Medical Device Daily Contributing Writers

Since Dec. 15, 2008, companies have agreed to pay the U.S. government more than $1.3 billion to settle charges under the once-little-enforced U.S. Foreign Corrupt Practices Act (FCPA). Multiple executives have recently pled guilty to FCPA charges and face millions in fines and/or years in prison. Aggressive enforcement is likely to continue.

Government officials have stated that enforcing the FCPA is one of the highest priorities for the Department of Justice (DOJ), second only to combating terrorism. The DOJ's 2008 enforcement action against AGA Medical (AGA; Plymouth, Minnesota) provides some useful lessons that can help medical company leaders avoid their own FCPA problems (Medical Device Daily, June 5, 2008).

The FCPA is a federal law designed to prevent and deter bribery of foreign officials. The anti-bribery provisions of the FCPA prohibit directly or indirectly offering "anything of value" to any "foreign official" for the purpose of influencing the decision of that official to do anything that assists the offerer in the obtaining or retaining of business.

Businesses should beware that the terms used in the law have been broadly construed and the statute prohibits conduct that may be considered routine by many companies when dealing with private clients. The FCPA also contains accounting and record-keeping provisions that place an affirmative duty on issuers to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer."

The healthcare industry has recently received considerable attention from FCPA enforcers from both the SEC and the DOJ. Multiple medical device and pharmaceutical companies have been investigated. In 2008, AGA, which sells devices to treat congenital heart defects, settled FCPA charges brought by the DOJ. In court filings, the DOJ alleged that a Chinese distributor working on behalf of AGA made improper payments to patent officials, government hospitals, and physicians in those hospitals.

AGA accepted the facts set forth by the DOJ and acknowledged that the company was responsible for the acts of its officers, employees and agents. AGA agreed to pay a penalty of $2 million. If the DOJ determines that AGA has breached the terms of the agreement, AGA can be criminally prosecuted for the conduct it has already acknowledged in the agreement as well as any other federal criminal violation of which the DOJ has knowledge.

Lessons learned from AGA

Here are the most important lessons to be learned from AGA's situation:

• Small companies are at risk. Even comparatively small companies with limited operations in a particular country may be prosecuted under the FCPA. According to court filings, AGA sales in China between 1997 and 2005 totaled approximately $13.5 million.

• Healthcare companies are at risk. Healthcare companies are at a particularly high risk under the FCPA. Because the DOJ defines "foreign official" broadly, the term can include employees of state-owned entities, including physicians or officials of government-operated hospitals, such as those in the AGA case. Similarly, many healthcare companies need government licenses, permits or patents. Increased contact with foreign officials provides greater opportunity for an FCPA violation to occur.

• Beware of third-party agents. Companies can be held liable for the acts of third-party agents, such as the Chinese distributor in the AGA case. Many medical device and pharmaceutical companies employ third-party agents to assist in sales, export or licensing requirements in foreign countries.

• The dangers of e-mail. With the click of a button, e-mails can embroil U.S.-based, home office employees in FCPA investigations. In the AGA case, the DOJ relied, in part, on an e-mail sent by a U.S. employee stating: "I understand that the fee you must pay each physician was to be included in your selling price. It should therefore not be an issue."

• Potential benefits of self-disclosure. Finally, self-disclosure can mitigate the damage of an FCPA violation. In the AGA case, the government recognized the company's voluntary disclosure after a thorough internal investigation.

Start with an anti-corruption plan

Rest assured there are several things you can and should do to protect your company, your employees and yourself from the high cost of a FCPA problem. The single most important step a med-tech company leader can take to avoid FCPA liability is to establish an effective anti-corruption compliance program.

The first goal of a compliance program is to prevent conduct that could violate the FCPA. Because the FCPA prohibits some conduct which might be considered routine in a private business context (such as meals, travel and entertainment under certain circumstances), a compliance program can significantly reduce exposure by helping to avoid inadvertent criminal violations and by establishing mechanisms to reduce the likelihood of third-party liability.

Second, a compliance program increases a company's ability to detect FCPA problems early and secure the benefits of voluntary disclosure. As in the AGA case, voluntary disclosure, along with a thorough investigation and cooperation with enforcers, may forestall criminal prosecution.

Third, by demonstrating the commitment of the company to preventing violations before they occur, a compliance program can help a company avoid criminal prosecution altogether or can reduce the consequences of a prosecution. Enforcers consistently emphasize that the tone at the top is critical to any effective FCPA compliance effort. Simply having a paper compliance program, such as a section on the FCPA in a company's Code of Conduct, is unlikely to achieve any of these goals.

Whether in medicine or law, prevention and early diagnosis are critical to reducing the risk of a bad outcome. If a company does business internationally, one of the most important steps its leadership can take to help reduce FCPA exposure is to ensure the company maintains a well-designed, active anti-corruption compliance program.

A key question for such leaders is: How would you, your employees and your third-party agents describe your company's current anti-corruption compliance program to an enforcer or your shareholders?

Ross Booher and Taylor Phillips are attorneys with Bass, Berry & Sims (Nashville) where they practice in the Antitrust & Trade Practices Group.