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Defamation Claim Advances By Former Biomet Argentina Employee Against Zimmer Biomet Holdings

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Foreign Corrupt Practices Act enforcement actions rarely tell the whole story about the facts and circumstances relevant to the underlying action. Thus, it is nice (from the perspective of getting a more complete alleged picture including specific names relevant to an FCPA enforcement action) when civil litigation is filed in connection with an FCPA enforcement action.

Such is the case regarding a recent civil action filed by Alejandro Yeatts, who from 2005 to September 2015 was employed by Biomet Argentina, in which he alleges various tort claims against Zimmer Biomet Holdings. Although the court recently dismissed Yeatts’s intentional infliction of emotional distress and negligent infliction of emotional distress claims, the court denied Zimmer’s motion to dismiss Yeatts’s defamation claim meaning the claim will advance to the next stage in litigation.

This post summarizes Yeatts’s defamation claim and the court’s recent decision (Yeatts v. Zimmer Biomet Holdings, 2017 WL 1375117 (N.D. Ind., Apr. 17, 2017).

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Issues To Consider From The Zimmer Biomet Enforcement Action

Issues

This previous post went in-depth into the $30.4 million Foreign Corrupt Practices Act enforcement action against Zimmer Biomet announced on January 12th.

This post highlights additional issues to consider.

Repeat Offender

Biomet is not the first company to be a repeat FCPA criminal offender, just the latest. Other criminal examples include Aibel Group / Vetco entities and Marubeni (and there several other examples involving SEC civil violations such as Orthofix Int’l recently becoming a repeat FCPA offender). To learn more about these examples, see the article “Measuring the Impact of NPAs and DPAs on FCPA Enforcement.”

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Biomet Becomes An FCPA Repeat Offender

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For many years, the DOJ has advanced the policy position that DPAs and NPAs “have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.” (See here for the prior post). Specifically in the Foreign Corrupt Practices Act context, the DOJ has stated that “the companies against which DPAs and NPAs have been brought have often undergone dramatic changes.”  (See here for the prior post).

As highlighted here, in March 2012 Biomet resolved an FCPA enforcement action involving alleged conduct in Brazil, Argentina, and China by agreeing to pay approximately $22.8 million ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint).

Since then, FCPA Professor has chronicled (herehere and here) how Biomet’s DPA was extended, how the DOJ ultimately came to conclude that Biomet had breached its DPA based on subsequent improper conduct, and how an additional FCPA enforcement was expected.

Last week, the DOJ and SEC announced (here and here) the additional FCPA enforcement action against Zimmer Biomet Holdings (in 2015 Zimmer Holdings acquired Biomet) and Biomet. As highlighted below, a portion of the improper conduct involved the same distributor in Brazil that gave rise to the 2012 FCPA enforcement action.

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In Times Like These, We Need To Ask: Is The FCPA Effective?

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In passing the Foreign Corrupt Practices Act, Congress anticipated that the “criminalization of foreign corporate bribery will to a significant extent act as a self-enforcing preventative mechanism.” Likewise since the FCPA’s earliest days, the DOJ has recognized that the “most efficient means of implementing the FCPA is voluntary compliance by the American business community.”

In short, the FCPA was never intended to be just a mechanism to achieve “hard enforcement” (actual enforcement actions), but more a mechanism to achieve “soft enforcement” (compliance) in furtherance of the statutory objective of  reducing bribery and corruption. Indeed, as stated by the Sixth Circuit in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (1990) and repeated by several other courts, the FCPA’s statutory scheme “clearly evinces a preference for compliance in lieu of prosecution.”

Yet, as the FCPA nears its 40th anniversary those in this space need to start asking the question of whether the FCPA – as currently written and currently enforced – has been effective?

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A Reminder That The FCPA Has Long Tentacles

The FCPA has long tentacles as FCPA scrutiny and enforcement can impact a wide range of business activities.

Such as merger and acquisition activity.

Two recent developments serve as a reminder.

As noted here, Zimmer Holdings Inc. agreed to acquire Biomet Inc. in a cash and stock transaction valued at approximately $13.35 billion.

In March 2012 Biomet resolved a $22.8 million Foreign Corrupt Practices Act enforcement action  ($17.3 million via a DOJ deferred prosecution agreement and $5.5 million via a settled SEC civil complaint).  The DPA had a three year term and, as is common, contained the following clause:

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.”

The Zimmer – Biomet merger highlights how FCPA compliance obligations of a target company can be inherited by the acquiring company.

News of General Electric’s possible purchase of Alstom’s energy business highlights how FCPA scrutiny of a target company can be, depending on how the transaction is structured, inherited by the acquiring company.

Alstom has been under FCPA (and related) scrutiny for several years.  Among other things, former Alstom employees and business partners have resolved FCPA enforcement actions concerning the Tarahan power plant project in Indonesia (see here and here for prior posts).  Documents filed in connection with the individual enforcement actions suggest that the following Alstom projects are also under scrutiny: (i) “projects in Indonesia other than the Tarahan Project, including intended payments to government officials in connection with the Labuan Angin and the Maura Tawar projects;” (ii) “projects in India, including intended payments to government officials in connection with the Sipat, Barh I, and Barh II projects;” and (iii) the following projects in China – “Baima PRC Project,” “Qilu, Maoming, Guangzhou, Wuhan, Jin Men,Yueyang.”

In short, Alstom’s FCPA scrutiny is well known.  Thus, a potential GE – Alstom transaction would not seem to implicate many of the thorny due diligence issues discussed in certain FCPA Opinion Procedure Releases or certain hypotheticals discussed in the FCPA Guidance.

In any event, the FCPA Guidance states:

“Companies acquire a host of liabilities when they merge with or acquire another company, including those arising
out of contracts, torts, regulations, and statutes. As a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities Successor liability is an integral component of corporate law and, among other things, prevents companies from avoiding liability by reorganizing. Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception. Whether successor liability applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.”

As referenced in the FCPA Guidance “whether successor liability applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.”

Here it is important to recognize the following black-letter legal principles.

In a stock purchase agreement, the acquiring company will ordinarily inherit the target company’s pre-acquisition legal liability. In an asset purchase agreement, the acquiring company ordinarily (subject to certain limited exceptions) does not inherit pre-acquisition legal liability of the seller.

In this area, as in others, the free-for-all nature of FCPA enforcement is apparent.

In “The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act” forthcoming in the William & Mary Business Law Review, Taylor Phillips (Bass Berry) writes:

“Although successor liability is a key aspect of the government’s FCPA enforcement policy, the Department of Justice and the Securities and Exchange Commission have not distinguished clearly between the contexts of mergers, stock purchases, and asset acquisitions. As demonstrated by this article, asset purchases should be recognized as an acquisition structure that minimizes the risk of FCPA liability. That is because the law that should be applicable to such transactions is not a relatively broad federal common law of successor liability. Instead, it is state common law, which traditionally concedes only very narrow exceptions to the general rule of successor nonliability. Furthermore, given the remedial foundations of most successor liability doctrines, it is not obvious that traditional state common law encompasses punitive — much less criminal — successor liability theories.”

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