October 11, 2012 Articles

Legal Life Sciences Tips and Trends

Health care reform, court decisions, and shifts in the industry have created a new climate for life sciences companies, which will need a wide range of tools to address this new environment.

By Lauren Silvis and Sara Beardsley

Counselors to life sciences companies in the United States must account for significant legal, political, and economic developments that are transforming the operations of their clients. These changes present risks and opportunities that will affect the legal advice that life sciences companies depend on to succeed. Internal policies, corporate relationships, and legal strategies must be measured against the emerging regulatory and enforcement landscape. We set forth short-term recommendations and longer-term considerations below for legal advisers to life sciences companies.

Short-Term Recommendations
The key actions that should be taken immediately are (1) reevaluating corporate risk disclosures; (2) creating new topics for employee training; (3) focusing on compliance of business partners with anti-bribery laws; and (4) implementing a system to monitor and account for new economic sanctions.

The U.S. Supreme Court unequivocally affirmed companies’ obligations to think broadly and critically about the information they include in their corporate risk disclosures. Specifically, in Matrixx Initiatives Inc. v. Siracusano, 131 S. Ct. 1309 (2011), the Court rejected a bright-line definition of “materiality” and instead held that facts are material when they are likely to be viewed by a reasonable investor as “significantly alter[ing] the ‘total mix’ of information made available.” (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)). The holding means that Matrixx, the manufacturer of ZICAM®, may have had an obligation under securities law to report certain adverse-event reports, even though no statistically significant causal connection had been demonstrated between the product and the adverse events.

To help prevent inappropriate omissions, firms should reassess their disclosures under the Matrixx standard and recognize that new legal requirements—particularly those imposed by the Patient Protection and Affordable Care Act (PPACA), Pub. L. 111-148, 124 Stat. 119  (Mar. 23, 2010), and other reform legislation—may mandate additional disclosures. A range of life sciences companies will be affected by the PPACA’s rules regarding insurance benefits and coverage, its fees, taxes, and administrative burdens, and by the increase in competitive pressure. Firms should consider whether these risk factors could affect investor decision-making. The risk disclosure requirements may also be affected by non-legislative and less obvious developments, such as the reform of the section 510(k) pathway to market for medical devices, currently under way at the U.S. Food and Drug Administration (FDA).

As health care laws change, companies should also ensure that their personnel have the knowledge and training to comply with both old and new requirements. Economic and regulatory factors have caused many life sciences firms to downsize and reorganize—consolidating some positions, putting employees in different roles, and creating alternative compliance structures. New hires may be entering a highly regulated industry for the first time. Compliance with good clinical practice, good manufacturing practice, and fraud and abuse laws may not be appropriate for “on the job” training. Employees who are not up to date on the latest regulatory and legal developments can lead to increased exposure for companies. Legal departments can help manage these risks by providing input into a comprehensive system that tracks training and accounts for changing compliance best practices.

In addition to conducting internal reviews, companies should evaluate their external operations—in particular, their business partners—to manage risk. SEC v. Biomet, Inc., No. 12-CV-0454 (D.D.C. filed Mar. 26, 2012). Biomet provides a good reminder that corporate liability can be created by third parties. In March 2012, Biomet settled charges that the company, its subsidiaries, and its distributors made payments to physicians in violation of the Federal Corrupt Practices Act (FCPA). Biomet was held responsible not only for its own actions but also those of its distributors because Biomet was alleged to have known about the distributors’ actions. Companies can reduce the risk created by business partners by thoroughly reviewing those partners for compliance with anti-bribery laws and by requiring key third parties to undertake regular compliance training and certifications.

Companies also should stay alert for economic sanctions traps. United States and European Union sanctions programs are constantly changing and targeting new persons and entities. Far-reaching prohibitions, such as the prohibition on “facilitation” of activities by overseas affiliates or independent companies, can create serious risks for companies. See 31 C.F.R. § 537.205(a) (“Except as otherwise authorized, U.S. persons, wherever located, are prohibited from approving, financing, facilitating, or guaranteeing a transaction by a person who is a foreign person where the transaction would be prohibited if performed by a U.S. person or within the United States.”). To tackle these risks, companies should maintain robust compliance programs and monitoring systems that can keep pace with evolving rules.

Longer-Term Considerations
Some legal developments will have a major impact later down the road. Life sciences companies should be on the lookout for increasing whistleblower activity, greater state law exposure, and expanding liability based on new health care reporting requirements.

An increase in whistleblower activity is likely to follow amendments to the False Claims Act (FCA), the new whistleblowing bounty provisions in the Dodd-Frank Act, increased government enforcement budgets, and corporate downsizing. The FCA amendments, or the Fraud Enforcement and Recovery Act of 2009 (FERA), 31 U.S.C. §§ 3729–3733, encourages whistleblowing by expanding protection applicable to whistleblowers and by broadening the range of conduct prohibited under the law. The Dodd-Frank Act provided a mechanism for whistleblowers to collect money by reporting tips about violations of federal securities laws to the Securities and Exchange Commission (SEC). Whistleblowers must “voluntarily” provide “original” information, and the information must lead to monetary sanctions exceeding $1 million. 15 U.S.C. § 78u-6. SEC Chairman Mary Schapiro reported in March that the provision is already “producing high-quality leads and shortening the length of some of [the SEC’s] investigations.” Suzanne Barlyn, “Comply: Getting a Grip on Whistleblowers,” Reuters (Mar. 23, 2012).

These developments come on the heels of massive corporate downsizing in the health care industry. According to one report, the pharmaceutical industry lost more jobs than any other for-profit sector in 2010; pharma jobs accounted for over a tenth of all the jobs lost that year. See Melly Alazraki, “Which Sector Lost the Most Jobs in 2010? Pharma,” DailyFinance (Jan. 7, 2011). These factors combine to create conditions ripe for whistleblowers, and they highlight the need for companies to have comprehensive pre-enforcement and pre-intervention defense strategies.

The Supreme Court’s decision in Wyeth v. Levine, 555 U.S. 555 (2009), which permitted state tort suits to proceed in spite of FDA labeling determinations, initiated an era of state-law-based action against life sciences companies. State suits that follow on FDA or U.S. Department of Health and Human Services (HHS) settlements have provided other avenues for plaintiffs to collect. Now, with the Obama administration’s decision to grant states wide latitude under the PPACA, the tradition of state leverage over the health care industry continues. The PPACA provides for the establishment of “Affordable Insurance Exchanges,” which “provide competitive marketplaces for individuals and small employers to directly compare available private health insurance options on the basis of price, quality, and other factors.” “Patient Protection and Affordable Care Act; Establishment of Exchanges and Qualified Health Plans; Exchange Standards for Employers,” 77 Fed. Reg. 18,310, 18,310 (Mar. 27, 2012).

HHS Secretary Kathleen Sebelius said that the standards for the exchanges are designed “to give states as much flexibility as possible,” should they elect to establish and operate an exchange. Robert Pear, “Health Care Exchange Rules to Be Set,” N.Y. Times (Mar. 9, 2012). That means that, subject to minimum federal requirements, states will have authority over the health insurance options and benefits available to their constituents. Furthermore, recent decisions by the Centers for Medicare and Medicaid Services (CMS) reveal federal unwillingness to stand in the way of state health care decisions. The Supreme Court’s opinion in Douglas v. Independent Living Center of Southern California, 132 S. Ct. 72, 73 (2011), notes that the CMS approved several California statutes that cut payments to Medicaid providers, even after the Ninth Circuit had determined that the statutes violated federal Medicaid provisions. These factors all suggest that life sciences companies will face increasing exposure at the hands of state lawmakers and policymakers.

Finally, companies should prepare for potential additional FCA and anti-kickback statute liability created by the PPACA’s new reporting requirements. First, the law requires providers and suppliers who have been overpaid by Medicare or Medicaid to return the overpayment or face “reverse false claims” liability under the FCA. In February, the CMS promulgated a proposed rule interpreting the statutory requirements; the rule states that an overpayment will be deemed “identified” when a person has actual knowledge that an overpayment exists or acts in reckless disregard or deliberate ignorance of the overpayment. The standard effectively requires companies to establish audit and compliance systems that can flag potential billing issues.

Second, the Physician Payment Sunshine Act requires companies to track and report all payments made by drug, medical device, and medical supply manufacturers to physicians and teaching hospitals. Companies that fail to file the required information with the government are subject to fines of up to $1 million per year. Both sets of reporting requirements create pitfalls for the unwary. Payment, tracking, and reporting infrastructures may be necessary to reduce enforcement risks and bolster defense theories.

Health care reform, court decisions, and shifts in the industry have created a new climate for life sciences companies. Companies will need a wide range of tools to address the new environment, including robust internal systems, external monitoring, and sophisticated government strategies. Our tips and trends may help firms identify areas of risk, even as challenges to the PPACA proceed in court and the political and economic environment continues to evolve.

Keywords: litigation, health law, life sciences, Patient Protection and Affordable Care Act, PPACA, whistleblower, health care, Federal Corrupt Practices Act, FCPA, False Claims Act, FCA, Dodd-Frank Act, Fraud Enforcement and Recovery Act, FERA, Securities and Exchange Commission, SEC, Physician Payment Sunshine Act

Lauren Silvis and Sara Beardsley are attorneys at Sidley Austin, LLP, in Washington, D.C.

Copyright © 2012, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).