and-Desist Proceedings (Bristol-Myers Squibb Company), Exchange Act Release No. 76,063 ¶ 12 (Oct. 5, 2015), available at https://www.sec.gov/litigation/admin/2015/34-76073.pdf.
21 See Press Release, Dep’t of Justice, Avon China Pleads Guilty to Violating the FCPA by Concealing More Than $8 Million in Gifts to Chinese Officials (Dec. 17, 2014), available at https://www.justice.gov/opa/pr/avon-china-pleads-guilty-violating-fcpa-concealing-more-8-million-gifts-chinese-officials.
22 See, e.g., Press Release, Sec. and Exch. Comm’n, SEC Obtains $500,000 Penalty Against Syncor International Corporation for Violating the Anti-Bribery Provisions of the Foreign Corrupt Practices Act (Dec, 10, 2002), available at https://www.sec.gov/litigation/litreleases/lr17887.htm.
23 See, e.g., Press Release, Dep’t of Justice, Medical Device Maker ev3 to Plead Guilty and Pay $17.9 Million for Distributing Adulterated Device; Covidien Paid $13 Million to Resolve Civil Liability for Second Device (Dec. 4, 2018), available at https://www.justice.gov/opa/pr/medical-device-maker-ev3-plead-guilty-and-pay-179-million-distributing-adulterated-device (alleging that a medical device manufacturer paid kickbacks via “a registry to pay hospitals and institutions to collect data about user experiences with the device” for the purpose of diverting business from competitors).