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Johnson & Johnson Settlement: Anatomy of a Complex Health Care Fraud Case

September 6, 2016

The Johnson & Johnson settlement has all of the earmarks of a large complex health care fraud case.  We discuss the features of this settlement that help understand how health care fraud drives corporate and prosecutors concerns.

Health Care Fraud and Abuse Meets With Compliance Chief

As we noted in our previous blog, this week’s lineup in the Health Care Fraud and Abuse seminar at Boston University School of Law starred the Chief of Compliance at a startup pharmaceutical company in Cambridge, Massachusetts.  Together with his colleagues, this industry veteran walked the law students through all the painstaking work that goes into trying to keep a company in a highly-regulated industry on the right side of the law.  Careful screening in hiring, thorough training, accountability mechanisms, compensation structures that reward ethical behavior. In addition, commitment from the top leaders of the company are all part of the equation.

A personal visit from the company CEO impressed upon the group how personal and real this commitment is. One gets the sense that doing the right thing by doctors and patients is more important than achieving short-term, artificial, sales results.  Ironically, while the careful and steady approach will no doubt be rewarded in the long run, it may be a bit – ahem – unusual in the industry.  Wall Street has reacted cautiously to the company’s stock.

Johnson & Johnson Settlement Announced

Right on cue, as if to prove the relevance of the discussion, the U.S. Department of Justice announced its long-awaited settlement in the multi-faceted Johnson & Johnson investigation.  The government’s press release shows that for some eight years the government has been looking into a range of different whistleblower allegations against the pharmaceutical giant. These include:

  1. marketing the anti-psychotic drug Risperdal to unapproved patient populations including the elderly and patients with dementia in nursing homes;
  2. paying kickbacks to nursing home pharmacies to induce those pharmacies to promote Risperdal and other J&J drugs in nursing homes;
  3. (3) off-label promotion of the heart failure drug Natrecor to patients with less severe heart failure than the approved population.

Three separate whistleblowers, or groups of whistleblowers, will split the combined relator’s share of $167.7 million.

While the feds were doing their work, Johnson & Johnson managed to test the waters (unsuccessfully) on some of the theories by going to trial in Texas state court on an individual state claim involving improper marketing of Risperdal.  But just as a jury in Texas rejected the company’s trial defense in the courtroom, so too the facts proved too much for the company to overcome in the larger investigation.

In today’s settlement, company subsidiaries will plead guilty to criminal misbranding of the drugs in question, and pay massive fines and civil damage awards in the global settlement of the civil and criminal charges.  And Johnson & Johnson itself will now be subject to a corporate integrity agreement, which places the company on a kind of probation in which it is contractually obligated to self-report to the government if it misbehaves again.  All of the relevant papers in the combined cases can be found here.  J&J’s stock barely moved on the news; the settlement numbers had already been baked into the company’s price, so Wall Street reacted with a yawn.

Johnson & Johnson Settlement Illustrates A Large Complex Health Care Fraud Case

The settlement has all of the earmarks of a large complex health care fraud case.  First, the numbers are huge, as befits a company of J&J’s size.  The government has wised up; its settlements must meet the scale of ill-gotten gain. Or else the wrongdoers treat the fines and sanctions as just a cost of doing business.  Some could argue that $2.2 billion is still not much to companies like J&J or Pfizer, but bravo to the government (and the whistleblowers and their lawyers) for seeing the case all the way through to serious settlement numbers.

Second, note that it is J&J’s subsidiaries who will take the criminal plea, not the parent company, and will plead only to misdemeanors under the Food, Drug & Cosmetic Act.  This represents the well-traveled compromise between the government’s interest in a criminal disposition and the company’s need to avoid the exclusion and debarment remedy that would come with a felony conviction.

Third, the parent company, Johnson & Johnson, signed the settlement agreement and the corporate integrity agreement, but gets to manage the public relations story by saying, effectively, “our naughty offspring spilled some milk but have cleaned it up.”

Fourth, once again, there is no sign that responsible corporate officers will be prosecuted criminally or forced to disgorge their personal profits and bonuses from the company’s illegal conduct.  It’s fair to ask: will the industry ever truly change its ways when only shareholders absorb the pain?

Some will say this isn’t enough of a deterrent to large-scale corporate mischief.  Others will say that the government has once again leveraged its prosecutorial discretion to force a company into terms it would never have accepted without the threat of debarment from federal programs that felony convictions automatically trigger.

Others, like the compliance folks we spoke to yesterday, are probably saying: “Whatever we have to do to avoid a train wreck like that, we should do.”  Millions of dollars consumed by legal fees, time and energy sucked into litigation, resources spent on responding to investigative demands rather than growing a company, individual employees huddling with lawyers to try to escape prosecution and prison time–it’s quite a brew.  To a small start up, such an event could kill the company.


So, compliance matters.  It matters to companies trying to avoid train wrecks of litigation.  It matters to us taxpayers who routinely foot the bills resulting from marketing abuses.  And oh yes, let’s not forget about patients.  Corporate compliance matters most of all to the patients who trust the health care system to give them only the drugs that they need.