At a recent Food and Drug Law Institute (FDLI) conference, Arun Rao, Deputy Assistant Attorney General for the US Department of Justice’s (DOJ’s) Consumer Protection Branch (CPB), reiterated DOJ’s “Safe Harbor Policy” with respect to mergers and acquisitions (M&A). Mr. Rao’s comments demonstrate DOJ’s continued efforts to promote its corporate compliance and self-disclosure initiative, which continues to create important implications for stakeholders in the life sciences industry.
M&A Safe Harbor and the CPB
Deputy Attorney General Lisa Monaco announced in October 2023 DOJ’s M&A Safe Harbor Policy under which acquiring companies may self-report discovered wrongdoing undertaken by the target company. As described in a prior LawFlash authored by our litigation colleagues, “DOJ does not want to ‘discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct’ but instead hopes to ‘incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.’”
Companies that uncover misconduct during the course of an acquisition can qualify for a “presumption of declination” (i.e., DOJ will not pursue criminal charges against the acquiring company) if the acquiring company (1) discloses the misconduct within six months of the transaction closing date, (2) cooperates fully with DOJ’s ensuing investigation, and (3) fully remediates the misconduct within one year of the transaction closing date.
Mr. Rao’s remarks at FDLI signaled to stakeholders in the life sciences industry that the CPB is embracing the M&A Safe Harbor as part of its continued efforts to develop and implement its own self-disclosure policy.
As part of this embrace, Mr. Rao noted that CPB’s policy of evaluating self-disclosure in the context of corporate transactions specifically encompasses disclosures related to, among other areas, the marketing of products that are regulated by the US Food and Drug Administration (FDA). As stated by Mr. Rao, “it’s worth making sure that . . . due diligence policies and procedures cover advertising and promotion risks in this area.”
Implications
The CPB’s use of the M&A Safe Harbor may become an important consideration for stakeholders engaged in corporate transactions with respect to FDA-regulated products and companies. As a primary matter, acquirers should ensure that they conduct thorough regulatory due diligence, including diligence with respect to marketing practices and other FDA requirements as well as compliance with all applicable federal healthcare program requirements.
Thorough regulatory due diligence assists acquiring companies to understand a target’s risk profile, providing the opportunity to properly value the target and structure the transaction to minimize such risk as much as possible, including by negotiating appropriate representations, warranties, and reserves. Companies also should conduct prompt follow-up post-closing due diligence. Thorough regulatory due diligence as part of the transaction and post-closing allows acquirers to make informed decisions regarding whether to avail themselves of CPB’s M&A Safe Harbor.
According to Mr. Rao, a prosecution declination, the purported reward for a company taking advantage of the Safe Harbor, is intended to be a “pretty juicy carrot.” Overall, the message to stakeholders was clear: the CPB wants companies to invest in due diligence to carefully vet potential target companies and let them know about potential misconduct. This echoes Ms. Monaco’s announcement of the M&A Safe Harbor where she said it was time for companies to “redouble” the time and attention to compliance programs and due diligence on acquisitions.
Make Room for the CPB
Beyond the immediate “open for self-disclosure business” signaling from Mr. Rao’s comments, there was a broader takeaway for stakeholders. Mr. Rao underscored that CPB is making itself a seat at the regulatory enforcement table, which is consistent with our recent experience with client matters, and wants to be included in self-disclosures.
More importantly, Mr. Rao made clear that disclosures of misconduct to agencies such as the FDA and US Federal Trade Commission (FTC) will not automatically trigger the Safe Harbor or any broader self-disclosure policies, which is an issue across DOJ. Mr. Rao wanted stakeholders to know that they should not expect leniency from CPB/DOJ if they do not include CPB in the initial self-disclosure.
CPB wanting a seat at the enforcement table is not surprising; the branch wants to be in the know of what companies may, typically, only disclose to agencies. If stakeholders are considering a disclosure of misconduct, including the CPB and/or DOJ should be part of the discussion. Otherwise, stakeholders are unlikely to receive any benefits from DOJ’s self-disclosure initiatives. In short, stakeholders should not expect to avoid enforcement activity from the CPB if they only disclose potential misconduct to the regulatory agencies.
The potential enforcement stakes are high too. Gabriel Scannapieco, CPB Assistant Director, also noted at FDLI that promotion of unapproved product uses and personal data sharing will be areas of enforcement focus for the CPB.
When making this statement, however, Mr. Scannapieco acknowledged the string of First Amendment case losses and the resulting adjustment of the enforcement approach, while also signaling that the pendulum may be swinging the other way, stating “[t]here’s been some change over time over the last few years that you don’t see actions being taken necessarily just because somebody says something that is true but off-label. But there have been a number of actions even recently in which both statements that have been made, along with other evidence about how a company intended a product to be used, are combined to demonstrate violation of the Food, Drug and Cosmetic Act.”
We have heard a similar theme with respect to off-label enforcement from select US Attorney’s Offices, which also have expressed interest in preapproval promotion as a means by which to “seed the market” for a pending product launch.
Takeaways
While careful transaction due diligence is already a must for stakeholders, Mr. Rao’s comments give extra weight to carefully reviewing any risks associated with a target’s advertising and promotion activities. If misconduct is uncovered during a transaction, stakeholders will need to undertake a careful assessment regarding whether they want to avail themselves of the self-disclosure Safe Harbor.
These considerations become more complex with the changing promotional standards being implemented by FDA, including FDA’s new draft guidance regarding dissemination of scientific information on unapproved uses of approved and cleared products. Acquiring companies will need to closely analyze a target’s promotional and advertising statements to assess whether they fall within FDA’s new policy or whether they are truly off-label promotional statements.
Moreover, if stakeholders decide that they want to take advantage of the M&A Safe Harbor, it’s clear that DOJ/CPB need to be a part of the initial self-disclosure, not as a follow-up to a disclosure to an agency such as FDA. These are important considerations for stakeholders in the life sciences, especially as the market for M&A begins to tick up as 2023 comes to an end and we look to 2024.