Pfizer Board Settles on Compliance Committee

Pfizer Corp. is turning heads in corporate governance circles with a new board-level committee oversee regulatory compliance—complete with its own independent funding source—that could become a model for other companies.

The pharmaceutical giant promised to create the committee as part settling a derivative shareholder lawsuit that sprang from earlier allegations of misconduct over how Pfizer marketed some of its drugs. As part of the deal, Pfizer will set aside $75 million first to pay for shareholders' legal fees, with the remainder going to fund the compliance committee. Even after those fees are paid out, the committee will still have more than $51 million to finance its activities for five years, according to court filings.

The settlement was filed in federal district court in New York on Dec. 2, and must still be approved by the judge presiding over the shareholder litigation. Pfizer itself did not respond to a request for comment.

The lawsuit accused Pfizer's board and some its top executives of breaching their fiduciary duty by failing to stop the company's illegal off-label marketing of some its drugs. It was filed last year on the heels of Pfizer's record-setting $2.3 billion settlement with the Justice Department in 2009 to resolve criminal and civil charges of illegal marketing.

The $51 million in funding will be kept in an escrow account subject to the exclusive control of the new compliance committee. If that money is exhausted during the initial five-year term, Pfizer will provide additional funding upon the committee's request. As part of the agreement, Pfizer's board and management will not be allowed to divert the money for other corporate purposes, and will not have a say in how the compliance committee decides to use it, according to court filings.

LaCroix

The segregated funding is unusual enough. Even more intriguing: the money to pay for it will come from the board's directors-and-officers insurance policies. Kevin LaCroix, a director with Oakbridge Insurance Services who blogs about D&O insurance issues, says shareholder derivative lawsuits do often include corporate governance reforms, but those costs are usually included as an operating expense on the company's balance sheet—not an item paid for by insurers. D&O insurance typically pays for defense expenses and settlement amounts only, he says—not governance reforms.

Given the settlement's size and widespread publicity, “These type of corporate therapeutics are not only are likely to be included in future settlements, but this could also put pressure on D&O insurers to pay for them directly,” LaCroix says.

Those involved in the settlement expect it to reach beyond Pfizer as well. “We're hopeful the [compliance] committee will be a significant benefit for Pfizer and its shareholders, and will become a model for other companies in heavily regulated industries,” says Mark Lebovitch, an attorney at Bernstein Litowitz Berger & Grossman who served as lead counsel for the plaintiffs.

“We're hopeful the [compliance] committee will be a significant benefit for Pfizer and its shareholders, and will become a model for other companies in heavily regulated industries.”

—Mark Lebovitch,

Lawyer,

Bernstein Litowitz Berger & Grossman

Jeffry Gordon, a law professor at Columbia University, echoed that sentiment in an affidavit he wrote in support of the settlement. “The creation of a Regulatory and Compliance Committee by a prominent company like Pfizer will encourage other companies that operate in complex regulatory environments to create such committees as well,” he wrote. “In this respect, the proposed settlement may catalyze a significant corporate governance reform initiative.”

The deal also continues a trend of plaintiffs in shareholder litigation expressing worry about a company's compliance and ethics program and demanding improvements, says Joseph Murphy, of counsel at Compliance Systems Legal Group. “Shareholders may be realizing just how important these programs are,” he says.

Details

The compliance committee will have five members. At least three must be independent directors, and at least one of them must also sit on the audit committee. Aside from compliance with drug marketing rules, the committee would also oversee compliance with Medicare and Medicaid rules, the Foreign Corrupt Practices Act, non-U.S. marketing, clinical studies and manufacturing quality control, and required drug safety reporting to the Food & Drug Administration.

Murphy

Murphy, however, calls the committee's composition a “missed opportunity.” 

“If they wanted to show the world that they were very serious, they would have required that the committee include at least one chief ethics and compliance officer from another company,” he says. In his view, a chief compliance officer serving on the board would reduce the chance of in-house management trying to “hide the ball” from the compliance committee. At minimum, he says, someone on the committee should be required to have expertise in compliance programs.

HISTORY OF THE PFIZER LITIGATION

The following excerpt from the Memorandum of Law in Support of Plaintiff's Motion for Peliminary Approval of Derivative Litigation Settlement regarding In Re Pfizer, Inc. and details the events leading to the filing of the action and the motion to dismiss:

In September 2009, Pfizer agreed to have a subsidiary plead guilty and to pay $2.3 billion

to resolve criminal and civil investigations into Pfizer's promotional practices of a number of

drugs, including Bextra, Zyvox, Geodon, and Lyrica. According to the government, Pfizer

engaged in widespread illegal conduct over a period of years by employing marketing methods

that were similar to illegal marketing methods for which Pfizer subsidiaries Warner Lambert and

Pharmacia had previously pled guilty. Pfizer admitted that members of its sales force had improperly marketed Bextra, but denied that this misconduct was widespread or similar to prior

misconduct that Pfizer's subsidiaries had engaged in before they were acquired by Pfizer. Pfizer

also insisted that it had made good faith efforts to implement a state of the art compliance

function in response to these “legacy matters.”

Following the announcement of the September 2009 settlement and guilty plea, a number

of Pfizer shareholders filed derivative complaints in the United States District Court for the

Southern District of New York. On November 4, 2009, the Court consolidated these complaints

and appointed Amalgamated Bank as “Lead Plaintiff” and Bernstein Litowitz Berger &

Grossmann LLP (“BLB&G”) as “Lead Counsel.”

On November 18, 2009, Plaintiffs filed a Consolidated, Amended and Verified

Shareholder Derivative Complaint (the “Complaint”). Docket No. 34. The Complaint alleged

that Pfizer's senior management and Board breached their fiduciary duties to Pfizer by, among

other things, allowing unlawful promotion of drugs to continue after receiving a flood of “red

flags” putting them on notice that Pfizer's improper drug marketing was systemic and

widespread. The Complaint also asserted an unjust enrichment claim and that the Board had

violated Section 14(a) of the Securities Exchange Act (the “Proxy Claims”).

Defendants moved to dismiss the derivative action on December 16, 2009. Docket Nos.

36-38. Plaintiffs opposed Defendants' motion on January 8, 2010, and Defendants replied on

January 22, 2010. Docket Nos. 41-43. Following oral argument, the Court issued an Order on

March 18, 2010, dismissing the Proxy Claims and unjust enrichment claims, but denying the

motion to dismiss with respect to the breach of fiduciary duty claims. Docket No. 50. The

Court subsequently explained that demand was excused because the Complaint alleged

“misconduct of such pervasiveness and magnitude, undertaken in the face of the board's own

express formal undertakings to directly monitor and prevent such misconduct, that the inference

of deliberate disregard by each and every member of the board [was] entirely reasonable.”

Docket No. 71.

Amalgamated Bank and some of the Defendants are New York citizens. To ensure that

the Court would continue to have diversity jurisdiction following dismissal of the federal Proxy

Claims, Lead Counsel submitted a Proposed Order to substitute Amalgamated with plaintiffs

LSPRF and Skandia, neither of which are New York citizens. The Court exercised supplemental

jurisdiction to hear this proposal and, on April 6, 2010, appointed LSPRF and Skandia as Lead

Plaintiffs and reappointed BLB&G as Lead Counsel. Docket Nos. 52 and 59.

Source

Plaintiff's Memorandum in Support of Motion for Preliminatry Approval Settlement.

The settlement also requires the compliance committee to work with Pfizer's compensation committee to judge whether Pfizer's pay practices support its compliance incentives. That's an important point that reflects an element of the U.S. Sentencing Guidelines that calls for incentives to promote an ethics and compliance program, Murphy says. “Other companies should look at this carefully and consider it as a model.” If wrongdoing does occur, the compliance committee will also be able to recommend that the compensation committee exercise a clawback to recoup improperly awarded pay.

Its other duties would include reviewing outside complaints, such as qui tam lawsuits, government investigations, FDA warning letters and retaliation claims. The committee would also be able to require management to conduct audits on compliance regulatory or legal concerns, to commission outside reviews, and to hire its own outside counsel consultants or experts.

“This committee isn't a guarantee the company won't have any problems, but it's a lot less likely those problems will remain undetected or spiral out of control,” Lebovitch says.

Murphy worries that the settlement creates somewhat of a stovepipe approach.  “Pfizer, like all large companies, has many compliance and ethics issues it addresses,” he says. ”This settlement takes some major ones … and focuses on them to the exclusion of the overall compliance and ethics framework.” 

To be effective, he says, specific compliance efforts must exist within the framework of an overall program. “One-off, isolated approaches, focusing on one specific area in a bolt-on fashion, can have negative consequences, leading to overlapping compliance efforts that can undercut one another,” he says.

Under the settlement the company will also appoint an independent ombudsman to field employee concerns. That's also rare, Murphy says. While such a person can be effective, language in the proposed settlement could require the ombudsman to tell the chief compliance officer about issues that may represent employee misconduct; that might gut the benefit of an ombudsman in the first place.

The Pfizer settlement may also highlight another emerging trend LaCroix says D&O insurers and policyholders should watch closely: the money to fund the compliance committee is specifically coming from so-called “Side A” coverage, typically used to indemnify directors and officers when a company is insolvent. Using Side A coverage outside that insolvency context is rare, LaCroix says, but stems from shareholder derivative settlements involving huge dollar amounts in the last two years.