The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.
Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.
The latest example concerns Becton, Dickinson and Company (“BD” – a medical technology company) and its Alaris infusion pump.
In summary fashion, this administrative order finds:
This matter involves Becton Dickinson’s repeated misrepresentations to investors regarding the risks it was taking in selling one of its most important products. From 2016 to early 2020, BD understood its Alaris infusion pump, whose sales contributed about 10% of BD’s profits, required new regulatory clearance from the FDA to address historical changes to the device and to fix multiple software flaws that posed safety risks to patients. BD misrepresented these risks and failed to disclose the risk that the FDA would prohibit sales of Alaris until the company obtained new clearance and fixed its software. BD also overstated its income by failing to properly account for the costs of fixing the device.
In 2016, BD’s regulatory experts determined that Alaris required new clearance from the FDA because of cumulative historical changes made to the device since its last regulatory clearance. In June 2016, BD began work internally to seek this clearance. Within several months, however, BD realized it was unable at that time to give the FDA information it would require to clear the device. So BD decided to change course. Instead, BD sought FDA clearance only for certain new features it wanted to add to Alaris in the future. However, even for this substantially narrowed submission, BD could not then give the FDA the information it needed for clearance. BD withdrew that application in June 2018 and advised the FDA it would work on a new submission. Nevertheless, BD continued to sell Alaris until 2020 while misleading investors about the company’s regulatory compliance and without informing investors of the material risk that the FDA would prohibit BD from continuing to sell the device without the necessary clearance.
In FY2019 and FY2020, BD also materially misled investors and failed to make required disclosures about the increased risk that the FDA would prohibit sales of Alaris in light of flaws in the device’s software that presented risks to patient safety. One involved the pump’s low battery alarm, which was intended, but sometimes failed, to alert clinicians that Alaris was on the verge of shutting down during infusions if the device was not plugged in. Another involved error codes the device would generate in certain circumstances that delayed the start of infusions. By 2018, BD had received reports that there had been over 30 deaths or serious injuries potentially associated with these issues.
By January 2019, BD had identified over 25 additional flaws in Alaris’s software that the company’s experts categorized as presenting risks of the greatest potential harm to patients. BD did not, however, fix any of these flaws or inform investors of the heightened risk that the FDA would limit BD’s ability to continue selling Alaris in light of these issues.
By this point, it was probable that BD would need to conduct a recall to fix Alaris. However, BD failed to comply with Generally Accepted Accounting Principles by not disclosing or properly accounting for these recall costs.
In October 2019, after the FDA raised new concerns about Alaris’s alarms, BD proposed a plan to the agency for fixing all of the software issues. In doing so, BD informed the FDA for the first time about the additional flaws it had found, including those categorized as presenting risks of the greatest potential harm to patients, which by then totaled 37. BD asked the FDA to allow the company to continue selling Alaris while it worked on addressing these issues over time. BD proposed to do this by fixing the issues with a new software version while deferring the regulatory clearance process it had tried and failed to complete previously.
On October 31, 2019, the FDA rejected BD’s proposal, warning BD it was putting a “violative” device into the market with “defects and safety issues.” The FDA informed BD that continuing to sell Alaris was “problematic” and “not an acceptable way to proceed.” The FDA said, “These issues cannot be propagated in current manufacturing products. We cannot allow that to happen.” The FDA added that the changes BD had proposed required regulatory clearance, and that the devices already in medical facilities needed to be recalled and remediated more quickly than BD had proposed.
BD understood it needed to stop selling new Alaris units until it addressed the FDA’s concerns. It told the agency it would develop a new plan to fix the software issues. Immediately following this meeting, BD ceased shipping Alaris.
Within a few days, however, BD’s then-senior management, in consultation with multiple attorneys, senior internal experts, and executives in various roles, agreed to a different plan proposed by the Alaris team that was similar to the one the FDA had already rejected: BD would, within three months, resume shipping Alaris with a new software version but without first completing the regulatory clearance process. Notwithstanding the concerns raised by the FDA several days prior, BD’s plan assumed the FDA would exercise its enforcement discretion to allow BD to make changes to Alaris’s software that otherwise required prior FDA clearance so that BD could resume selling the device with new software that fixed all of the issues presenting risks of the greatest potential harm.
On November 5, 2019, BD held an earnings call in which it told investors it was pausing Alaris shipments during its first fiscal quarter to make software “upgrades” to the device. On that call and in a concurrent Form 8-K, BD issued earnings and revenue forecasts that assumed the company would recoup in the remainder of FY2020 most of the sales it would not make during this pause. BD’s statements materially misled investors about Alaris’s regulatory status and the reliability of its forecasts because they implied the company was merely enhancing the device and were based on the company’s undisclosed conjecture that the FDA would reverse course and allow BD to continue selling Alaris without clearance.
During this call and in the Form 8-K, BD also overstated its Q4 FY2019 operating income. By this point, BD estimated the Alaris recall would cost the company $50 million. Yet it did not reserve for these costs as GAAP required. BD’s failure to record the costs in Q4 FY2019 resulted in BD overstating its operating income for that quarter by 82%.
Later in November 2019, BD filed a Form 10-K that included various statements regarding the regulatory status of Alaris and the company’s interactions with the FDA. These statements continued to mislead investors about Alaris and BD’s ability to continue selling the device without new regulatory clearance.
In that filing, BD also materially misstated its financial results by again failing to record the estimated costs of remediating and recalling Alaris—this time overstating its FY2019 annual income before taxes by over 5%.
BD made additional misrepresentations to investors regarding Alaris over the following two months. At a widely attended healthcare investor conference in November 2019, BD again said it was “upgrading” Alaris and reaffirmed its previously issued earnings and revenue guidance. In December 2019, BD told participants at another investor conference it believed Alaris would continue to take market share from its competitors, and that the pause in sales would be short-lived. In neither case did BD inform investors that it had ceased shipping Alaris to address concerns raised by the FDA about the device, or that its forecasts depended on the FDA allowing the company to resume sales.
In December 2019, BD finalized the interim software version it had been developing and resumed selling Alaris without receiving FDA concurrence. At another investor conference in January 2020, BD told investors Alaris sales had resumed and reaffirmed its 2020 revenue forecast. BD did not, however, inform investors of the material fact that its forecast hinged on its assumption that the FDA would allow BD to continue selling the device without new regulatory clearance.
When the FDA learned in mid-January 2020 that BD had resumed shipping Alaris, it warned the company that its decision to resume sales was “misaligned with our previous conversations regarding your software issues and our mutual agreement that your firm should not be distributing devices to new customers.”
On January 23, BD again stopped shipping Alaris. BD did not know how long this “ship hold” would last, but understood it would likely have a substantially negative impact on the company’s revenue in FY2020. Nevertheless, during its January 28 annual shareholders’ meeting, BD again reaffirmed the FY2020 revenue forecasts that assumed the company would continue selling Alaris without limitation in FY2020.
In February 2020, BD informed investors it had ceased shipping Alaris to new customers and would not fully resume selling the device until it obtained clearance from the FDA. That announcement led to a 12% decline in the company’s share price. Following the call, one analyst texted a senior member of BD’s investor relations group, “I just can’t even . . . I do not understand what happened here. 10 days ago we heard everything in pumps was ok and back on market and better than expected . . . I’m stunned and have a lot of angry people with pitchforks.”
Based on the above, the order finds that BD violated, among other things, the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, BD agreed to pay a $175 million civil penalty and to engage an independent compliance consultant.
In the SEC’s release, Sanjay Wadhwa (Acting Director of the SEC’s Division of Enforcement) stated:
“BD repeatedly painted a misleading picture of its Alaris infusion pump for investors and then doubled down by keeping them in the dark when the device’s issues came to a head with the FDA in late 2019. Public companies have a fundamental duty to accurately disclose material business risks and should expect to be held accountable when they fall short in that regard.”
