Since introduced to the Foreign Corrupt Practices Act context in 2004, most corporate FCPA enforcement actions are resolved via non-prosecution agreements or deferred prosecution agreements (DPAs).
DPAs are essentially contracts, but beyond the fine amount, few of the contractual terms are explored.
This post uses recent events involving Biomet to explore other terms of a typical FCPA DPA.
As highlighted in this previous post, 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).
The three-year DPA stated, as is typical in FCPA DPAs, as follows.
Deferred Prosecution: In consideration of: (a) the past and future cooperation of Biomet […] ; (b) Biomet’s payment of a monetary penalty of $17,280,000; and (c) Biomet’s implementation and maintenance of remedial measures, the Department agrees that any prosecution of Biomet for the conduct set forth in the … Statement of Facts, and for the conduct that Biomet disclosed to the Department, prior to the signing of this Agreement, be and hereby is deferred for the Term of this Agreement. The Department further agrees that if Biomet fully complies with all of its obligations under this Agreement, the Department will not continue the criminal prosecution against Biomet […] and, after the Term, this Agreement shall expire and the Department shall seek to move to dismiss, with prejudice, the Criminal Information filed against Biomet.”
Breach of Agreement: If during the term of this Agreement, the Department determines, in its sole discretion, that Biomet has: (a) committed any felony under federal law subsequent to the signing of this Agreement; (b) at any time, provided deliberately false, incomplete or misleading information; or (c) otherwise breached the Agreement, Biomet shall thereafter be subject to prosecution for any federal criminal violation of which the Department has knowledge, including the charges in the Information […]
As relevant to the above terms of the Biomet DPA, on July 3rd, Biomet disclosed as follows.
“As previously disclosed, on March 26, 2012, Biomet entered into a Deferred Prosecution Agreement, or DPA, with the Department of Justice, or DOJ, and a Consent to Final Judgment, or Consent, with the Securities and Exchange Commission, or SEC, regarding an investigation regarding possible violations of the Foreign Corrupt Practices Act. Pursuant to the DPA, the DOJ agreed to defer prosecution of Biomet in connection with those matters, provided that Biomet satisfies its obligations under the DPA over the term of the DPA. The DPA has a three-year term but provides that it may be extended in the sole discretion of the DOJ for an additional year. Pursuant to the Consent, Biomet consented to the entry of a Final Judgment which, among other things, permanently enjoined Biomet from violating the provisions of the Foreign Corrupt Practices Act.
In October 2013, Biomet became aware of certain alleged improprieties regarding its operations in Brazil and Mexico. Biomet retained counsel and other experts to investigate both matters. Based on the results of the investigation, Biomet terminated, suspended or otherwise disciplined certain of the employees and executives involved in these matters, and took certain other remedial measures. Additionally, pursuant to the terms of the DPA, in April 2014, Biomet disclosed these matters to the independent compliance monitor and to the DOJ and SEC.
On July 2, 2014, the SEC issued a subpoena to Biomet requiring that Biomet produce certain documents relating to such matters. Moreover, pursuant to the DPA, the DOJ has sole discretion to determine whether conduct by Biomet constitutes a violation or breach of the DPA. If the DOJ determines that the conduct underlying these investigations constitutes a violation or breach of the DPA, the DOJ could, among other things, extend or revoke the DPA or prosecute Biomet and/or the involved employees and executives. Biomet continues to cooperate with the SEC and DOJ and expects that discussions with the SEC and the DOJ will continue.”
In short, Biomet’s recent disclosure creates the risk that the company may be in breach of the DPA giving the DOJ the ability, per the terms of the DPA, to continue or resurrect the prosecution of Biomet deferred under the DPA, as well as bring an enforcement action for any conduct occurring after the DPA.
As relevant to DPAs, the DOJ maintains that such agreements “have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.”
Yet, Biomet’s recent disclosure puts it in a category of many other companies (such as Orthofix International, Willbros Group, Marubeni, Diebold, IBM, Tyco, Aibel Group, and Ingersoll-Rand) that have become the subject of additional scrutiny or enforcement after resolving FCPA enforcement actions through a DPA or agreeing to an SEC permanent injunction. For more, see this prior post Do NPAs and DPAs Deter?
Yet, what Biomet’s recent disclosure demonstrates is that not even companies with the greatest incentive to comply with the FCPA – and subject to post-enforcement action compliance obligations – are able to ensure FCPA compliance across its business organization or eliminate FCPA scrutiny. In short, FCPA compliance can not be guaranteed in a business organization, rather steps can be taken that only minimize the risk of non-compliance occurring.
This fundamental fact (and it is a fact that even the enforcement agencies have recognized) is one of the policy reasons underlying an FCPA compliance defense. (See here for the article “Revisiting a Foreign Corrupt Practices Act Compliance Defense”).
Whether Biomet may ultimately be in breach of its 2012 DPA is not the only contractual term that could implicated by recent events at Biomet.
In April 2014, Biomet and Zimmer Holdings announced “that their respective Boards of Directors have approved a definitive agreement under which Zimmer will acquire Biomet in a cash and stock transaction valued at approximately $13.35 billion, including the assumption of net debt.” The transactions is expected to close in the first quarter of 2015.
As relevant to this pending merger, the DPA states as follows.
“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.”