United States: Medical Device Company Smith & Nephew Resolves FCPA Charges For Unlawful Incentive Payments To Greek Physicians

The U.S. Department of Justice ("DOJ") announced on February 6, 2012 that medical device company Smith & Nephew Inc. has agreed to pay over $22 million to settle Foreign Corrupt Practices Act ("FCPA") allegations that it paid government-employed doctors in Greece to use its products. The company agreed to disgorge $5.4 million in wrongful profits to the Securities and Exchange Commission ("SEC") and pay a $16.8 million penalty to the DOJ under a deferred prosecution agreement. The government's enforcement action demonstrates how pharmaceutical and medical device companies can run afoul of the FCPA, which prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business when distributing products in countries with health care providers employed by the government.

The government first made an inquiry with Smith & Nephew in 2007, when the DOJ and SEC asked it to investigate improper payments to government-employed physicians. The company, which is based in London but has a wholly owned U.S. subsidiary, conducted an internal investigation in response to the inquiry. The company disclosed that it had been selling its products through a Greek distributor and paying the difference between the full list price and distributor discount price to off-shore shell companies under the label of "marketing services." The distributor then used those shell companies to transfer cash incentives to Greek physicians who used Smith & Nephew orthopedic products for their patients. According to facts stipulated to in the deferred prosecution agreement, the company (and its U.S. subsidiary) was aware that the distributor was paying these bribes but continued the arrangement anyway. Therefore the company was held accountable for the payments made by the distributor as its intermediary.

Under the deferred prosecution agreement, the government will not pursue its charges as long as the company complies with its terms, including paying the $16.8 million fine, implementing remedial measures and cooperating with the government. The company will have to appoint an outside corporate monitor for 18 months, and its reporting obligations are set to last three years. In agreeing to a deferred prosecution, the DOJ took note of the fact that the company cooperated fully in the government's investigation, voluntarily disclosed the violation and took remedial measures including implementation of an enhanced compliance program.

Interestingly, however, the company also resolved civil SEC charges in a consent agreement in which it neither admitted nor denied the SEC's allegations, despite the fact that the company admitted many of these same allegations in its deferred prosecution agreement with the DOJ. This is significant because a recent policy shift has disfavored settlements of SEC enforcement actions in which corporate defendants do not admit or deny the allegations when there are admissions or findings of wrongdoing in a related criminal case, including in deferred prosecution agreements as is the case here. In addition, a major proposed settlement between the SEC and Citigroup was recently rejected by a federal court in part because Citigroup would not admit or deny the allegations. An admission of allegations in an SEC settlement has significant consequences because it can bind the company in subsequent shareholder lawsuits. Although this policy shift is expected to affect future SEC settlements, the SEC did not require an admission in the consent agreement in this particular case.

The government's prosecution should serve as a reminder to pharmaceutical and medical device companies that physicians in countries with public health care systems are considered "foreign officials" under the government's current interpretation of the FCPA. Although the allegations against Smith & Nephew involved cash payments, companies should be aware that marketing gifts or perks given to government health care providers may violate the law as well. In other words, the payments do not have to be a classic "bribe" to trigger the FCPA—any payment made for the purpose of gaining or keeping a health care provider's business will qualify. The Smith & Nephew charges are just one example in a series of recent FCPA investigations of pharmaceutical and medical device companies that includes Johnson & Johnson's $70 million settlement with the SEC and DOJ last year.

In addition, the practice of giving gifts or perks to health care providers is a hot topic in government oversight of pharmaceutical and medical device companies. The Physician Payment Sunshine Act, which is expected to take effect this year, will regulate gifts and other transfers of value from pharmaceutical and medical device companies to U.S. health care providers. In light of increasing scrutiny of physician payments to health care providers and FCPA enforcement efforts targeting the pharmaceutical and medical device industries, companies are well advised to consider the following proactive steps as part of their compliance efforts:

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