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July 25, 2012

GLAXO CORPORATE INTEGRITY AGREEMENT BREAKS NEW GROUND

1111305_pills.jpgThe headlines regarding the recent settlement between GlaxoSmithKline and the U.S. government focused on the record-breaking dollar amount of the deal, namely, $3 billion. That dollar amount bought Glaxo temporary peace in the form of resolving its criminal and civil liability arising from the company's allegedly unlawful promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices. As is often the case in any high-dollar settlement with the federal government involving a pharmaceutical company, Glaxo entered into a 5-year corporate integrity agreement with the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS).

This corporate integrity agreement, however, breaks new ground because it includes restrictions on how Glaxo compensates its sales force and provides for the company to recoup annual bonuses and long-term incentives from covered executives if they, or their subordinates, engage in "significant misconduct," a term that the agreement attempts to define but fails to do so clearly.

In a July 2 DOJ press release hailing the settlement, the government stated that the corporate integrity agreement "is designed to increase accountability and transparency and prevent future fraud and abuse." After reading the relevant new provisions in the agreement, it is hard to see how the agreement accomplishes those ends?

With respect to the restrictions on compensation for sales representatives, the agreement provides that Glaxo will not reward (through compensation) or punish ("through tangible employment action") sales representatives or their managers based upon their volume of sales of Glaxo products. Instead, sales representatives will be evaluated on "business acumen, customer engagement, and scientific knowledge about [Glaxo's] products." But isn't at least one component of an employee's "business acumen" an evaluation of how well the employee is performing based on his or her sales volume? Is Glaxo now restricted in firing or demoting employees who consistently fail to meet sales goals?

With respect to the "Executive Financial Recoupment Program," Glaxo agreed to establish a program under which any executive who is discovered to have been involved in any significant misconduct agrees to forfeit up to 3 years of annual bonuses plus long terms incentives, such as stock options. Ironically, although an entire appendix to the corporate integrity agreement is dedicated to explaining Glaxo's Executive Financial Recoupment Program, two words are used to define the triggering event for the claw back provision, namely, "significant misconduct." The agreement provide just one example of what is meant by the term "significant misconduct" by way of the following example: "violation of a significant [Glaxo] policy, or regulation, or law." This is hardly the model of clarity.

Only time will tell whether these groundbreaking provisions are truly effective as a means to increase accountability and transparency and prevent future fraud and abuse. One thing is certain. They will keep a lot of lawyers busy for the next five years.