Editor's Corner: Pharma exec’s trial underscores Yates memo limits

Allergan Headquarters

Photo of Evan SweeneyA pharmaceutical rep and four doctors walk into a high end restaurant. Each of them brings their spouse and together, they eat and drink like kings. When the bill comes they look at each other and laugh. The pharmaceutical rep pays the tab—after all, what are friends for if not to pick up the check twice a week, every week?

Ok, it’s not a great joke, but it is a rough summary of how W. Carl Reichel, the former president of Warner Chilcott PLC, a subsidiary of Allergan, escaped a felony charge of violating the Anti-Kickback Statute by overseeing a sales team that plied physicians with expensive dinners dubbed “medical education programs.”

Reichel’s case was noteworthy because he was arrested less than two months after Deputy U.S. Attorney General Sally Q. Yates published what has become the “Yates memo,” outlining the government’s hardline approach to “pursuing individuals for corporate misdeeds.” Reichel became the memo’s poster-boy after his company pleaded guilty to charges that it paid kickbacks to physicians to prescribe seven different drugs, and agreed to pay $125 million in criminal and civil fines.

According to his indictment, prosecutors argued that Reichel was the puppet master of the company’s scheme, directing the sales representatives beneath him to take doctors out for “free dinners at least twice a week” where the reps could “build relationships.”

The dinners were decidedly more social than educational and sales reps were instructed to review prescribing patterns. If those numbers didn’t budge, the doctors were cut off from the free meals. High prescribers, on the other hand, were paid “speaking fees” as high as $1,200 to attend the dinners.

Felony charges against pharmaceutical executives are virtually unheard of despite a growing list of multi-billion dollar settlements. With the ink still drying on the Yates memo, Reichel’s arrest was a sign that this new directive was more than just an empty threat.

But questions still swirled about the practicality of the memo. Subsequently, many saw Reichel’s trial as a harbinger of fraud enforcement: A conviction would solidify the government’s position and send a strong message to corporate healthcare executives, particularly those in the pharmaceutical industry. An acquittal would weaken it.

Federal prosecutors argued that the dinners organized by Warner Chilcott sales representatives, referred to by Reichel as “medical education programs” were “the heart and soul” of the company’s business model.

Drawing on testimony from Warner sales personnel—including regional sales managers and directors, as well as physician speakers—prosecutors described a program in which employees were actively discouraged from providing education. In one instance, sales reps paid for a barbecue attended by several doctors and their spouses. From 2000 through 2011, the company allegedly spent $85 million on “medical education programs.”

But defense attorneys countered that this offered no hard evidence that Reichel knowingly broke the law, or that he knew his business strategy toed the line of illegal kickbacks. The defense team also argued that the idea that “building a relationship to get access to persuade is widely acceptable conduct and not criminal.”

The fact that these dinners are “widely acceptable” may be the sad truth of the whole thing, and it was apparently persuasive enough for the jury to acquit, although it certainly raises a few questions.

Namely, at what point does “relationship building” stop and bribery begin? When does an $85 million tab inch beyond the “friend zone”?

Perhaps more importantly, it underscores the significant uphill climb that prosecutors face when it comes to fleshing out the substance of the Yates memo in the courtroom. The burden of proof is high, and proving that an executive knowingly violated anti-fraud regulations is difficult, even with some fairly damning testimony from sales representatives.

Will this decision derail the government’s new edict? Probably not. There are already several fraud cases pending against healthcare CEOs that will shape the impact of the policy even further. But if you thought a strongly-worded memo would shake up an industry was practically built on a foundation of kickbacks, this serves as a stark reality check.

Ironically, if you’re looking for a punchline for the whole thing, look no further than Reichel’s attorney, who told the Wall Street Journal, simply: “Justice done.”