Biomet’s Second Bite at The Apple
By Christopher R. Hall and Courtney L. Schultz
Indiana-based medical device company Biomet recently found itself in hot water again over allegations of illegal payments made to doctors. This time, the conduct occurred abroad in public hospitals in Brazil, Argentina and China, giving rise to violations of the Foreign Corrupt Practices Act (“FCPA”), 15 U.S.C. §78dd-1, et seq. As it did in 2007, the Company managed to avoid high fines and exclusion by entering into a Deferred Prosecution Agreement, commonly referred to as a “DPA,” with the Department of Justice (“DOJ”), and a consent to final judgment in a related civil action with the U.S. Securities and Exchange Commission (“SEC”). The Company has agreed to pay total fines of approximately $22.8 million: $17,280,000 to DOJ and $5,575,731 to the SEC.
First Bite: The 2007 Anti-Kickback Actions
In 2007, Biomet became the target of a government investigation into whether consulting agreements between the largest orthopedic manufacturers and orthopedic surgeons violated the Anti-Kickback Statute (“AKS”), 42 U.S.C. §1320a-7b(b). The AKS prohibits the knowing and willful solicitation or receipt of any “remuneration,” or an offer to pay any “remuneration” in return for referring an individual to a person for the furnishing of an item or service for which a federal healthcare program pays, or in return for purchasing an item or service for which a federal healthcare program pays. Remuneration includes anything of value and can take many forms besides cash, including expensive gifts, entertainment and travel. Penalties include fines, jail time and exclusion from federal healthcare programs. In September 2007, Biomet entered into a DPA with the United States Attorney’s Office for the District of New Jersey. Biomet also settled parallel civil claims with the United States for $26,949,120. In March 2009, the DPA expired and the Company, having complied with the terms of the DPA, received a notice of dismissal of the Complaint filed in the U.S. District Court of New Jersey.
Second Bite: The 2012 FCPA Actions
On March 26, 2012, DOJ filed a criminal information against Biomet in the U.S. District Court for the District of Columbia charging one count of conspiracy to violate the FCPA, three substantive anti-bribery charges, and one charge of violating the FCPA’s books and records provisions. The same day, the parties filed a DPA with the court on the criminal charges, and a Consent to Final Judgment to resolve the civil and administrative charges brought by the SEC.
The FCPA prohibits persons or entities from providing an offer, promise, authorization or payment of money or anything of value to a “foreign government official” to secure business. The FCPA also requires issuers of securities to keep books and records that accurately reflect the transactions of the issuer. Here, DOJ pursued Biomet on the enforcement theory that health care providers (“HCPs”) working in publically owned and operated hospitals are “foreign government officials” within the meaning of the FCPA. This is not a novel theory. The government has successfully used this tactic to extract fines and penalties from both Johnson & Johnson (April 2011) and Smith & Nephew (February 2012).
The conspiracy charge alleges that during the 2000-2008 period Biomet offered money and other items of value to HCPs in Argentina, Brazil and China in order to secure hospital business. Biomet characterized the payments as “commissions,” “consulting fees,” “scientific incentives” and “royalties” (paying 15 to 20 percent in Argentina; 10 to 20 percent in Brazil; and 10 to 15 percent, plus travel, in China). The information also alleges that Biomet and its subsidiaries knowingly concealed the true nature of these payments in their books and records.
The evidence against Biomet in each of the three countries appears to have been strong. In Argentina, beginning as early as 2000, Biomet paid “commissions” to doctors. In 2003, a Biomet auditor discovered the payments and noted that they were shown in Biomet’s accounting records as commissions. The company appears to have not responded internally until August 2005 when the managing director of Biomet Argentina expressed concerns regarding payments to customs officials, not doctors, and requested an internal audit. In the course of that investigation, Biomet discovered that “bribes were made,” and in 2006 acknowledged internally that commissions recorded on the books were really “royalties” paid to doctors who used Biomet products. Payments to doctors continued nonetheless until at least August 2008. The Company distributed new compliance guidelines that emphasized FCPA issues at that time, and the Argentine general manager sought advice from the Company’s attorneys regarding the payments to the doctors.
Similar conduct occurred in Brazil. In August 2001, the Vice President of Biomet, Indiana, was informed that doctors were being paid commissions. Then, in February 2002, the Director of Internal Audit informed the Vice President that payments were being made to surgeons “that may be considered as a kickback.” It appears as though the payments continued until at least April 2008 when the Company sent accountants and outside counsel to Brazil to conduct due diligence on its distributor, which admitted making payments to doctors for buying Biomet products and describing them as “scientific incentives.”
Lastly, Biomet’s conduct in China was also scrutinized. Internal emails from February through May 2001 show that Biomet provided “payments or other things of value” to doctors in China, including lavish trips, to induce them to use the company’s artificial hips and knees. The company continued to entertain and pay doctors through late 2006, and debated internally ways to evade the Chinese government’s efforts to stop payments by companies to its doctors.
Food For Thought
While Biomet appears to have put the ordeal behind it, danger lurks for the individuals involved. DOJ has made FCPA enforcement a priority, and views individual liability as the most effective form of deterrence. The 2012 DPA does not protect the officers, employees or agents of Biomet or any of its subsidiaries. In fact, it expressly reserves the right to pursue individuals. The 2012 DPA states that it “does not provide any protection against criminal prosecution of any present or former director, officer, employee, shareholder, agent or consultant of Biomet for any violations committed by them.” We will watch, wait and keep you posted on developments as they unfold.
But there is no need to wait to apply the lessons learned from the Biomet matter: (1) take swift action to stop conduct that violates the AKS and to prevent its recurrence; (2) actively audit and monitor international operations; and (3) dedicate sufficient resources to training and education to equip employees with the information they need to identify (and report) improper business relationships.