FCPA: Smith & Nephew DPA: Lessons Learned in Using Distributors

A distributor can be generally defined as a company or individual who purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set the resell price at any amount above what was originally paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside of the US.

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers, who are most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However, many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However, such belief is sorely miss-placed.

As reported by the FCPA Professor and FCPA Blog, on February 1, 2012, the Department of Justice (DOJ) announced that it entered into a Deferred Prosecution Agreement (DPA) with Smith & Nephew, Inc., a medical equipment manufacturer, for violations of the FCPA. Smith & Nephew paid a monetary penalty of $16.8MM to the DOJ and $5.4MM to the Securities and Exchange Commission (SEC) as a civil penalty, all for a total of $22.2MM in fines and penalties. The violations revolved around a Greek distributor of Smith & Nephew who paid bribes to Greek doctors so that they would purchase and use Smith & Nephew products. According to the FCPA Professor, in a post entitled “Next Up – Smith & Nephew”, Smith and Nephew and its German subsidiary, would sell products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-sell to Greek HCPs and government hospitals at a profit.”

Further, as noted by the Professor, the purpose in setting up these entities “was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employed Greek HCPs.” According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay th…