Beware of Distributors: Mead Johnson Settles FCPA Charges for over $12 Million

The SEC alleged that Mead Johnson’s majority-owned Chinese subsidiary improperly paid health care professionals at state‑owned hospitals more than $2 million. The alleged payments were funneled through third‑party distributors and were intended to induce the health care professionals “to recommend Mead Johnson’s nutrition products to, and provide information about, expectant and new mothers.” The conduct allegedly occurred from 2008 to 2013 and led to profits of approximately $7.77 million for the company.

Despite the allegation of improper payments, Mead Johnson was not charged with violating the FCPA’s anti-bribery provisions. The only charge was violating the FCPA’s books, records, and internal control provisions. Mead Johnson consented to a cease-and-desist order without admitting or denying the SEC’s findings. It was also ordered to pay $7.77 million in disgorgement, $1.26 million in prejudgment interest, and $3 million in civil monetary penalties. Notably, no further remedial measures were required.

Mead Johnson’s settlement is relatively light compared to other recent cases involving alleged payments to publicly-employed health care professionals. Companies have recently paid as much as $70 million (Johnson & Johnson), $60 million (Pfizer and Wyeth), and over $29 million (Eli Lilly) in connection with alleged payments to such employees, whom the DOJ and SEC consider “foreign officials” under the FCPA. These companies were also subject to continuing DOJ/SEC oversight of required compliance enhancements through a monitorship and periodic self‑reporting. In contrast, Mead Johnson’s settlement contains no continuing obligations.

Mead Johnson’s comparatively light settlement appears to be further evidence of the unofficial “adequate procedures” defense under the FCPA. Unlike the UK Bribery Act, which explicitly provides protection for companies that maintain “adequate procedures” to prevent bribery, the FCPA contains no such allowance. However, the DOJ and SEC often consider companies’ internal anti-bribery systems when charging and penalizing them. In a 2012 case against Morgan Stanley, the DOJ charged a managing director with FCPA violations but declined to charge the firm because of its extensive “system of internal controls, which provided reasonable assurances that its employees were not bribing government officials.” The DOJ noted that the managing director “actively sought to evade Morgan Stanley’s internal controls.”

Similarly for Mead Johnson, the SEC’s Order acknowledged the company’s “internal policies to comport with the FCPA and local laws, and to prevent related illegal and unethical conduct.” Such provisions included “prohibitions against providing improper payments and gifts to [health care professionals] that would influence their recommendation of Mead Johnson’s products.” While these systems were not “adequate” in the SEC’s opinion, the Order notes that “certain employees” circumvented Mead Johnson’s internal policies to make the allegedly improper payments. Mead Johnson also received credit for “significantly revising its compliance program” after a 2013 internal investigation. The company established “a unit in China that monitors compliance and controls in China on an on-going basis,” enhanced its “compliance division, adding positions including a second senior-level position,” and established “new business conduct controls and third party due-diligence procedures and contracts.”

The Mead Johnson settlement is further proof that agents and consultants are not the only third parties that can get companies in trouble under the FCPA. Mead Johnson allegedly provided discounts to its third-party distributors. The discounts were then allocated, with guidance and control from Mead Johnson employees, to fund improper “cash and other incentives” for the Chinese officials. Distributors are less often involved in FCPA charges, but as this and other cases demonstrate, the risk is just as great.

Accordingly, companies that maintain a presence abroad should devise and regularly update internal policies and procedures to prevent and remediate misconduct by all types of third-party partners. Proper due diligence and monitoring of contracts with not only agents and distributors, but also joint venture partners, consultants, suppliers, and others, should be a regular part of a risk-based compliance program tailored to each company’s business and risk profile.