Zimmer Biomet Finally Settles for $30.5 Million
Jessica Mehta • Thu, January 19th, 2017
Zimmer Biomet announced on January 12, 2017 that it had reached a resolution with the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) regarding the “previously disclosed violations of the U.S. Foreign Corrupt Practices Act (FCPA)”—to the tune of $30.5 million.
A new settlement with the SEC and a plea agreement with the DOJ is the encore after years of legal challenges. The $30.5 million price tag is the combined, total fees in penalties, fines, interest, and disgorgement paid to both agencies. The agreements also include a “three-year deferred prosecution agreement with the DOJ.” Zimmer also agreed to form an independent, third-party compliance monitor (again) for legacy operations.
Zimmer acquired Biomet in a June 2015 merger, and all alleged Biomet violations—for these matters—occurred before the acquisition. Zimmer Holdings acquired Biomet for $13.35 billion—which was paid completely in cash and stock transactions. (Henceforth, for clarity, both Zimmer and Biomet will be referred to as ZBH.)
According to Senior Vice President, General Counsel, and Secretary of Zimmer Biomet Holdings Chad Phipps,
“We are pleased to have reached this resolution involving legacy Biomet FCPA compliance matters. Zimmer Biomet is committed to upholding the highest ethical and legal standards in our business practices across the globe, and we look forward to continuing to integrate the legacy Biomet business operations into our robust corporate compliance program.”
Even though all alleged illegal activities took place years before Zimmer acquired Biomet, someone had to pay the consequences.
ZBH was founded in 1927 in Warsaw, Indiana, and has become the leader worldwide for designing, manufacturing, and marketing a variety of orthopedic reconstructive items. ZBH brings to physicians all over the world solutions in sports medicine, large joint reconstruction, extremities, and trauma products, spine care, dental care, biologics, craniomaxillofacial and many other musculoskeletal products and services.
Deja Vu All Over Again
The January 2017 settlement isn’t the first time ZBH has clashed with the DOJ and SEC.
In September 2007, the SEC told ZBH (and other, related companies) that they were investigating alleged violations of the FCPA in regards to selling medical devices in “foreign countries.” In November 2007, the DOJ formally requested that any information ZBH and other companies provided to the SEC were also sent to the DOJ. This request was voluntary. In early 2011, ZBH was subpoenaed by the SEC for documents related to “business activities in substantially all countries in the Asia Pacific region.” ZBH says they produced those records.
On March 26, 2012, ZBH announced a settlement with the DOJ and SEC for an “ongoing federal investigation into its international sales practices”. Part of this settlement included “consent to final judgment with the SEC and a deferred prosecution agreement (DPA) with the DOJ.” ZBH was also assigned an independent compliance monitor. Part of the final judgment includes close scrutiny to ensure ZBH follows FCPA guidelines.
However, in December 2012, Zimmer announced the receipt of “declination letters” from the SEC. Such letters suggest an enforcement agency has found evidence that it could bring a case against a person or company, but has decided not to pursue the situation further. The declination letter story was covered by The FCPA Blog which reported at the time, “The DOJ and SEC won’t bring any FCPA enforcement actions (against ZBH).” ZBH noted that, “During a meeting in December 2012, representatives from the agencies informed us that the SEC and the DOJ planned to close their investigation without pursuing any enforcement action against us.”
On February 27, 2013, ZBH released the FCPA disclosure Form 10-K filed with the SEC. Within the form, ZBH says, “The agencies (DOJ and SEC) have closed their inquiries into this matter. While we are pleased with the government’s declination decision in this matter, we are committed to continuing to enhance our global anti-corruption compliance program.”
Unfortunately for ZBH, events were to challenge those statements.
The Proverbial Dog Was Sleeping (Not Dead)
A few months after ZBH made the official declination statement, in October 2013, the company announced that it was tipped off about alleged improprieties at its Brazil and Mexico operations. ZBH says these alleged behaviors and actions predated the 2012 DPA. In fact, ZBH says that although the alleged activities were apparently happening for some time, they just became aware of it in late 2013.
ZBH formally revealed the details with the DOJ, SEC, and their appointed independent compliance monitor in April 2014. However, on July 2, 2014, the SEC again subpoenaed ZBH, demanding key documents about the circumstances in Brazil and Mexico.
On March 13, 2015, the DOJ told ZBH that the previous requirements for the DPA and independent compliance monitoring were being extended for one extra year. A few weeks later, on April 2, 2015, the SEC asked ZBH to agree to an amended final judgment. ZBH complied, which further extended the compliance monitor’s appointment to include one year from the date of the Amended Final Judgment. January 2017’s new settlement and plea agreement again amends and extends the independent compliance monitor’s appointment as well as the DPA stipulation for an additional three years.
The DOJ and SEC say that they plan to closely watch ZBH’s conduct, especially in Brazil and Mexico, throughout 2016. According to the DPA, the DOJ is armed with sole discretion in deciding whether ZBH’s conduct violates the DPA.
Ultimately, the DOJ retained the right to prosecute ZBH, its employees, or revoke the DPA—but didn’t act on any of those privileges. ZBH showed compliance throughout the 2016 evaluation, resulting in the final decision of the plea agreement and new settlement terms.
Zimmer Pays the Piper (Again)
The FCPA issue seems to have finally rested, but it wasn’t the only legal kerfuffle plaguing ZBH in recent years.
In 2012, a federal judge centralized a multidistrict litigation (MDL) against Biomet for allegedly faulty M2A Magnum hip transplants. In 2014, a $56 million settlement was reached. MDLs are like class action lawsuits, in that they both involve several complaints, and are designed for speed and efficiency. The big difference is that class action lawsuits are combined into one lawsuit via several people (plaintiffs), while MDLs are a transfer of individual cases to a single court. These MDL cases are not rolled into a single lawsuit.
The 2012 MDL allegations and recent allegations are, of course, wildly different. The 2012 MDL focused on an alleged faulty hip implant, which plaintiffs claimed slowly leaked toxic elements into the bloodstream. A number of side effects were noted including swelling, metal blood poisoning, inflammation, and tissue damage. Oftentimes, doctors recommended revision surgery. Plaintiffs claimed these second surgeries were painful and very expensive. Per Blue Cross Blue Shield, hip replacement (and revision) costs can vary greatly, but average close to $40, 000. For patients without insurance, or without quality insurance, $80, 000+ in medical costs can be devastating.
FCPA’s Long Tentacles
ZBH is a very large organization. It operates in over 25 countries and sells to over 100 more. And, it has deep pockets. In its own words:
“We collaborate with healthcare professionals around the globe to advance the pace of innovation. Our products and solutions help treat patients suffering from disorders of, or injuries to, bones, joints, or supporting soft tissues.”
However, the FCPA also has “long tentacles, ” says Southern Illinois University School of Law professor Mike Koehler, J.D. As founder and editor of the FCPA Professor website, Professor Koehler says, “FCPA scrutiny and enforcement can impact a wide range of business activities.”
During negotiations with the DOJ and SEC throughout the 2012 – 2016 debacles, Biomet made sure to have a special clause in the DPA. It’s a common clause according to Professor Koehler, but it proved to be a savvy one:
“Sale or merger: Biomet agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger, or transfer, it shall include in any contract for sale, merger, or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement.”
Zimmer surely knew what they were “inheriting” when they purchased Biomet with cash and stocks. However, when a company like Zimmer has several billion liquid dollars on hand, getting a potential multi-million-dollar lawsuit or settlement tacked onto the acquisition is likely a drop so small in their bucket that it’s hardly noticeable. Professor Koehler uses the Zimmer-Biomet merger as a prime example of how “FCPA compliance obligations of a target company can be inherited by the acquiring company.”
The FCPA has also been eyeing other medical companies, enforcing actions, and collecting handsome settlements. In 2011, Johnson & Johnson paid $70 million to settle FCPA allegations and Smith & Nephew settled for $22 million in 2012. The ZBH is far from the DOJ’s and SEC’s biggest fish in the frying pan, but it’s certainly a prized catch.