On October 3, 2011, SciClone Pharmaceutical, Inc. (“SciClone”), a California specialty pharmaceutical company with substantial commercial business in China, entered into a stipulation of settlement in connection with several consolidated derivative lawsuits pending against certain members of its staff of current and former directors and officers. These suits were initially filed following an announcement by SciClone that the US Securities and Exchange Commission (“SEC”) and the US Department of Justice (“DOJ”) were conducting formal investigations, which are currently ongoing, into possible violations of the Foreign Corrupt Practices Act (“FCPA”) with respect to its activities in China. The stipulation of settlement of these shareholder derivative actions, upon court approval, will resolve allegations that the defendants failed to implement internal controls and systems for compliance with the FCPA and that the defendants thus breached their fiduciary duties.
Under the terms of the stipulation of settlement, all pending private litigation against SciClone in connection with these FCPA matters will be either settled or dismissed. As part of the Proposed Settlement, SciClone has also agreed to pay plaintiffs’ counsel $2,500,000 for their attorneys’ fees and expenses. However, the crux of the Proposed Settlement focuses, unusually, on efforts by SciClone to implement and maintain a program to ensure compliance with the FCPA and other applicable anti-corruption laws.
This Proposed Settlement marks the latest in a series of significant FCPA-related shareholder derivative suits. As the SEC and the DOJ have become more focused on investigating and prosecuting violations of the FCPA, the number of shareholder derivative suits has likewise increased. Like other FCPA-based derivative suits, the plaintiffs in the SciClone case alleged breach of fiduciary duty. However, the terms of the Proposed Settlement distinguish it from the typical FCPA derivative in that, generally, derivative suits seek – and sometimes obtain – financial penalties much greater than those actually paid to the SEC and the DOJ. In contrast, the SciClone Proposed Settlement’s main feature is the commitment to a heightened corporate anti-corruption compliance program.
The corporate compliance program obligations set forth in the SciClone stipulation of Proposed Settlement are detailed. Notably, they are also more specific than those found in recent deferred prosecution agreements (DPAs) or non-prosecution agreements (NPAs). Even the recent Johnson & Johnson DPA, which contained enhanced compliance requirements going beyond the standard checklist, lacks the specific detail of this resolution. The Proposed Settlement would require the measures to be maintained for at least three years from the effective date of the settlement, unless the company’s stock ceases to be publicly traded.
The most salient aspects of the Proposed Settlement’s compliance features are highlighted below:
SciClone is required to retain a so-called “Compliance Coordinator”, fluent in both Mandarin and English, to oversee the implementation of the company’s anti-corruption compliance program. Although many companies have Chief Compliance Officers, the Compliance Coordinator seems to mix features of an internal compliance officer and an external monitor.
- The Proposed Settlement requires the Compliance Coordinator, who is to be a member of the Company’s executive team, to report directly to the Audit Committee, and then for the Chair of the Audit Committee to report to the Board at least quarterly on the company’s implementation of remedial measures and compliance with the FCPA. These reports are in addition to the review the Board must make, with the assistance of the Compliance Coordinator, on an annual basis.
- In locations where the Compliance Coordinator is not primarily located, the company must have a designated point person to be a liaison for the Compliance Coordinator.
- Most significantly, the Compliance Coordinator is specifically required to provide a written and/or oral report on compliance on at least a quarterly basis to the Board, SciClone legal counsel, the CEO, the CFO, the internal auditors, and the company’s external auditors. This requirement goes beyond the typical requirements for a compliance officer, and has the flavor of external monitoring.
The level of detail required in these reports by the Proposed Settlement is also noteworthy: the report must include a summary of the nature and types of expenditures incurred or paid for by SciClone relating to travel of non-SciClone officers, directors, employees or independent contractors. This includes a summary of travel expenses of Health Care Professionals (“HCP”) to seminars and events conducted or sponsored by SciClone.
- The Proposed Settlement, perhaps not surprisingly given the focus of the government investigations, contains China-specific provisions, requiring that the company’s Global Anti-Bribery & Anti-Corruption Policy (“the Policy”) and the company’s commitments to it are to be communicated to all employees and contractors in writing in both English and Mandarin.
- The Proposed Settlement also is detailed regarding SciClone’s anti-corruption policies and procedures. The Proposed Settlement covers all areas typically covered by DPAs, but is much more prescriptive as to the specific standards. For example, it lists items that require pre-approval when the expense exceeds $2,500, such as an invitation to a government official and/or HCP that involves travel and other sponsorship, entertainment, gifts, and/or speaker/consultant fees. It also prohibits certain types of gifts, regardless of cost. In contrast, the J&J DPA contained no monetary limits, requiring only that gifts be “modest in value, appropriate under the circumstances, and given in accordance with anticorruption laws and regulations….”
- The SciClone Proposed Settlement also goes into more detail about its internal controls and compliance function. As with the Compliance Coordinator, the agreement requires an internal auditor to report directly to the Audit Committee at least quarterly.
- The Proposed Settlement also goes further than other government settlements in requiring employee compliance training. The agreement makes such training mandatory for all directors, officers, employees and independent contractors. It also mandates that training shall be annual, details what should be encompassed in training, stipulates that it should be done in person where practicable, and upon completion of training, specifies that a written certification as to each person’s understanding of the obligations will be provided.
- Finally, the Proposed Settlement departs from previous DPAs in its attention to the contours of a whistleblower program. This program permits complaints to be anonymous, to be forwarded to the Compliance Coordinator, and for a log of such complaints to be memorialized in writing and maintained for a period of not less than five years. The program also requires that the Compliance Coordinator notifies the whistleblower when the investigation is complete and to report the results of any investigation when practicable.
Overall, the compliance terms of the Proposed Settlement are not in conflict with typical DPA requirements, but are certainly more detailed than even the most detailed, enhanced compliance requirements found in recent resolutions in the same industry. Yet, whether this approach represents an emerging trend remains to be seen. While corporate compliance programs are typically much more prescriptive and detailed than the typical DPA requirements, presumably any change to the Proposed Settlement’s requirements during the three-year term of the compliance obligations would require a further agreement with the shareholders. This creates significant rigidity in what has been a dynamic area, and puts shareholders at the table in establishing controls that heretofore have been the province of management and the board of directors.