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Executive Compensation At Risk: Government Prosecutors Unveil New Enforcement Method in Recent GlaxoSmithKline Healthcare Fraud Settlement

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08.15.2012 | Article

GlaxoSmithKline’s (“GSK”) recent agreement to plead guilty and pay $3 billion to resolve its liability for the unlawful promotion of certain prescription drugs has been touted by the U.S. Justice Department (“DOJ”) as the largest healthcare fraud settlement in history and the largest payment ever by a drug company. The GSK settlement continues a trend of large healthcare fraud settlements in recent years; most of which result from cases brought by the Massachusetts U.S. Attorney’s Office with assistance from DOJ prosecutors in Washington. In 2009, Pfizer settled claims involving an array of different pharmaceuticals for $2.3 billion. That same year, Eli Lilly & Company paid $1.415 billion to resolve claims involving a single drug, which included the then largest corporate criminal fine of $515 million. Earlier this year, DOJ Abbott Laboratories agreed to pay $1.5 billion for claims involving a single drug, including $700 million in criminal fines. In GSK’s case, criminal fines account for $1 billion of the $3 billion settlement.

Understandably, many news reports have focused on the size of the GSK settlement, but have paid little attention to the creation of a new enforcement mechanism of which companies and executives in the healthcare industry should be aware: the Financial Recoupment Program (“Recoupment Program”) in the GSK Corporate Integrity Agreement (“CIA”).

CIAs have become standard components of large healthcare fraud settlements. They typically require the settling company to institute policies and operational controls geared toward preventing future improper conduct. Most CIAs require the expenditure of substantial time and resources in implementation, and additional time and resources are devoted to the monitoring and enforcement of the CIAs.

Before the GSK settlement, one of the Government’s favored methods to combat improper pharmaceutical sales practices was to include a provision in the CIA that required the company to overhaul its sales representative compensation structure. The CIAs with Abbott Labs, Pfizer, and Eli Lilly all included provisions that required significant changes to company compensation plans so that sales conduct such as improper off-label promotion was not rewarded in compensation decisions. In the GSK CIA, the Government has taken its toolbox to the executive suite, through the newly devised Recoupment Program.

The Recoupment Program requires GSK to put the equivalent of up to three years of all covered executives’ performance pay at risk of forfeiture. The Recoupment program requires GSK to recover annual performance pay, which includes cash bonuses, stock options, and other incentives, from any executive who individually commits certain bad acts, or should have known of improper conduct by other employees within his/her business unit. The Program applies to C-level executives, vice presidents and senior vice presidents across three levels of GSK’s hierarchy. Even its executives based in the United Kingdom are at risk of losing bonuses and other performance pay. In addition, GSK will defer 10-25% of the executives’ annual performance pay for up to three years and paid on a rolling basis after the deferral period ends. If improper conduct surfaces, however, the deferred performance pay may never be paid and the executive could be reported to the Government. Notably, the Program directs GSK to recoup compensation from its former executives as well, under certain conditions. These provisions appear to have no precedent in prior government settlements.

The Recoupment Program will have important implications for both GSK and its senior managers. It is unclear whether GSK had to revise any executive compensation contracts in connection with the CIA, but this type of recoupment program, if implemented unilaterally, could be a material breach of an executive’s contract. Also, it is unclear whether the “deferred compensation plan” is intended to be a deferred compensation plan within the meaning of Section 409A of the tax code, and Section 201(2) of ERISA. If so, there are potentially significant adverse tax consequences for executives if the plan is defective in any way.

The Government has not commented on why it added a Recoupment Program into the GSK CIA, or if it plans to expand its use of this tool in the future to prevent healthcare fraud. However, past practice has been that new CIA provisions become the norm. Therefore, healthcare companies under government investigation should anticipate having to deal with these recoupment issues in the future.

Healthcare executives should be prepared for these provisions. For any executive in the healthcare industry who has an employment contract, the contract presumably restricts the company from materially altering its relationship with the employee, including the executive’s compensation. Those executives with employment agreements whose companies face government investigation should seek counsel as to their rights and obligations in this regard, and executives entering into agreements ought to consider provisions that address this new enforcement landscape.

This article was prepared by Liam T. O'Connell, chair of the Labor, Employment and Benefits practice group.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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