Compliance. TODAY March Meet Donna Abbondandolo

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1 Compliance TODAY March 2013 a publication of the health care compliance association Meet Donna Abbondandolo Director of Compliance, Internal Audit & Compliance, Catholic Health Services of Long Island See page What constitutes reckless disregard under the FCA? Michael P. Matthews and A. Joel Richlin 27 Compliance as an opportunity for growth Robert E. Powers 31 Avoiding the mourning after: Minimizing FCPA risk of pass through or successor liability Paul Pelletier and Noam Fischman 37 Ingredients for establishing compliance best practices Andrew Finkelstein This article, published in Compliance Today, appears here with permission from the Health Care Compliance Association. Call HCCA at with reprint requests.

2 by Paul Pelletier and Noam Fischman Avoiding the mourning after: Minimizing FCPA risk of pass through or successor liability The Department of Justice and the Securities Exchange Commission are increasingly focused on health care companies as targets for anti-corruption enforcement. The acquisition of (or partnership with) another entity that operates abroad may create a relatively high level of risk of acquiring corruption liability. Companies seeking to acquire existing health care entities that operate abroad should conduct thorough due diligence of the target company to ensure compliance with applicable anti-corruption laws. If the due diligence inquiry uncovers any red flags of potential corruption, a thorough and independent investigation should be conducted to determine the scope of potential anti-corruption concerns. Experienced FCPA counsel should be consulted to examine the impact of potential FCPA issues and to evaluate whether self-disclosure is warranted. Paul Pelletier (PEPelletier@mintz.com) is a Member in the Litigation Section at Mintz Levin and Noam Fischman (nfischman@polsinelli.com) is a Shareholder at Polsinelli Shughart, both in Washington DC. Since 2006, more than 75% of all reported investigations and FCPA-related enforcement actions have stemmed from some sort of pass-through (i.e., vicarious or imputed) liability. 1 This number is astounding. It reflects a clear and present compliance danger for companies wishing to expand overseas, many of whom take pride in conducting business ethically. This enforcement trend, borne from history and a recent guide released by the Department of Justice (DOJ) and the Securities Exchange Commission (SEC), reflects that the clear threat of imputed liability can no longer be relegated to a secondary level of concern for companies looking to expand through acquisition. For instance, on November 14, 2012, the government issued its A Resource Guide to U.S. Foreign Corrupt Practices Act (Guide), 2 which, among other industries, highlights the health care industry as one that is particularly fraught with FCPA concerns. This is the result of two converging storms. First, the health care industry is increasingly focused on delivering products and services Pelletier to emerging markets (e.g., China, Venezuela, Brazil, among others). 3 Second, the provision of health care services in those markets is often nationalized or delivered through public-private partnerships. 4 Thus, doctors and other health care providers in these emerging markets are likely to be employees of a foreign government within the meaning of the Fischman FCPA. And although the United States continues to be among the largest markets for health care service providers, commentators believe

3 that emerging markets are the new frontier in health care. 5 Health care companies continue to contract enthusiastically with providers doing business in these markets, either through acquisition or the creation of business partnerships. In 2011 alone, there were approximately 1,150 such transactions, and that level of activity has continued through at least the first half of Why should this matter? Since 2006, the health care industry has accounted for approximately 16% of reported investigations and FCPA enforcement actions. Considering the increasing dominance of emerging markets in the provision of health care services, this percentage is likely to soon increase. Although all companies conducting business abroad would be well served to focus on the risk of internal corruption, health care companies in particular should dedicate themselves to advancing anti-corruption due diligence to avoid acquiring or assuming unwarranted civil and even criminal risk. Lessons learned from recent prosecutions of health care companies Two recent health care-related enforcement matters in particular reflect the potential consequences of corruption risk to an acquiring company. First, in 1998, Johnson & Johnson, a publicly-traded pharmaceutical manufacturer located in New Jersey, bought DePuy Inc. and its subsidiary, DePuy International (together, DePuy ). As a result, both DePuy companies became wholly-owned subsidiaries of Johnson & Johnson. DePuy manufactures and distributes orthopedic medical devices globally, including in Greece. At the time of its purchase, DePuy had a series of distribution relationships already in place to sell its devices in, among other places, Greece. Since 2006, the health care industry has accounted for approximately 16% of reported investigations and FCPA enforcement actions. Most hospitals in Greece are publicly owned and operated, and health care providers at such facilities are considered to be government employees. The DePuy distributors engaged in elaborate activities to provide cash and other incentives to induce Greek health care professionals employees of the Greek government to use DePuy s medical devices in lieu of the devices marketed by its competitors. These illicit arrangements existed prior to Johnson & Johnson s purchase of DePuy, and they continued after DePuy was absorbed in the Johnson & Johnson family of companies. 7 Second, like Johnson & Johnson, Pfizer is a publicly-traded pharmaceutical company, which does business internationally. In 2009, Pfizer acquired Wyeth. During the first 180 days after this acquisition closed, Pfizer conducted a detailed due diligence review of Wyeth s foreign sales activities. It found that Wyeth s Nutritional Products Division in Indonesia, Pakistan, China, and Saudi Arabia, and other Wyeth subsidiaries, had paid bribes to influence governmentemployed health care professionals to provide Wyeth s products to new mothers in hospitals and to obtain information, which Wyeth used in subsequent marketing efforts. Pfizer ultimately disclosed these activities to the government, and, as a result, agreed to pay $60 million in criminal penalties and civil disgorgement. 8 Applying the lessons learned an ounce of prevention The two discussions above reflect only snippets of the facts at play in Johnson & Johnson and Pfizer, and we know little about the due diligence that was conducted in advance of either transaction. Regardless, these two cases highlight broader lessens about the critical role

4 corruption-related due diligence must play in future deals among health care companies doing business abroad. Indeed, there are five essential due diligence steps, which must be conducted if the acquiring entity is to conduct effective due diligence of potential corruption risk. 1. Perform a first-tier review of all relationships When acquiring a company doing business abroad, thorough due diligence must be conducted to uncover any potential ties between the target company and employees of foreign governments. Does the target company distribute goods or services to employees of foreign governments? If so, appropriate due diligence must be conducted to ensure that the target company s business sources are free from indicia of corruption. Does the company require regulatory approvals or licenses? If so, how those approvals and licenses were obtained and how they are renewed (if applicable) must be reviewed. Does the target company have tax exempt status? If so, the acquiring company must ensure that this status is not the byproduct of conduct that would violate the FCPA. These are only three examples of potential problem areas. Critically, potential buyers or partners must take care to avoid unknowingly assuming FCPA risk by acquiring an entity engaged in business that potentially intersects with foreign government officials. 2. Perform a second-tier review of relationships In addition to examining the direct contacts between the target company and foreign government employees, the bona fides of contacts between any contractual counterparties of the target company and employees of foreign governments must be rigorously evaluated. This second-tier review includes direct contractual relationships such as distributors, sales agents, and joint venture partners, among other possibilities. This second-tier review also includes an examination of the potential corruption risk posed by consultants and any third-party intermediaries who interface with foreign government officials. Target companies could be held responsible for FCPA violations committed by any third parties. Thus, acquiring companies should be attuned to the potential of purchasing this indirect corruption risk. 3. Investigate red flags and assess the meaning of investigative findings Any indicia of potential corruption (i.e., red flags ) must be fully vetted. Conduct a thorough and independent investigation, which examines whether the FCPA or other potentially applicable anti-corruption laws have been violated. If, after investigating red flags, there is a belief that a FCPA violation may have occurred, seek the advice of experienced FCPA counsel to determine the level and nature of risk posed by this finding and to evaluate how that level of risk ought to be considered in the context of the pending transaction. 4. Remediate and consider whether to selfdisclose the findings to the government If an acquiring company opts to move forward with an acquisition notwithstanding corruption red flags, the acquiring company should take affirmative steps (a) to ensure that potentially corrupt behavior ceases immediately, and (b) to remediate past behavior. Also, acquiring companies should consult with experienced FCPA counsel to determine whether self-disclosing the discovered conduct to the government is warranted under the circumstances. 5. Post-merger conduct Assimilate the newly-acquired company into your corporate compliance culture. Conduct anti-corruption related training for all appropriate employees of the acquired company and, where appropriate, for relevant third parties

5 Feature (e.g., the acquired company s intermediaries and business partners, etc.). Finally, continue to take steps on a routine basis to identify and remediate potential problem areas. Conclusion By following these due diligence recommendations, companies can severely reduce the corruption risk posed by acquiring an entity that conducts business abroad. Critically, these five recommendations are not limited to entities conducting mergers and acquisitions, nor are they limited to companies operating in the health care space. Rather, these due diligence steps, albeit in modified form, ought to be followed to ensure that the business practices of target companies those you may wish to acquire or those with whom you may wish to contract (e.g., joint venture partners, distributors, third-party contractors, or other types of contractual counterparties) cannot be imputed to your company. These steps are vital in today s enforcement environment. Compliance Today March This calculation is based on the listing of reported FCPA investigations since 2006, found at compendium/default.asp?mode=1&keywords=&idyearchk=2012&id YearChk=2011&idYearChk=2010&idYearChk=2009&idYearChk=2008&id YearChk=2007&idYearChk=2006&idDataFieldChk=1&idDataFieldChk= 4&sort=name&s=Search 2. See, e.g., U.S. Dept. of Justice & U.S. Securities and Exchange Commission: A Resource Guide to the U.S. Foreign Corrupt Practices Act (2012) Available at fraud/fcpa/guide.pdf 3. Axendia Research: Walking the Global Tightrope: Balancing the Risks and Rewards of Med-Tech Globalization. Medical Technology Globalization Report (June 2012). Available at The%20Gray%20Sheet/38/27/Walking%20the%20Global%20 Tightrope%20report_final.pdf See also, Yair Holtzman,: The U.S. Medical Device Industry in 2012: Challenges at Home and Abroad. MMDI Medical Device and Diagnostic Industry News Products and Suppliers (July 17, 2012). Available at medtech-2012-swot 4. U.S. Dept. of Justice & U.S. Securities and Exchange Commission: A Resource Guide to the U.S. Foreign Corrupt Practices Act 20 (2012); see, e.g., Information at 17, United States v. DePuy, No (D.D.C. Apr. 8, 2011). 5. PricewaterhouseCoopers: Fast Forward: Healthcare Deals on the Global Horizon. Global Healthcare Deals Quarterly, Jan Available at deals-quarterly-mergers-acquisitions-market-activity/assets/ pwc-global-healthcare-deals-first-edition.pdf 6. PricewaterhouseCoopers: Stronger M&A Trend in Emerging Markets: Brazil is Fertile Ground for Mobile Health Technology. Global Healthcare Deals Quarterly, Apr Available at en_gx/gx/healthcare/deals-quarterly-mergers-acquisitions-marketactivity/assets/pwc-global-healthcare-deals-second-quarter-2012.pdf 7. United States v. DePuy, No (D.D.C. Apr. 8, 2011). 8. U.S. Dept. of Justice : Pfizer H.C.P. Corp. Agrees to Pay $15 Million Penalty to Resolve Foreign Bribery Investigation (Press release, August 7, 2012). Available at August/12-crm-980.html