The U.S. Department of Justice reported a major $750 million settlement arising from claims first asserted by an employee/whistleblower against her former employer – GlaxoSmithKline PLC (“GSK”).  The civil and criminal penalties stem from allegations that the company manufactured and distributed defective and adulterated drugs from its now-closed manufacturing facility located in Puerto Rico.

Employee’s Claims against the Employer

Cheryl D. Eckard worked as the company’s quality manager.  She claims that she alerted GSK management about the problems associated with the facility in question and the company fired her rather than address the appropriate issues.  Thereafter, Eckard filed a False Claims Act (“FCA”) Qui Tam action in the U.S. District Court of Massachusetts.  As a “Relator” under the FCA, she filed claims on behalf of the United States, against GSK.   Eckard alleged that during her tenure at GSK, from 1992 to 2003, she had repeatedly alerted management to quality issues at the Puerto Rico facility.  Her specific allegations included the following:  (1) some batches of Kytril (an anti-nausea medication) and Bactroban (a baby ointment) were contaminated with bacteria; (2) Paxil CR tablets were splitting apart, causing some consumers to receive either products with no active ingredients and/or products with only the active ingredient layer and no controlled release mechanism; and (3) that Avandamet was being manufactured with higher or lower amounts of the specified ingredients.  She alleged that after reporting the matter to several GSK executives, she was terminated.

Background on Settlement Terms

The 26-page, published settlement agreement included among the parties the U.S. Department of Justice, the U.S. Attorney’s Office for the District of Massachusetts, the Office of Inspector General of the Department of Health and Human Services, the Department of Veteran Affairs, Cheryl Eckard, and GlaxoSmithKline PLC.

The agreement recites the Government’s allegations that GSK caused claims to be submitted to the Medicaid Program, the Department of Veteran Affairs and other federal agencies for payment of certain “Covered Drugs,” including Paxil CR, Avandamet, Kytril and Bactroban.  The alleged defects included deficiencies in strength, purity, and/or quality of products resulting in fraudulent claims for payment of such “adulterated” products. 

GSK agreed to pay the United States and the Medicaid Participating States (“MPS”) the sum of $600 million, plus accrued interest ($436,440,000 will be paid to the United States as the federal settlement and $163,560,000 will go to the MPS).  GSK will pay an additional $150 million in criminal fines.

Implications for Employers

The Eckard case against GlaxoSmithKline has implications and lessons for many organizations – publicly traded companies that do business with the federal government, as well as privately held federal contractors.  Among them:

1. The False Claims Act is a Major Weapon for Law Enforcement:  The FCA is one of the federal government’s key weapons for addressing corporate fraud.  Now it also may be wielded against alleged health care fraud in Medicaid/Medicare reimbursements. With continued anxiety over the high costs of health care, organizations vulnerable to claims they have defrauded the government (even where the alleged fraud is unwitting) will likely face an uphill battle.  Zealous regulators charged with stamping out fraud and courts with jurors already antagonistic toward organizations they believe are contributing to exorbitant health care costs are likely to prove formidable adversaries and skeptical factfinders. 
2. Employees Have Strong Incentives:  Under FCA’s Qui Tam provisions, the settlement agreement provides that Eckard will receive a hefty 22 percent share of the federal settlement amount, which comes to more than $96 million.  This recovery is one of several since the 2009 amendments to the FCA, and stands as solid proof that employee-whistleblowers can enjoy a big pay-day by pursuing claims against their employer.  We may be sure this case will capture the attention of employees with an axe to grind against their current or former employer. 
3. Compliance and Ethics Programs are Essential but must be Managed:  As never before, business organizations must be capable of identifying and combating fraudulent behavior.  Effective compliance and ethics programs communicate a company’s behavioral standards, but they also educate employees on becoming a whistleblower.  Organizations developing such programs, therefore, will need to monitor and improve their operations systematically.  Employees who make internal reports must be treated with care.  For example, employees who have made complaints that might qualify as whistleblower claims need not be provided with guaranteed, lifetime employment, but, by the same token, they should be protected from retaliation. To that end, a thorough, objective, and documented process for consideration of employee terminations is strongly indicated. 

The Corporate Governance practice group of Jackson Lewis LLP assists clients with development of best practice compliance and ethics programs that meet the recommendations of the U.S. Sentencing Commission Guidelines for Organizations and the mandates of the Federal Acquisition Regulations.  The firm defends clients against all whistleblower claims, including those arising from False Claims Act Qui Tam and Sarbanes-Oxley Act.